Quantitative Easing and its impact

This article was originally published in Postnoon on July 4, 2013

http://postnoon.com/2013/07/04/quantitative-easing-and-its-impact/133578

Vishal was waiting for me at the cafeteria when I went to get my usual cup of the morning coffee. He has been investing small amounts of money in the stock market with reasonable success. He would usually stop by to tell me about the performance of the stocks in which he has invested. Today he looked troubled.

Nicky: What is it Vishal?

Vishal: Professor Nicky, you must help me. My dad will beat me.

Nicky: Why? What happened?

Vishal: Last few weeks have been pretty bad. The SENSEX has been shedding points and the prices of the stocks I hold have also been going down. My dad has threatened to stop my pocket money and force me to withdraw all my investments from the stock market if there are any further losses.

A lot of the newspapers are talking about the withdrawal of Quantitative Easing by the US. They say that it will result in foreign institutional investors withdrawing money from the stock markets in India.

I don't understand any of it. Firstly, what is Quantitative Easing (QE)? Secondly, why should Indian markets go down if US withdraws QE?

Nicky: I am glad that you are reading the papers.

Quantitative Easing is a means to increase money supply or liquidity in the economy to stimulate growth. Countries like the US, Japan, UK and the Euro Zone, decided to infuse capital into their economy by buying corporate bonds, equities or mortgage backed securities.

Vishal: From what I know, these countries have huge debt and high fiscal deficit. Where do they get the money to infuse it into the system?

Nicky: Simple. They print it. Printing money does have the danger of making the domestic currency weaker. But the idea is to promote growth by increasing consumption, development and expansion. That is demand.

When the government supplies capital, some of the money finds its way to emerging countries like India, as the interest rates in emerging countries are much higher than in US, Japan, UK or the European Union. Some of this money also goes into the stock markets in the hope of better returns than the investors would find in their own countries.

When the Chairman of the Federal Reserve of US, Ben Bernake, announced plans to taper down the QE last month, it resulted in foreign institutional investors withdrawing money from emerging nations, including India. This resulted in the markets going downhill.

Vishal: You said that printing money has the danger of making the domestic currency weaker. But dollar is becoming stronger.

Nicky: Dollar is getting stronger as it is still seen as a safe haven. Also, the rate of dollar appreciation increased after the announcement of tapering the QE came.

Vishal: We are truly living in an integrated world. I must not just look at the Indian economy when taking decisions, but also the global economy.

Nicky: Yes indeed!

Ten point agenda for India by Jim O' Neill

This article was originally published in Postnoon on June 27, 2013
http://postnoon.com/2013/06/27/ten-point-agenda-for-india-by-jim-o-neill/132436

The Rupee is falling, almost touching the Rs60 per dollar mark. The Sensex is falling, is at last two months lowest levels. Confidence in the economy and government is at the lowest. Even nature does not seem to be co-operating and continues to pour in Uttarakhand. The general atmosphere is that of pessimism.

Amidst this scenario, comments from Jim O' Neill, British economist and former Chairman of Goldman Sachs Asset Management, famous for coining the term BRICs, to denote Brazil, Russia, India and China, indicate his continuing confidence in the potential of India.

O' Neill revisits the 10 ten things that India must do (included in his original paper in 2008, and relevant even today) to achieve its potential in a recent article published by Bloomberg.com. The ten things that O' Neill writes about are:

1. Improve governance. This seems the most difficult as well as the most important. The corruption and lapses at all levels are reaching unprecedented levels.

2. Fix primary and secondary education. While the population of India is now looked as, as an asset, rather than a liability, it would not remain an asset if the majority of the workforce are not capable of doing even the most basic jobs. A lot of other social problems have their root in the lack of education.

3. Improve colleges and universities. Once considered a centre for learning, and home to the Indian Institute of Technologies and the Indian Institute of Managements, half the graduates in India are unemployable. The quality of faculty and infrastructure and the number of institutions of higher education needs to be beefed up.

