Writing a post after a loooong time.
Most of us often feel bad that we are not saving enough from our net take home salary. Yes, one should feel bad about it and need not be bogged down because of this for a simple reason - you can find opportunities to save always if you are little bit more disciplined.
But what is this hidden savings which i am talking about. Every employee in the organized sector saves 24% of the basic salary as Employee provident fund and EPF earns 8.5% annually. Following are the most likely hidden savings for an employee in organized sector.
1. Employee Provident Fund + Employee Pension Scheme = 24% of basic salary.
2. Super Annuation = 10-15% of basic salary ( varies between companies).
3. Gratuity = 4-5% of basic salary ( varies between companies)
All the above components can be redeemed when an employee quits an organization and moves to another one.
For a take home salary of 50k, one would save around 7-8k without knowingly and this is earning 8.5-9.5% interest which is not bad.
How to calculate your super annuation balance in LIC?
I thought i could share some useful information on how to check your superannuation balance online in LIC if your employer maintains a super annuation fund in LIC. First let me give a brief description on Superannuation.
What is Superannuation?
Superannuation is a contribution made by your employer each year(usually it is 10-15% of your basic sal) on your behalf towards the group superannuation policy held by the employer.
Conditions of Superannuation account:
The amount that the employee gets is as under:
a) < 1 year of employment : NIL
b) >1 year but < 2 years : 50% of the contribution + interest earned
c) > 2 years but < 3 years : 75% of the contribution + interest earned
d) > 3 years : 100% of the contribution + interest earned
At the end of each financial year, LIC pays an interest on the contribution made by the employer in your account. The interest rate is around 9.25% and it is set by LIC annually.
Benefits of Superannuation:
Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension. He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.
How to Check Superannuation balance online?
1. Go to licindia.com
2. Register for a user id and password.
3. Login.
4. Click on 'Group Scheme Details' tab.
5. Click on 'member' radio button.
6. Get the group policy number for super annuation from your company's payroll department and enter '' in the policy number text box and click ok.
7. It will ask for LIC Id no and Date of Birth fields.
8. To get LIC Id no, call LIC branch with which your employer has a super annuation account and inform that you are calling from your company and provide your name to the LIC official. They will give your LIC ID No.
9. Since most companies had not furnished the date of birth details to LIC, enter '01/07/1960' / '07/01/1960' (forgot the order, try both n check) in the date of birth field.
10 .You will get the policy enrolled and you can click on the policy number to view the details. The details will contain the accumulated balance till the last financial year. It also shows contribution made by your employer i the current financial year.
What is Superannuation?
Superannuation is a contribution made by your employer each year(usually it is 10-15% of your basic sal) on your behalf towards the group superannuation policy held by the employer.
Conditions of Superannuation account:
The amount that the employee gets is as under:
a) < 1 year of employment : NIL
b) >1 year but < 2 years : 50% of the contribution + interest earned
c) > 2 years but < 3 years : 75% of the contribution + interest earned
d) > 3 years : 100% of the contribution + interest earned
At the end of each financial year, LIC pays an interest on the contribution made by the employer in your account. The interest rate is around 9.25% and it is set by LIC annually.
Benefits of Superannuation:
Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension. He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.
How to Check Superannuation balance online?
1. Go to licindia.com
2. Register for a user id and password.
3. Login.
4. Click on 'Group Scheme Details' tab.
5. Click on 'member' radio button.
6. Get the group policy number for super annuation from your company's payroll department and enter '
7. It will ask for LIC Id no and Date of Birth fields.
8. To get LIC Id no, call LIC branch with which your employer has a super annuation account and inform that you are calling from your company and provide your name to the LIC official. They will give your LIC ID No.
9. Since most companies had not furnished the date of birth details to LIC, enter '01/07/1960' / '07/01/1960' (forgot the order, try both n check) in the date of birth field.
10 .You will get the policy enrolled and you can click on the policy number to view the details. The details will contain the accumulated balance till the last financial year. It also shows contribution made by your employer i the current financial year.
Cash is King
When you take a look at the newspapers in the morning, you see more news on "DECLINE" in almost all asset classes and if not declining , they are volatile otherwise. So where can we put your money (if at all you are left with some money after being battered with losses in markets)
In these troubled times, "Cash is King" the best way to survive this downfall is just to keep accumulating your savings bank account with loads and loads of cash as and when you get them.
Reasons for being in Cash
1. The first and foremost reason to be in cash is that you have control over your money. In current scenario markets are driven by all kinds of external dependencies and is more sensitive to global economic condition.
2.Capital Protection is a must in these troubled times and one should minimize the risk of losing his/her money.
Where to park my cash
1. The best and most safe instrument is fixed deposit. Most banks offer 10+% interest on 1 year deposit. This is the safe heaven.
2.Investors with more risk appetite can go for liquid funds,FMP and other short term debt mutual funds.
Reiterating once more, "Cash is King" is the film Name and You are the real hero if you have cash right now.
In these troubled times, "Cash is King" the best way to survive this downfall is just to keep accumulating your savings bank account with loads and loads of cash as and when you get them.
Reasons for being in Cash
1. The first and foremost reason to be in cash is that you have control over your money. In current scenario markets are driven by all kinds of external dependencies and is more sensitive to global economic condition.
2.Capital Protection is a must in these troubled times and one should minimize the risk of losing his/her money.
Where to park my cash
1. The best and most safe instrument is fixed deposit. Most banks offer 10+% interest on 1 year deposit. This is the safe heaven.
2.Investors with more risk appetite can go for liquid funds,FMP and other short term debt mutual funds.
Reiterating once more, "Cash is King" is the film Name and You are the real hero if you have cash right now.
Sensex Long Term Outlook
I would like to introduce to Investment School Readers, a very good technical analyst -Mrs. Lokeshwari .For those who read Hindu Business Line, this name should be very familiar. She the technical analyst and writes technical analysis columns every sunday and she is associated with Business Line for past several years. Those who are curious to know the various resistance and supports of benchmark indices can definitely spare some time and read through her sunday columns in Business Line.