4. Adopt an inflation target, and make it the center of a new macroeconomic policy framework. This is what RBI has been trying to do, though with little help from the government.

5. Introduce a medium to long-term fiscal-policy framework, perhaps with ceilings as in the Maastricht Treaty-  a deficit of less than 3 percent of GDP and debt of less than 60 percent of GDP. This is something the current UPA government would find impossible to achieve with its populist policies. But if not addressed soon, growing deficit and debt could go out of hand.

6. Increase trade with its neighbors. As O' Neill points out, this could also be a good way to promote peace with neighbors.

7. Liberalize financial markets. The financial markets in India are relatively more liberalized than a lot of other emerging nations. Though investor protection and awareness is something that needs to be worked on.

8. Innovate in farming. Another green revolution is required in India to improve productivity and yield. With increasing number of middle class families and people being able to afford better quality food, the demand for pulses, fruits and vegetables are on the rise.

9. Build more infrastructure. O' Neill suggests that India learn from China in this department. I totally agree.

10. Protect the environment. With the ongoing calamity at Uttarakhand, need this point be emphasized more?

Beware of Scam Messages

This article was originally published in Postnoon on June 20, 2013
http://postnoon.com/2013/06/20/beware-of-scam-messages/131361

Abhi, my cousin, had been going through a bad patch in his life. He lost his job last year as the company in which he was working was acquired by another firm. In the process, many employees were laid off. He was still unemployed and looking for ways to improve his financial situation. He called me excitedly one evening and told me that there is something he wants to show me. Since I did not have any other engagements, I agreed to see him at home.

He walked into my drawing room before time, with a piece of paper in his hands and a wide smile on his face.

Abhi: See! God is very kind. Look what I've got! This came into my mail box today morning. All my troubles will be resolved now.

Nicky: Really? Let me see.

I read the letter he was carrying.

Attention dear,

I am Mann Sylvester, barrister at law. A deceased client of mine who died as the result of a heart-related condition in March 12th 2005. His heart condition was due to the death of all the members of his family in the tsunami disaster on the 26th December 2004 in Sumatra Indonesia.

http://en.wikipedia.org/wiki/2004_Indian_Ocean_earthquake

I have contacted you to assist in distributing the money left behind by my client before it is confiscated or declared unserviceable by the bank where this deposit valued at $19million dollars is lodged.

This bank has issued me a notice to contact the next of kin, or the account will be confiscated. My proposition to you is to seek your consent to present you as the next-of-kin and beneficiary of my late client, so that the proceeds of this account can be paid to you. Then we can share the amount on a mutually agreed-upon percentage.

All legal documents to back up your claim as my client's next of kin will be secured gradually and forwarded to you. All I require is your honest cooperation to enable us see this transaction through. This will be executed under a legitimate arrangement that will protect you from any breach of the law.

If this business proposition offends your moral values, do accept my apology. Please contact me at once to indicate your interest. Please note keep this proposal confidential between us only.

As I finished reading the letter, Abhi looked at me expectantly. I looked at him angrily.

Nicky: Abhi, have you completely lost your senses? Do you really believe that someone is waiting out there to share $19 million with you?

Abhi: I have no reason to not believe it. That's what the letter says.

Nicky: How about common sense? Don't you realize that this is just a way to fool you and get some money from you instead? As soon as you reply to this mail, this person will ask for your bank account details and then he will ask you to transfer some money to him to cover transaction costs. As soon as you do that, you will never hear from him again if you are lucky. In the worst case scenario, using your account details, they can withdraw money from your account.

This is a very common way to lure people into divulging details about their bank accounts. You must beware of such deals.

Abhi: I am glad I ran it through you first before accepting the deal.

Rupee Fall Explained

This article was originally published in Postnoon on June 13, 2013

http://postnoon.com/2013/06/13/rupees-fall-explained/130153

Prices are determined by demand and supply. And it is true for Exchange rates as well. Exchange rate is nothing but the price of a currency in terms of another currency. If the exchange rate between US dollars and Indian rupee is Rs58 per dollar, what it means is that you need Rs58 to buy one dollar. In other words, the price of a dollar is Rs58. So as the dollar becomes more expensive, or appreciates in value, one would need more and more rupees to buy one dollar. It means, the value of rupee is falling with respect to the dollar, that is, it is depreciating.

The exchange rate was Rs45.26 per dollar on June 12, 2011, compared with Rs56.75 per dollar on June 12th, 2013. The rupee has depreciated more than 25 percent in the last two years. It implies that the importers need to pay 25 percent more in rupee terms for the same quantity of goods, everything else remaining same; oil imports, gold imports, electronics, cars, foreign travels, education in US, everything for which one needs to pay in US dollars!

The depreciating rupee also implies improved revenues and good news for companies which charge for their products and services in US dollars, or for non residential Indians who send back money home.

But largely, people are worried. The stock market is worried and the worry is reflected in the falling indices. The central bank is worried as they fear that the falling rupee will result in an increase in inflation which has been tamed after maintaining high interest rates for a very long time. An increase in inflation would mean that any hopes of a reduction in interest rates by the Reserve Bank of India would be lost.

But why is the rupee falling? As mentioned earlier, it is all a play between demand and supply. The demand for rupee is falling, and the demand for dollar is increasing. Both resulting in a falling rupee. A few main reasons for the falling demand for rupee and the rising demand for dollars are:

·         Change in outlook for US by credit rating agency Standard and Poors from negative to stable and better than expected jobs data has increased the demand for dollar.

·         Decline in capital inflows and heavy outflow of funds due to foreign institutional investors pulling out their investments from the slowing Indian economy.

·         Falling gold prices lead to a surge in gold imports, resulting in an increase in demand for dollars.

·         Surge in oil imports, resulting in further widening of the current account deficit.

A strong exchange rate is what any country wishes for. For it is a reflection of the sound economy. The falling rupee does not boost the confidence of an already struggling Indian economy. Measures by the Reserve Bank of India and the Securities and Exchange Board of India to put a brake to the fall would be highly appreciated at this time.

What is NPS

This article was originally published in Postnoon on June 6, 2013; Co-Author: Anuj Hetamsaria

http://postnoon.com/2013/06/06/what-is-nps/129119

The New Pension Scheme is a scheme launched by the Government of India in 2009, to enable all citizens of India between the age of 18 to 55 to save for their retirement. The minimum amount to be invested is Rs500 per month, while there is no upper limit for the maximum amount that can be invested. Payment can be made by cash, cheque, demand draft or electronic clearing system.

A Permanent Retirement Account Number (PRAN) is issued to the subscribers. The PRAN card looks like the Permanent Account Number (PAN) card as the issuer of both is National Securities Depository Limited (NSDL). The PRAN is a 12 digit unique number and it is useful to track the status of the NPS account like balance, NAV units, transfer of funds etc, online.

One of the most attractive features of the NPS is the flexibility that it offers. It can be operated from anywhere in the country, irrespective of employment and geography. The safety of funds, returns and tax benefits are of course the primary benefits.  Its currently has ETT exempt status, that is it will be exempt from taxation at the investment and accumulation or earning stage, but will be taxed at the withdrawal stage. However, in the proposed Direct tax code it will have EEE status, which means that there will be no taxation at the time of withdrawal as well.

NPS also has the flexibility to chose the risk level that the investor wants to take. The investor can invest in one of the three schemes available as per the risk appetite. Asset class E scheme invests in Equities, Asset class C scheme in Fixed Income and Asset class G in Government securities.

There are two types of accounts, Tier I and  Tier 2. Tier 1 is for retirement and non-withdrawal account where as Tier 2 can be withdrawn as per the wishes of the investor. There are different schemes for withdrawal. One is premature withdrawal in which 20 percent will be given as lumpsum and remaining 80 percent as annuity. In case of retirement withdrawal, 60 percent will be given as lumpsum and 40 percent as annuity.