In her recent column , she had given the long term outlook of Sensex and i would like to quote her technical calculations to our readers,
In her column, she has indicated the next major support levels at 9700,8800 and ofcourse 6800. So as per technical counts , Sensex can go to 6800 given the current situations.
Note: The counts are revisited if some major changes happens in the global financial arena.
In her recent column , she had given the long term outlook of Sensex and i would like to quote her technical calculations to our readers,
In our review in July, we had stated that, “The decline below 13700 brings the next long-term supports for the Sensex at 11,900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus. We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980. The fifth leg (upward) would then take the index beyond 25,000 again. Caveat - decline below 9,703 would need recasting of the counts.
The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.
The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.”
In her column, she has indicated the next major support levels at 9700,8800 and ofcourse 6800. So as per technical counts , Sensex can go to 6800 given the current situations.
Note: The counts are revisited if some major changes happens in the global financial arena.
Should you buy real estate now?
Recently i read an article in Economic Times(not a opinion or sensex target kind of articles which is usually a trade mark of ET). This article was all about stats. The article was about the advance tax paid by the real estate companies.
What is Advance tax?
Advance tax is a tax paid by individuals who earn in addition to monthly income and corporates. These are paid in three installments,
1. Sep 15 - upto 30% of advance tax should be paid
2. Dec 15 - upto 60% of advance tax should be paid
3. March 15 - upto 100% of advance tax should be paid.
Take the following example:
What is Advance tax?
Advance tax is a tax paid by individuals who earn in addition to monthly income and corporates. These are paid in three installments,
1. Sep 15 - upto 30% of advance tax should be paid
2. Dec 15 - upto 60% of advance tax should be paid
3. March 15 - upto 100% of advance tax should be paid.
Take the following example:
Gross total income: Rs 160,500
Salary (Rs 100,000), income from house property (Rs 48,000), income from other sources (Rs 12,500)
Deductions: Rs 14,500
Section 80D (Rs 2,500), section 80L (Rs 12,000)
Net income: Rs 146,000
Total tax: Rs 15,970
Tax on net income (Rs 20,020) - section 88 rebate (Rs 5,500) + 10 per cent surcharge (Rs 1,452)
Net balance: Rs 10,000
Total tax (Rs 15,970) - TDS (Rs 5,972)
Taking the above example, Rs 3,000 by September 15; Rs 3,000 (60 per cent of Rs 10,000 - Rs 3,000) by December 15 and the balance Rs 4,000 by March 15.
So coming back to the article which i read, the following are the advance tax paid by some of the leading real estate companies and it gives useful insights on where the real estate market is heading towards.
1.DLF - NIL Vs 37 Crores paid on Sep 15 2007
2.Omaxe - NIL Vs 37.5 Crores paid on Sep 15 2007
3.HDIL - NIL Vs 30 Crores paid on Sep 15 2007
4.Unitech - 50 Crores Vs 100 Crores paid on Sep 15 2007
5.Ansal Properties - 5 Crores Vs 10 Crores paid on Sep 15 2007
What does this signify?
Real estate companies has paid NIL to fewer crores of advance tax because they expect far lesser revenue than the last year.
Why lower revenue expected?
Simple logical conclusion - They have sold lesser properties and many properties across the nation have no takers because of high interest rate and high cost of the property.
What can we expect out of lower revenue?
Builders build apartments by taking loan from banks at a much higher interest rate. At one point of time when there are no takers for the property, they will be forced to reduce the price of the property or even sell the properties at throw away prices like what is happening in US currently.
So real esate prices are in for a correction next to equities and think twice before you buy a property at this juncture.
Note : This is my personal assesment of the situation. You should take your decision after applying your thoughts and calculations.
What is Balance Sheet?
As a continuation of Fundamental Analysis Series, let us learn about balance sheets of a company and how to interpret it and how to utilize a balance sheet of a company.
What is Balance Sheet?
Balance sheet of a company indicates how healthy is a company with respect to financial factors. It lists the assets and liabilities of a company and you should remember that assets and liabilities are not same as revenue and earnings. Broadly balance sheet has the following components
1. Assets
2. Liabilities
3. Equity
Asset:
There are two types of assets
Current Assets:
It includes assets that be converted into cash in a financial year.It includes ready cash,inventories and receivables. A company with high cash holding in its balance sheet is a good bet compared to a company with debt or less cash. Inventories are nothing but goods which are yet to be sold to consumers and receivables are bills which are pending payment to the company.
Non Current Assets:
These are assets which are not very liquid and can not be converted to cash quickly. These include Land,machinery etc.
Liabilities:
These are again classified into two types.
Current Liabilities:
These are debt which needs to be repaid within the current financial year.
Non-current Liabilities:
These are long term debt in the form of bank debt or bonds borrowed.
Equity or Shareholder's equity:
Shareholder's equity is nothing but
Equity = Total Assets - Total Liabilities
Paid Capital:
Amount of money the company collected during its IPO(Initial Public Offer).
Retained Earnings:
It is the amount of earnings that the company has reinvested in the business rather than paying it back as dividend to the share holders.
So these are the important components of a balance sheet though there may be few other. So as an investor one can derive very useful insight about the company financial health from its balance sheet and make a good decision on his investment.
What is Balance Sheet?
Balance sheet of a company indicates how healthy is a company with respect to financial factors. It lists the assets and liabilities of a company and you should remember that assets and liabilities are not same as revenue and earnings. Broadly balance sheet has the following components
1. Assets
2. Liabilities
3. Equity
Asset:
There are two types of assets
Current Assets:
It includes assets that be converted into cash in a financial year.It includes ready cash,inventories and receivables. A company with high cash holding in its balance sheet is a good bet compared to a company with debt or less cash. Inventories are nothing but goods which are yet to be sold to consumers and receivables are bills which are pending payment to the company.
Non Current Assets:
These are assets which are not very liquid and can not be converted to cash quickly. These include Land,machinery etc.
Liabilities:
These are again classified into two types.
Current Liabilities:
These are debt which needs to be repaid within the current financial year.
Non-current Liabilities:
These are long term debt in the form of bank debt or bonds borrowed.
Equity or Shareholder's equity:
Shareholder's equity is nothing but
Equity = Total Assets - Total Liabilities
Paid Capital:
Amount of money the company collected during its IPO(Initial Public Offer).
Retained Earnings:
It is the amount of earnings that the company has reinvested in the business rather than paying it back as dividend to the share holders.
So these are the important components of a balance sheet though there may be few other. So as an investor one can derive very useful insight about the company financial health from its balance sheet and make a good decision on his investment.
How to calculate HRA for Tax Exemption?
Most of us pay more tax by neglecting to know about House Rent Allowance(HRA) component in our payslip.
What is HRA?
HRA is house rent allowance offered by employers to all its employees. HRA is exempted from taxable income and hence reduces the tax paid by an employee.
How HRA is calculated?
The HRA calculated by the employer is the minimum of the following three amount.
1. Actual HRA given by the employer as mentioned in the payslip.
2. Acutal rent paid by employee minus(-) 10% of his/her basic salary
3. 50% of basic salary in metro cities(delhi,mumbai,chennai,calcutta) or 40% of basic salary in other cities.
Lets take an example.
Ram lives in a house in bangalore and pays a rent of 7,000. The HRA offered by his employee is 6000/month and his basic salary is 20,000/month. Let us calculate the three amount stated above
1. HRA offered = 6,000
2. Rent - 10% of basic = 7,000 - 10% of 20,000 = 5,000
3. 40% of basic salary = 40% of 20,000 = 8,000
Hence minimum of the three , 5,000 is taken as HRA and 12*5,000 = 60,000 is exempted from tax for the current financial year.
Note : You have to pay monthly rent receipts to your employer and you can not have short routes in stating wrong rents paid by you.
What is HRA?
HRA is house rent allowance offered by employers to all its employees. HRA is exempted from taxable income and hence reduces the tax paid by an employee.
How HRA is calculated?
The HRA calculated by the employer is the minimum of the following three amount.
1. Actual HRA given by the employer as mentioned in the payslip.
2. Acutal rent paid by employee minus(-) 10% of his/her basic salary
3. 50% of basic salary in metro cities(delhi,mumbai,chennai,calcutta) or 40% of basic salary in other cities.
Lets take an example.
Ram lives in a house in bangalore and pays a rent of 7,000. The HRA offered by his employee is 6000/month and his basic salary is 20,000/month. Let us calculate the three amount stated above
1. HRA offered = 6,000
2. Rent - 10% of basic = 7,000 - 10% of 20,000 = 5,000
3. 40% of basic salary = 40% of 20,000 = 8,000
Hence minimum of the three , 5,000 is taken as HRA and 12*5,000 = 60,000 is exempted from tax for the current financial year.
Note : You have to pay monthly rent receipts to your employer and you can not have short routes in stating wrong rents paid by you.
What is Capital Gain tax?
Tax is one area where most of us have always loads n loads of questions. One major tax that is associated with any individual who owns an asset is Capital gains tax.
What is Capital Gains?
When a person sells an asset and makes profit out of it, the profit is called Capital Gains. The tax paid on profit of these asset sale is Capital Gains Tax. The asset may include mutual funds, stocks, house, land,gold and few other. When a person makes a loss out of his asset sale, it is called Capital Loss.
What are 2 types of Capital Gains?
Depending on how long you hold on to your asset before selling, there are two types of capital gains.
Short Term Capital Gains
If a person sells an asset before 3 years from its purchase and if he makes a profit , it is called short term capital gains tax. For mutual funds and equities, it is 1 year.
Long Term Capital Gains
If a person sells an asset after 3 years from its purchase and makes a profit, it is called as a long term capital gains tax. For mutual funds and shares, it is 1 year.
Short Term Capital Gains Tax:
The short term capital gains is added to your taxable income for the financial year and taxed at your income tax slab rate.
Long Term Capital Gains Tax:
There are two ways for taxing long term gains.
1. 10% of your gains without indexation.
2. 20% of your gains with indexation.
Lets take an example for case 2 (with indexation)
What is Capital Gains?
When a person sells an asset and makes profit out of it, the profit is called Capital Gains. The tax paid on profit of these asset sale is Capital Gains Tax. The asset may include mutual funds, stocks, house, land,gold and few other. When a person makes a loss out of his asset sale, it is called Capital Loss.
What are 2 types of Capital Gains?
Depending on how long you hold on to your asset before selling, there are two types of capital gains.
Short Term Capital Gains
If a person sells an asset before 3 years from its purchase and if he makes a profit , it is called short term capital gains tax. For mutual funds and equities, it is 1 year.
Long Term Capital Gains
If a person sells an asset after 3 years from its purchase and makes a profit, it is called as a long term capital gains tax. For mutual funds and shares, it is 1 year.
Short Term Capital Gains Tax:
The short term capital gains is added to your taxable income for the financial year and taxed at your income tax slab rate.
Long Term Capital Gains Tax:
There are two ways for taxing long term gains.
1. 10% of your gains without indexation.
2. 20% of your gains with indexation.
Lets take an example for case 2 (with indexation)
Let's say Mr Ram purchased a house of Rs 2,50,000 (Rs 250,000) on June 20, 1996. He sells it on January 20, 2005, for Rs 4,50,000 (Rs 450,000). Since the house was sold over 36 months after being bought, the capital gain will be long term.
First, you calculate the Cost Inflation Index. These indices are fixed and declared by the Central Government every year (see table below). This is called indexation.
Cost inflation index:
Index of the year it was sold / index of the year it was bought
2004-05 index / 1996-97 index
480/305 = 1.57377
Indexed cost of acquisition
= Buying cost x CII
= 250000 x 1.57377
= 3,93,443
Long term capital gain
= Selling price – Indexed cost
= 4,50,000 – 3,93,443
= Rs 56,547
Tax payable will be 20% of Rs 56,547 ie Rs 11,310. (Plus surcharge of 10% if applicable)
Importance of Stop Loss
Sensex at 18 months low and global markets feeling the heat of us economic failure, and most of us have accumulated loss in our portfolio.We need to sit and analyse if we can digest the current loss and if we can digest more loss or should i cut back loss and move to fixed return investments.