The point to be noted is the strictness in the premature withdrawal of only 20 percent. So a huge amount is blocked for a long period of time ensuring financial freedom at the time of retirement.

Is your cheque CTS compliant?

This article was originally published in Postnoon on May 30, 2013; Co-Author: Anuj Hetamsaria

http://postnoon.com/2013/05/30/is-your-cheque-cts-compliant/128058

or

http://issuu.com/postnoon/docs/epaper_30_may_2013/13?e=4033961/2680231

Mr. Mukherjee was holding a sheet of paper and walking towards me at the Park. He looked agitated as he always is whenever faced with financial decision making or difficulty in understanding something. He held out the paper even before he greeted me.

Prof. Nicky: What is this Mr. Mukherjee?

Mukherjee: Read it. I got it from my bank as an email today. What does this mean? What am I supposed to do?

Nicky: Okay, let me see.

The email read, "The RBI has introduced a new Cheque Truncation System (CTS). All cheques issued from 1st August, 2013 needs to be CTS 2010 compliant. Any old cheques or non CTS cheques will not be accepted after 31st July 2013".

You don't need to worry Mr. Mukherjee. RBI is implementing a new cheque clearning system called cheque truncated system which is meant for faster clearance of cheques.

Mukherjee: What is this CTS?

Nicky: CTS was introduced and implemented in the National Capital Region (NCR) in February 2008 on a pilot basis. The number 2010 in 'CTS-2010' is because the guidelines for CTS came up in the year 2010.

As per wikipedia, CTS is basically an online image-based cheque clearing system where cheque images and Magnetic Ink Character Recognition (MICR) data are captured at the collecting bank branch and transmitted electronically.

Mukherjee: But why should I worry about it? Since you taught me to use internet banking, I hardly ever use the cheque. I transfer money using RTGS and NEFT. Pay bills through internet banking.

Nicky: But didn't you give post dated cheques when you took a home loan? Also, you may need to pay for your daughter's education through cheque, many a times payments to government agencies need to be made by cheques, you may receive cheque from someone. If not immediately, you will definitely get affected by it in the future. So it would be best to be prepared rather than sorry. This system is anyways for your safety and benefit.

Mukherjee: How so?

Nicky: Its easier for banks to implement and is less costly than physical movement of cheques. It will result in shorter clearing cycle, superior verification and reconciliation process. It will be faster as the physical movement of cheques will stop and an electronic image of the cheque will be transmitted with key important data. As the system matures, it is proposed to integrate multiple locations and reduce geographical restrictions in cheque clearing. Hence, there are chances of multi-city cheques getting cleared on the same day, going forward.

It's not only beneficial from users perspective, it's good from regulators and banks' angle too. It reduces operational risk in banking. Scope for frauds are minimised under the CTS regime, which is good for banks.

Mukherjee: What kind of information will be transmitted electronically to the other bank?

Nicky: Information like date of presentation, presenting bank details, data on the MICR band.

Mukherjee: And what about the changes to the cheque leaf itself?

Nicky: A CTS compliant cheque leaf is different from a normal cheque leaf you currently use, and has certain distinct features. Certain benchmarks have been prescribed like quality of paper, watermark, bank’s logo in invisible ink, void pantograph, etc, and standardization of field placements on cheques. This will achieve standardization of cheques issued by banks. The printer details along with the words ‘CTS-2010’ is mentioned along the area where you tear off the leaf from the cheque book. The new symbol of the Indian rupee is printed beside the area where the amount in figures needs to be written. The words ‘please sign above’ are mentioned indicating the space where you will need to sign the cheque.

Mukherjee: It's good to know that the regulators are taking steps to introduce safer processes for us!

It's about confidence

This article was originally published in Postnoon on May 23, 2013

http://postnoon.com/2013/05/23/its-about-confidence/126879

Vishal was not ready to leave my office till his curious brain was satisfied. He wanted to start investing in stocks. In spite of my telling him to first get a demat account and then come back to me, he continued to ask questions.