This is required because each one of us have a certain level of risk appetite and we should ensure that our investments are bearing a risk which is affordable by us. All of us invest our hard earned income and hence we should have a comfort level with your investments.
Any investment made should have the following attributes associated with it.
1. Time period of investment.
2. Stop Loss.
3. Target Amount.
Lets take a usecase and analyse it. Ram makes an investment of 2 lacs in sensex(sensex taken for easy reference) on Oct 1st 2007.
Time period of investment = 3 years
Stop Loss = 10%
Target Amount = 3 lacs
Current Value of investment = 1.5 lacs
What is stop loss?
Stop loss is usually expressed as a %age of total investment. In this case it is 15%. So when your market value of investment reaches 90%(100-10) of your initial investment, you should book your losses and exit from that investment.In this example, Ram should have booked loss when it was 1.8 lacs (10% 2 lacs = 20,000) and exited his investment.
However he continues to hold his investment and his loss has increased from 20,000 to 50,000 now. There are so many Rams out there in the market who does not have a well defined stop loss planned for their investment and hence accumulate their losses.
How stop loss is useful?
Emotions should never play a part in one's investments. When you invest a certain amount and have your target set, you should exit when your target is achieved. In the same case, you should exit when your stop loss condition is also met.
Stock market is all about emotions but an intelligent investor should never get into that trap.
What is the common mistake committed?
Most of the investors, when experience a loss in their portfolio and if that loss is more than a specified stop loss, expect the market to recover and expect their investments to come back to profit at some point of time. But they never know "when will their investments be back in profit again". They live on hope of recovery.
Instead of living on hope of recovery, an investor should cut his losses and analyse the investment he had made and what are the areas that he can improve upon so that his upcoming investments are made properly.
Capital Protection Vs Hope of Profit
When an investor is in loss, he is expecting the market to recover and go back to highs but at the same time he has already lost his capital and he is bearing the risk of losing more of his capital. Capital protection should be given highest priority over expectation of recovery when an investor is experiencing a loss.
This is required because each one of us have a certain level of risk appetite and we should ensure that our investments are bearing a risk which is affordable by us. All of us invest our hard earned income and hence we should have a comfort level with your investments.
Any investment made should have the following attributes associated with it.
1. Time period of investment.
2. Stop Loss.
3. Target Amount.
Lets take a usecase and analyse it. Ram makes an investment of 2 lacs in sensex(sensex taken for easy reference) on Oct 1st 2007.
Time period of investment = 3 years
Stop Loss = 10%
Target Amount = 3 lacs
Current Value of investment = 1.5 lacs
What is stop loss?
Stop loss is usually expressed as a %age of total investment. In this case it is 15%. So when your market value of investment reaches 90%(100-10) of your initial investment, you should book your losses and exit from that investment.In this example, Ram should have booked loss when it was 1.8 lacs (10% 2 lacs = 20,000) and exited his investment.
However he continues to hold his investment and his loss has increased from 20,000 to 50,000 now. There are so many Rams out there in the market who does not have a well defined stop loss planned for their investment and hence accumulate their losses.
How stop loss is useful?
Emotions should never play a part in one's investments. When you invest a certain amount and have your target set, you should exit when your target is achieved. In the same case, you should exit when your stop loss condition is also met.
Stock market is all about emotions but an intelligent investor should never get into that trap.
What is the common mistake committed?
Most of the investors, when experience a loss in their portfolio and if that loss is more than a specified stop loss, expect the market to recover and expect their investments to come back to profit at some point of time. But they never know "when will their investments be back in profit again". They live on hope of recovery.
Instead of living on hope of recovery, an investor should cut his losses and analyse the investment he had made and what are the areas that he can improve upon so that his upcoming investments are made properly.
Capital Protection Vs Hope of Profit
When an investor is in loss, he is expecting the market to recover and go back to highs but at the same time he has already lost his capital and he is bearing the risk of losing more of his capital. Capital protection should be given highest priority over expectation of recovery when an investor is experiencing a loss.
What is super annuation?
As explained in the previous article, employees like you and me , make another hidden savings by means of super annuation. So what is super annuation and what are its benefits?
What is super annuation?
Now a days, corporate have two sections in the compensation package. One of them is Gross Annual Income and the other is Cost To Company(CTC). Super Annuation is a fund maintained by the employer on behalf of all its employees. An employee needs to stay for more than 3 years in an organization to get the full benefit of super annuation fund.
Amount invested in super annuation fund per year by employer for employee = 10% of basic sal.
Duration of employment and super annuation benefits:
IF employee stays in a company < 1 year, he get no amount from super annuation.
IF employee stays in a company for 1 -2 years, he gets 50% of amount + interest earned on his super annuation contribution.
IF employee stays in a company for 2-3 years, he gets 75% of amount invested + interes earned on his superannuation contribution.
IF employee stays in a company for > 3 years, he gets full amount invested + interest earned.
When an employee leaves a company to another one, he can get his super annuation fund balance transferred to the new company. The interest earned per year on super annuation fund varies from company to company. Each company can choose from a bunch of group super annuation policies offered by insurance companies to employers.
When an individual stops working, he gets 33% of his super annuation fund in lumpsum and the rest of the amount will be given as monthly payments to the employee.
So this explains the reason for being in a company for a longer period. In today's world, people shift companies very often which is not advisable from career perspective as well as monetary perspective.
In the next article, lets see how gratuity also rewards long term employees.
How to calculate your PF balance?
There are some savings that we make without our knowledge. Sounds surprising? but thats what is the reality. An employee in an organized sector have mandatory savings like PF,Employer Pension Scheme,Superannuation,Gratuity. From our monthly gross salary, we make a significant contribution to all four of these. Lets see how much we are saving each month unknowingly in a provident fund.
Provident Fund
For all employees who work in an organized sector, following is the PF contribution every month.
PF contribution by Employee = 12% of basic salary.
PF contribution by Employer = 12% of basic salary.