Vishal: Professor, if I invest in a particular company, I would get dividends and/or capital appreciation. That's how I would get my returns. But how does my trading in the market have an impact on the company? Why should the company worry about the share prices? They don't get anything if I buy from trader A and sell to trader B!

Nicky: You are right. The company does not get any money out of your trade. But what if the company needed more money to expand and wants to raise that money through equity? Who will subscribe to the public offering of a company which has not been performing well? Ultimately, share prices are closest indication of the value of a company that the investors have.

Vishal: Could you explain it with an example please?

Nicky: Yes. Let us say we have only two companies in the market. One gives a return of 10% and the other gives a return of 5%. Every investor would want to invest in the first company. Increase in demand will lead to increase in prices of this company and the low demand for the shares of the other company will lead to fall in prices of that company.

Now let's say that both the companies want to raise money and come to the market with a public offering. Which company will you chose to invest your money in?

Vishal: Obviously the company which gives a 10% return, whose share prices are rising.

Nicky: Correct. Due to increased share prices, this company will be able to raise the same amount of money as the other company by issuing lesser number of shares. The earnings per share will not get as diluted as in the other company.

Vishal: Ah, got it. But what if the company does not want to raise money through the stock market and goes to a Bank for a loan?

Nicky: Higher stock prices indicate confidence of the investors in a company. Even if the company goes to a bank for loan or a financial institution for private placement of shares, the bank or the financial institution would prefer to give funds by way of equity or loan to companies which enjoy better goodwill and confidence in the market.

Vishal: Now I get the big picture. Thank you.

Demat Account for investing in stocks

This article was originally published in Postnoon on May 16, 2013
http://postnoon.com/2013/05/16/demat-account-for-investing-in-stocks/125582

Prof. Nicky was distracted by the knock on her door. Vishal, a first year MBA student, with a rich dad, was peeping through the door.

Prof. Nicky: Come in Vishal. What brings you here?

Vishal: Professor, I have some spare pocket money with me, say around Rupees fifty thousand. I am quite fascinated by the world of the stock markets and wanted to invest in a few shares. But I don't know from where to start. Could you help me please?

Nicky: Do you have a Demat Account?

Vishal: No I don't. How do I get one? And why do I need one?

Nicky: You need a Demat account because the shares are stored in an electronic dematerialised form now a days. Paper shares are no longer issued. So to ensure that the shares bought by you are properly credited in your account, the demat account is mandatory.

You have to first select a Depository Participant (DP) like IIFL, HDFC Securities, India bulls etc. Then fill up the Demat account opening form given by the DP that you choose. Attach all the documents required by them like proof of identity and address. You will also need to produce your original Permanent Account Number (PAN) card while opening your account.

Vishal: The procedure seems similar to opening a bank account! Will the DP do the transactions for me?

Nicky: Once the account is opened, the DP will provide you a Unique Beneficial Owner Identification (BO ID) to quote while making transactions. While selling and buying shares, you need to specify your BO ID and provide the DP with instructions to buy or sell, for example, which company, how many shares, at what price, which exchange, etc. Following which your Demat account will get updated and payment for the transaction will be made through broker/ sub broker / bank.

Vishal: How will I be able to keep a track of my transactions then? How much will they charge me?

Nicky: The DP will provide you with periodic statements of your stock holdings and transactions. The charges for opening and maintaining the Demat account differs with DPs. A fair idea of comparative rates can be obtained from the NSDL and CDSL websites.

Vishal: How do I choose a company to invest in?

Nicky: There are various ways of valuing a stock. You can do it personally with the help of past records of the companies or you can take the help of an advisor/broker. But, to begin with, go get a demat account opened. We can chat about picking stocks after that. And please ensure that you inform your parents that you are going to be putting their money in the stock market.

Vishal: Sure Prof.!