Employer Pension Scheme
Out of 12% contribution from employer, 8.33% of the contribution (subject to maximum of 541 rs/month) is invested in employer pension scheme.
Lets take an example and understand this.
Ram's basic salary per month = 15,000
Ram's contribution to PF = 12% of 15,000 = 1,800
Ram's Employer contribution = 12% of 15,000 = 1,800
Employer's contribution to EPS = 8.33% of 15,000 = 1250
This 1250 is higher than the max limit of Rs 541/month and hence
Employer's contribution to EPS = 541
Employer contribution to PF = 1800-541 = 1259
So Total PF contribution to Ram's PF account per month = 1800 + 1259
= 3059
How to calculate your PF balance?
Lets say Ram worked in a firm from April 2007 to March 2008.Let us find out what is his balance as on April 1st 2008.
Interest Rate on PF account = 8.5% (fixed by central govt)
So monthly contribution of 3059 for one year @ 8.5% =~ 40,000 (not exact figure)
So in this way you can calculate your return for 'n' number of years for your PF contribution, provided you know your monthly contribution.
I would insist on the readers to get to know their monthly contribution towards PF from your payslip and also collect your PF account statement every year.
Happy Investing!
Provident Fund
For all employees who work in an organized sector, following is the PF contribution every month.
PF contribution by Employee = 12% of basic salary.
PF contribution by Employer = 12% of basic salary.
Employer Pension Scheme
Out of 12% contribution from employer, 8.33% of the contribution (subject to maximum of 541 rs/month) is invested in employer pension scheme.
Lets take an example and understand this.
Ram's basic salary per month = 15,000
Ram's contribution to PF = 12% of 15,000 = 1,800
Ram's Employer contribution = 12% of 15,000 = 1,800
Employer's contribution to EPS = 8.33% of 15,000 = 1250
This 1250 is higher than the max limit of Rs 541/month and hence
Employer's contribution to EPS = 541
Employer contribution to PF = 1800-541 = 1259
So Total PF contribution to Ram's PF account per month = 1800 + 1259
= 3059
How to calculate your PF balance?
Lets say Ram worked in a firm from April 2007 to March 2008.Let us find out what is his balance as on April 1st 2008.
Interest Rate on PF account = 8.5% (fixed by central govt)
So monthly contribution of 3059 for one year @ 8.5% =~ 40,000 (not exact figure)
So in this way you can calculate your return for 'n' number of years for your PF contribution, provided you know your monthly contribution.
I would insist on the readers to get to know their monthly contribution towards PF from your payslip and also collect your PF account statement every year.
Happy Investing!
How double indexation increases return in FMP?
Finance minister Mr P.Chidambaram in one of the award function asked the recipient of the award "What is your wish list in this year's budget" and the recipient "he din want to pay more taxes" and the recipient is none other than India richest person Mr Mukesh Ambani. In return FM commented that "India is a country where a normal person as well as the richest person does not want to pay taxes".
If Mukesh Ambani himself is more conscious about paying taxes, aam aadmi like you and me should be trying to save taxes in a judicious manner. So lets see how we can reduce taxes on Fixed Maturity Plan by double indexation.
How is the profit taxed from debt mutual funds?
Debt mutual funds have a long term capital gain tax which is taxing the interest if the investment is held for more than a year. There are two methods of taxation.
1. 10% on the interest gained without indexation.
Taxable amount = Amount Returned - Amount Invested
2. 20% on the interest gained without indexation.
In the second gain, the taxable amount is calculated by
Taxable amount = Amount Returned – (Amount Invested * Inflation Index for Redemption financial Year/ Inflation Index for Investment financial Year)
Inflation index for every year is released by the govt.
Lets understand this concept with an example.
Assuming an FMP of 15 months returning 11% and Rs 10,000 is invested. Inflation index for 2006-2007 100 and inflation index for 2007-2008 is 105 and for 2008-2009 is 111. s Tax is calculated using indexation at the rate of 20%.
Scenario 1:
Amount invested in sep 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2007-2008))
= 11000 - (10000 * 111/105)
= 11000 - 10571 = 430
Tax @ 20% = 20% of 430 = 86
Amount redeemed = 10914.
Scenario 2:
Amount invested in Mar 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2006-2007))
= 11000 - (10000 * 111/100)
= 11000 - 11100 = -100
Net Loss = 100 and hence no tax.
Amount redeemed = 11000
So in this case we have totally avoided tax.
Hence while planning an FMP investment, we should plan it in such a way that it spans two financial years to get the advantage of double indexation.
If Mukesh Ambani himself is more conscious about paying taxes, aam aadmi like you and me should be trying to save taxes in a judicious manner. So lets see how we can reduce taxes on Fixed Maturity Plan by double indexation.
How is the profit taxed from debt mutual funds?
Debt mutual funds have a long term capital gain tax which is taxing the interest if the investment is held for more than a year. There are two methods of taxation.
1. 10% on the interest gained without indexation.
Taxable amount = Amount Returned - Amount Invested
2. 20% on the interest gained without indexation.
In the second gain, the taxable amount is calculated by
Taxable amount = Amount Returned – (Amount Invested * Inflation Index for Redemption financial Year/ Inflation Index for Investment financial Year)
Inflation index for every year is released by the govt.
Lets understand this concept with an example.
Assuming an FMP of 15 months returning 11% and Rs 10,000 is invested. Inflation index for 2006-2007 100 and inflation index for 2007-2008 is 105 and for 2008-2009 is 111. s Tax is calculated using indexation at the rate of 20%.
Scenario 1:
Amount invested in sep 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2007-2008))
= 11000 - (10000 * 111/105)
= 11000 - 10571 = 430
Tax @ 20% = 20% of 430 = 86
Amount redeemed = 10914.
Scenario 2:
Amount invested in Mar 2007.
Amount redeemed in Dec 2008 = Rs 11,000
Taxable Amount = 11000 - (10000 * (inflation index for 2008-2009 / inflation index for 2006-2007))
= 11000 - (10000 * 111/100)
= 11000 - 11100 = -100
Net Loss = 100 and hence no tax.
Amount redeemed = 11000
So in this case we have totally avoided tax.
Hence while planning an FMP investment, we should plan it in such a way that it spans two financial years to get the advantage of double indexation.
What is Fundamental Analysis?
When it comes investing in stocks, there are two schools of thoughts - Fundamental Analysis and Technical Analysis. Fundamental analysis focusses on company economic factors to make an investment decision whereas technical analysis focus on stock price movements to determine the investment. Let us get started with fundamental analysis and what are the various factors affecting fundamental analysis.
Fundamental analysis of a stock should answer the following questions related to the stock.
1. How is the company growing in terms of revenues and earnings over the past?
2. Has the company been able to maintain healthy profit consistently over the past?
3. How good is the company placed with respect to its competitors?
4. How good is the management of the company?
5. How transparent are the company's operations and decisions?
These are only few , more questions on the similar note needs to be answered to fulfill a fundamental analysis of the company.
Factors affecting Fundamental Analysis:
Quantitative factors - The factors which can be measured in numeric terms like net profit growth,revenue growth, equity:debt ratio, EPS, P/E Ratio etc.
Qualitative factors - Quality of management of the company, brand value of the company etc.
Both these factors are equally important and should be considered in conjunction while choosing a stock. For eg, Coke has a good track record of financials and also a great brand value which also contributes to its sales. Some of Warren Buffet's(Richest person on earth) investment are shining examples of fundamental analysis. He invested in coke for a simple reason that people will not ditch coke no matter how many times they drink it, coz it has a brand value associated with it.
Fundamental analysis will help in identifying the "intrinsic value" of the company. For eg a company trading at Rs 100 may have a intrinsic value of 200 rs which can be identified by fundamental analysis. In the long run stock markets will reflect the fundamentals of the company.
Lets look into the factors affecting fundamental analysis in deep in the coming posts.
How does inflation affect your invesment?
Before going on with the topic, i would like to take some time and say a "big thanks" to all readers/subscribers of "Investment School" on the occasion of the 50th post of my blog. I am encouraged by your astounding response to my blog and consistent tracking of my blog. Its your active reading that makes me to write more on investment and best practises. Thanks again!
What is inflation?
To put it in simple terms, inflation is nothing but an increase in cost of living for a person on a yearly basis.
Eg. If inflation is 8%, then theortically a good which was sold for 100 rs an year back is now costing Rs 108. So inflation is not a very tricky and difficult to understand , it is as simple as the above example.
How does inflation affects investments?
Inflation reduces the purchasing power of money. 100 rupees can purchase you more last year than what it can purchase as per the last example.
Inflation also erodes investment. Lets see this with an example.
Eg. Ram invests Rs.1,00,000 in a bank FD fetching him 11% interest rate on yearly basis. Ram is in a income tax bracket of 20%.At the end of one year, he gets back Rs.1,11,000 and he pays 20% of 11,000 as tax.
Amount Invested = 1,00,000
Maturity Amount = 1,11,000
Interest Earned = 11,000
Tax on Interest @ 20% = 2,200
Amount in Hand = 1,08,800
Interest Earned = (8,800/1,00,000) * 100
= 8.8%
If the inflation prevailing is 7%, then
Real rate of return/Inflation adjusted return = 8.8% - 7%
= 1.8%
This implies value of money at your hand has increased only by 1.8% and not by 11% or 8.8%.
As we can see in the above example, inflation erodes the return from our investments significantly.
How to reduce the impact of inflation?
We should choose a mix of investment instruments, so that the collective return out of our investment should beat inflation by a good margin of (8-10%) so that real value of our money increases in a significant manner.
Lets rework the same example above by splitting across two investment instruments - debt and equity invested for 12 months or 1 year.
Amount to be invested = 1,00,000
Amount invested in equity = 50,000
Amount invested in debt = 50,000
Interest earned in debt = 11% (0r) 5,500
Tax on interest = 20% (or) 1100
Interest - tax = 4,400
Interest earned in equity = 20% (or) 10,000
Total Interest Earned = 14,400 (or) 14.4%
Inflation = 7%
Real rate of return = 14.4% - 7% = 7.4%
So the inflation adjusted return has increased from 1.8% to 7.4% by reallocating the amount in two different modes of investment. The returns mentioned are assumptions, you need to reallocate the %age of amount in each asset class based on interest available during your investment period.
What is P/E Ratio?
"Company XYZ is available at a cheaper PE and is a good buy". You would have come across this phrase many a times in NDTV Profit or CNBC-TV18 or in the business newspapers. Most of us make an investment on recommendations from either friends/newspaper/TV channels and overlook technical parameters. Let us understand about these parameter and let me tell you it is not rocket science to learn these.
What is P/E Ratio?
P/E Ratio = Price of one share of a company/Earnings Per Share of the company.
Usually, EPS of the last four quarters is taken into consideration and the resultant P/E is called trailing P/E.If the expected EPS for the next few quarters is taken into account, we arrive at Forward P/E.
How to use P/E Ratio?
P/E Ratio can help investor take their decision to buy a stock. P/E indicates how much Rs is needed to generate a earning of Rs 1.
Eg. If P/E of company XYZ is 20, then it indicates, an investor is willing to pay Rs 20 to generate Rs 1 as earnings for the company.
P/E value varies across sectors. Banks have a lower P/E whereas the tail sector may have a higher P/E. Investors are willing to pay more for a retail company to generate earnings than they want to pay for Banks.
How to use P/E ratio along with other parameters?
As stated in one of the previous article, any technical parameter should not be considered alone to take a buy/sell decision. They should be analysed in conjunction with other parameters.
P/E ratio should be analyzed along with the growth rate of the company. If a company has a higher P/E ratio and but the future growth of the company is not very encouraging, then one should rethink on his decision to buy the stock. P/E of a company should be compared only with its peers. For eg, Infosys P/E should not be compared with SBI's P/E.
To reiterate, P/E should not be the only guiding factor to make your buy/sell decision. One should consider all factors affecting a stock's price before taking a call.
What is P/E Ratio?
P/E Ratio = Price of one share of a company/Earnings Per Share of the company.