Exchange Traded Funds

This article was originally published in Postnoon on May 9, 2013

http://postnoon.com/2013/05/09/exchange-traded-funds/124394

Regarded as the most revolutionary alternative investment instrument, Exchange Traded Funds or ETFs have evolved rapidly in the last few decades. However, despite proving their effectiveness globally, ETFs are yet to make a stronghold in India.

What Are ETFs?

ETFs are index funds that, like stocks, are traded on the stock exchange; but unlike stocks, they are the shares of a portfolio and not of a particular company. Like mutual funds (MFs), ETFs represent a collection of stocks; but unlike MFs, they are traded throughout the day. ETFs closely track the performance of different market indices during the trading day. Unlike closed-ended funds, they do not have a limited number of shares. An ETF’s trading value is based on the market price of the underlying stocks in the target index, like a Nifty ETF will look to replicate CNX Nifty returns.

Advantages

ETFs can be traded real time during market hours as well as in advance. Since they are a passive investment tool with low turnover, ETFs, compared to active MFs and closed-ended funds, have a lower expense ratio and transaction cost. They do not impose backend redemption charges. Adding to the attractiveness of ETFs is their high diversification quotient, simplicity and transparency. In ETFs the underlying stocks are known and quantities are already defined. Investment in ETFs can be directly made through the fund house or the stock exchange. Unlike MFs, ETFs report holdings on a daily basis and transact based on the market price. They are tax efficient as they seek to minimize capital gains by exchanging the stocks that are sold out of the index with those funds that are added to it. ETFs are a good choice for new investors with a small corpus. The minimum ticket size is 1 unit (in case of IIFL Nifty ETF, 1 unit is approximately 1/10th of the Nifty level, that is INR 500, when Nifty is at 5000).

Disadvantages

These advantages notwithstanding, ETFs have certain demerits that have derailed their growth in India. ETF investments are limited to narrow-based market indexes and some of them result in higher costs and risks as they do not track the widely accepted indexes. With ETFs being limited to large-cap stocks in some countries, investors could be deprived of gains from investments in mid/small-cap stocks. Compared to actual stocks, ETF investments are generally made in a low volume index, which could result in a higher bid-ask spread. Further, ETFs, like stocks, cannot be wilfully sold if it is a thinly traded issue or if the market is experiencing high volatility.

These might explain why ETF investments, though attractive, have yet not found a significant place on the investment bandwagon in India.

Silver linings playbook

This article was originally published in Postnoon on May 2nd, 2013
http://postnoon.com/2013/05/02/silver-linings-playbook/123121

After a long hiatus, Professor Nicky was back to the campus. After the cool breeze of the hills, the heat of Hyderabad summers was not helping her mood. The innumerable messages, mails and posts needed her attention, as also a long list of people who wanted to meet her. As usual, she took a cup of coffee and strolled out of the campus to clear her head. Just outside the campus gate, she bumped into Laxmiamma.

Laxmiamma was always a pleasure to meet. With a smile on her face, she greeted Nicky. But the smile was extra wide today.

Nicky: Oh hello there! What is the reason for your million dollar smile today?

Laxmiamma: First reason is that you are back....

Nicky: Thank you. What's the second?

Laxmiamma: Gold prices fell by more than 20% last month. I bought 50grams of my favorite metal. I will buy more if it falls further.

Nicky: You are above 60 years of age. Why do you need to buy gold now? I've never seen you wear any ornaments.

Laxmiamma: What does age have to do with buying Gold? And anyways I buy it as a security for the future, for bad times.

Nicky: Then why just Gold? Why not Silver as well?

Laxmiamma: Silver?

Nicky: Yes. While Gold has given a total return of around 325% over the last 10 years period, Silver has given a return of around 375% over the same period. And it is expected to give a much higher return than Gold in the future.

Laxmiamma: Why?

Nicky: Well, for one, the reserves of Silver have been going down, thereby making its supply limited. It is used in small quantities in many industrial processes. It is one of the most widely used commodity, with over 10,000 uses. Hence, the demand for silver is growing, but the supply is limited. Another parameter is the Gold-Silver ratio. The current ratio between the gold and the silver prices is approximately 1:60. Whereas, historically, this ratio has been around 1:15 to 1:20.