Usually, EPS of the last four quarters is taken into consideration and the resultant P/E is called trailing P/E.If the expected EPS for the next few quarters is taken into account, we arrive at Forward P/E.
How to use P/E Ratio?
P/E Ratio can help investor take their decision to buy a stock. P/E indicates how much Rs is needed to generate a earning of Rs 1.
Eg. If P/E of company XYZ is 20, then it indicates, an investor is willing to pay Rs 20 to generate Rs 1 as earnings for the company.
P/E value varies across sectors. Banks have a lower P/E whereas the tail sector may have a higher P/E. Investors are willing to pay more for a retail company to generate earnings than they want to pay for Banks.
How to use P/E ratio along with other parameters?
As stated in one of the previous article, any technical parameter should not be considered alone to take a buy/sell decision. They should be analysed in conjunction with other parameters.
P/E ratio should be analyzed along with the growth rate of the company. If a company has a higher P/E ratio and but the future growth of the company is not very encouraging, then one should rethink on his decision to buy the stock. P/E of a company should be compared only with its peers. For eg, Infosys P/E should not be compared with SBI's P/E.
To reiterate, P/E should not be the only guiding factor to make your buy/sell decision. One should consider all factors affecting a stock's price before taking a call.
What is short covering?
In the previous article, we have seen about short selling and what are the risks involved. As promised in the last article, let us see how to mitigate the risk associated with short selling. We shall look at this with an example.
Trader Ram, borrows 50 stock of company XYZ at Rs 100 and promises to give back the stocks to the lender in a months time. Ram anticipates that the stock price of the company would go down to 80 rs and he is planning to buy back the share at 80 rs. Unfortunately , due to external and market conditions, the stock price of the company XYZ rallies to Rs 120 and there is only 3 more days for the month end and Ram has to buy back the shares and deliver it to the lender.
So Ram is in a loss of 20 rs/share and he has only 3 days to go and the market sentiment is very bullish and the stock price of company XYZ can appreciate further. Hence Ram decides to trim his loss at 20 rs/share and buys the share at 120 rs. Share market is not a place with only Ram as a short seller. There are numerous short sellers in the market and say 500 people had short sold the stock of company XYZ. All of them would be trimming their losses and all of them would be buying at higher stock price of 120 rs.
When 500 people places buy order for company XYZ at 120 rs, the company's stock price will eventually go further up and this increases the stock price of the company. This entire process is called "Short Covering". Short covering will lead to a rally in the overall market and these are called short covering rallies. When most of the traders had predicted that the market will touch lower levels, due to some global cues or other factors if the market rises, we tend to see the short covering rally.
The practises of short selling and short covering only suits traders and investors should try to stay away from risky practises.
Trader Ram, borrows 50 stock of company XYZ at Rs 100 and promises to give back the stocks to the lender in a months time. Ram anticipates that the stock price of the company would go down to 80 rs and he is planning to buy back the share at 80 rs. Unfortunately , due to external and market conditions, the stock price of the company XYZ rallies to Rs 120 and there is only 3 more days for the month end and Ram has to buy back the shares and deliver it to the lender.
So Ram is in a loss of 20 rs/share and he has only 3 days to go and the market sentiment is very bullish and the stock price of company XYZ can appreciate further. Hence Ram decides to trim his loss at 20 rs/share and buys the share at 120 rs. Share market is not a place with only Ram as a short seller. There are numerous short sellers in the market and say 500 people had short sold the stock of company XYZ. All of them would be trimming their losses and all of them would be buying at higher stock price of 120 rs.
When 500 people places buy order for company XYZ at 120 rs, the company's stock price will eventually go further up and this increases the stock price of the company. This entire process is called "Short Covering". Short covering will lead to a rally in the overall market and these are called short covering rallies. When most of the traders had predicted that the market will touch lower levels, due to some global cues or other factors if the market rises, we tend to see the short covering rally.
The practises of short selling and short covering only suits traders and investors should try to stay away from risky practises.
What is short selling?
Most of us are taken back with the stock market crash of late eroding our investment value, but you would be surprised to know that you can make profits even in a crashing market. Want to know how is that possible at all? To know how to make money in a bear market, we need to understand the concept of short selling.
What is short selling?
Short selling is selling of a stock which is not owned by a seller. When a trader feels that the stock price of a particular company will fall in the near future, he indulges in short selling. Let us see how it works with a simple example.
Eg. Suppose say, trader Ram feels that stock price of company XYZ currently trading at 1000 rs will go down significantly in the near future due to market correction or any other reason. Ram borrows certain number of stocks,say 20, of company XYZ from his broker for 1000 rs/share.The commitment is that he will have to return back 20 shares to the broker on a specified date in the future say in one month's time.
After purchasing the stock at 1000 rs, Ram immediately sells the stock at 1000 rs and gets 20,000. As expected the stock price of the company XYZ falls by say 100 rs and is at 900 rs at the end of one month. So Ram buys back 20 shares of XYZ at 900/share thereby spending 18,000 and gives back the shares to the broker.
Hence Ram has gained 2,000 from short selling of company XYZ.
Risk Involved
Making money is not that easy. So once you buy the stocks assuming that it's price will go down, what if the price begins to rise due to the overall market sentiment and in these days, where the market volatility is very high the markets can go up and down in a days time and hence there is significant risk involved in short selling.
So should we not indulge in short selling at all? If involved how to trim our losses? The answer is short covering. Let us digg on that in the upcoming posts.
What is short selling?
Short selling is selling of a stock which is not owned by a seller. When a trader feels that the stock price of a particular company will fall in the near future, he indulges in short selling. Let us see how it works with a simple example.
Eg. Suppose say, trader Ram feels that stock price of company XYZ currently trading at 1000 rs will go down significantly in the near future due to market correction or any other reason. Ram borrows certain number of stocks,say 20, of company XYZ from his broker for 1000 rs/share.The commitment is that he will have to return back 20 shares to the broker on a specified date in the future say in one month's time.
After purchasing the stock at 1000 rs, Ram immediately sells the stock at 1000 rs and gets 20,000. As expected the stock price of the company XYZ falls by say 100 rs and is at 900 rs at the end of one month. So Ram buys back 20 shares of XYZ at 900/share thereby spending 18,000 and gives back the shares to the broker.
Hence Ram has gained 2,000 from short selling of company XYZ.
Risk Involved
Making money is not that easy. So once you buy the stocks assuming that it's price will go down, what if the price begins to rise due to the overall market sentiment and in these days, where the market volatility is very high the markets can go up and down in a days time and hence there is significant risk involved in short selling.
So should we not indulge in short selling at all? If involved how to trim our losses? The answer is short covering. Let us digg on that in the upcoming posts.
Things to know about mutual funds
In a previous article , we have seen about famous investment myths about investments in general. There are also misconceptions about mutual funds prevailing among the investors. Let us dig through them and understand how they are misconceived.
1.Diversified funds invests across all sectors.
Ideally an investor would expect the fund to be invested in all sectors . However the funds usually have a bias towards large cap or mid cap or small cap. They have significant exposures in one or two sectors as they take sectoral bets. So investor should not go by the label "diversified fund". One should look at the funds past track record and identify what are the funds major bets over the past. So long term funds are a better option than new funds.
2. Mutual fund dividends are same as stock dividends.
Investors tend to believe that mutual fund's dividends are same as stock dividend. However it is not true. When a mutual fund declares dividend in a scheme, the dividend is deducted from the fund's NAV and it does not come free to investors.
Eg. A fund with 40 rs nav, when declares a dividend of 3 rs , the nav of the fund reduces to 37.
So an investor can opt for dividend-yield funds if he intends to generate minimum cash flow from his investment on a regular basis.
3.SIP always scores over lumpsum investing.
Though it is true that SIP(Systematic Investment Planning) would bring in discipline in investment and would lead to regular contribution, SIP does not beat lumpsum investing in a rising market. The major benefit of SIP - cost averaging does not hold good in a long term rising market. SIP works best when market has upward and downward cycles alternatively.
4. Lower NAV is cheap to buy
It is advisable to go for a old fund with a good track record rather than buying a new fund offer at a lower NAV. A detailed analysis of this given here.
5.FMP returns are fixed
Though the name Fixed Maturity Plan suggests fixed returns, in mutual funds, as per SEBI , no fund can assure the investor of fixed return. Hence even FMP's return can turn negative if the interest rate scenario changes during the tenure or inflation rises during the tenure.
So as an investor you should know all features of asset class (pro's and cons) before making your investment. So i hope this series of information is educating you in your investment journey.
What is Dividend Yield?
Continuing on the series of explanation of technical parameters of stock analysis, let us now get to know about one another important ratio known as "Dividend Yield".
Dividend yield of a company indicates the annual dividend paid by the company relative to its share price.
Dividend Yield % = (Annual Dividend Per Share / Price per share)*100
If a company A pays dividen of rs 10 and its stock price is 100 rs, then dividen yield is (10/100)*100 = 10%
Dividend yield indicates how much cash flow is generated for each rupee invested in the company by the investor.Dividend yield mutual funds are category which invests in stocks which has higher dividend yields.In general FMCG stocks have a higher dividend yield.
Who can invest in dividend yield stocks?
It is suitable for investors who wanted minimum cash payouts on a regular basis from their investment.
Dividend yield of a company indicates the annual dividend paid by the company relative to its share price.
Dividend Yield % = (Annual Dividend Per Share / Price per share)*100
If a company A pays dividen of rs 10 and its stock price is 100 rs, then dividen yield is (10/100)*100 = 10%
Dividend yield indicates how much cash flow is generated for each rupee invested in the company by the investor.Dividend yield mutual funds are category which invests in stocks which has higher dividend yields.In general FMCG stocks have a higher dividend yield.
Who can invest in dividend yield stocks?
It is suitable for investors who wanted minimum cash payouts on a regular basis from their investment.
What are Gold ETFs?
As a country, India is the largest consumer of gold and Indians value gold very high than anyone else in the world. In the past few years, apart from physical gold, other channels of gold investment have opened up. One of the most interesting option is Gold ETF. So what are GOLD ETF?
Gold ETFs are mutual funds which listed and traded in the stock market.All you need is a demat account to buy and sell Gold ETFs. The advantages of ETF as explained in the previous article holds good for Gold ETF too.
While investing in Gold ETF, take into account the following information.
1. Avoid buying Gold ETF funds during the NFO. The reason is during NFO Gold ETF charge 1.5-2.5% as entry load. However when these Gold ETFs are listed in the stock market, you can buy them without entry load but with a marginal brokerage of 0.2-0.5%.
2. Check the expense ratio of Gold ETFs. Currently they are in the range of around 1% for most Gold ETFs.
3. Gold ETFs cost includes cost of annual fees for demat account and online trading account. Remember you need demat and trading account to operate in Exchange Traded Funds.
What should investors do?
Though Gold ETFs reduces the risk of holding gold in physical format, you should take into account the cost(Expense ratio,brokerate,annual fees for trading and demat account) of holding a Gold ETF. After considering both scenarios, make your investment call.
Gold ETFs are mutual funds which listed and traded in the stock market.All you need is a demat account to buy and sell Gold ETFs. The advantages of ETF as explained in the previous article holds good for Gold ETF too.
While investing in Gold ETF, take into account the following information.
1. Avoid buying Gold ETF funds during the NFO. The reason is during NFO Gold ETF charge 1.5-2.5% as entry load. However when these Gold ETFs are listed in the stock market, you can buy them without entry load but with a marginal brokerage of 0.2-0.5%.
2. Check the expense ratio of Gold ETFs. Currently they are in the range of around 1% for most Gold ETFs.
3. Gold ETFs cost includes cost of annual fees for demat account and online trading account. Remember you need demat and trading account to operate in Exchange Traded Funds.
What should investors do?
Though Gold ETFs reduces the risk of holding gold in physical format, you should take into account the cost(Expense ratio,brokerate,annual fees for trading and demat account) of holding a Gold ETF. After considering both scenarios, make your investment call.
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