Laxmiamma: You are losing me.

Nicky: Sorry. What I mean to explain is that, either Gold is priced too high, or Silver prices are too low, or it's a combination of both. We can expect the Silver price rises to be steeper than the Gold price rises in the future. We should see a correction in the ratio.

Laxmiamma: So are you saying that I should not invest in Gold?

Nicky: No. I am not saying that. I am saying that Silver is also a good option and you should try investing in Silver too, if the aim is to invest. Anyways it is better to diversify your investments.

Laxmiamma: Yes. Like you keep saying, "don't put all your eggs in one basket"!

The role of stock markets

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...

RBI keeps us guessing

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.

KYC Norms eased

This article was originally published in Postnoon on December 21, 2012. Co-author: Purvee Hetamsaria

http://postnoon.com/2012/12/21/kyc-norms-eased/96450

“The KYC (Know Your Customer) Guidelines were formulated to protect the financial system against threat of money laundering/terror financing and frauds”, said Prof. Nicky, when she was asked about their purpose by one of the new first year student.

Prof. Nicky: But why do you ask?

Student: I have been trying to open a savings bank account in a bank which has a branch just outside my home. The executive wanted a host of documents which I provided to him. But he is asking for separate identification and address proofs. I gave him my passport which also has my address. But he says that he needs an electricity bill or a bank statement as an address proof. Now where do I get that from? There is no separate electricity bill for me. It's on my father's name. Also, I want a bank account because I don't have one.

Prof. Nicky: Oh! In that case you need not worry any more. Just a couple of days back, the Reserve Bank of India, the regulator for all banks in India, revised the guidelines for KYC. To ease the burden in complying with the KYC requirements for opening new accounts, RBI has now notified that if the address on the document submitted for identity proof is same as that declared in the account opening form, the document may be accepted as a valid proof of both identity and address.

Student: Ah...that solves at least part of my problems.

Prof. Nicky: You must keep in mind though, that this happens only if you give the same address in the form as mentioned in the proof that you have provided.

Student: Ok. That is what I have done. Though I have another problem.

Prof. Nicky: And that is?

Student: The executive has also asked me for an introduction from an existing customer. My parents have accounts in a different bank. I do not know of anyone who has an account with this bank. What am I to do?

Prof. Nicky: You are in luck lady! Seems like RBI has been taking note of your prayers! RBI has notified that the introduction is not necessary any more under the KYC guidelines. So the bank should not insist on introduction for opening an account. So call back the executive and ask him to update himself with the newest changes and then open your account.

Student: I must thank RBI for these changes. This problem was being faced by a few of my other friends too. I must go and inform them too about these developments. Thank you, as usual!

Deeper PF cut will help in long term

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!

For investors or govt?

This article was originally published in Postnoon on December 7, 2012

http://postnoon.com/2012/12/07/for-investors-or-govt/92810

"So Life Insurance Corporation (LIC) of India is launching a new Unit Linked Insurance Plan (ULIP)?" asked Srikanth.

"Yes. So the newspapers and news channels have reported", I replied.

Srikanth: I remember, ULIPs were really popular a couple of years back. Everyone was talking about it, investing in it. Then suddenly, they disappeared from the investments arena. Why? What happened?

Me: Well, as the regulations stood way back in 2010, the costs to the investors were huge in the case of ULIPs. The distributors and agents got large selling commissions, as high as 40% of the first year premium, and hence many of them pushed the product, mis-informed and mis-sold it to the investors.

Srikanth: Wow...isn't that wrong?

Me: It is. Hence the investors protested, once they realized that they had a product which was a sure way to lose money. Following the protests and a legal battle with the capital markets' regulator, SEBI, the Insurance Regulatory and Development Authority (IRDA), brought in new regulations regarding the costs and losses in the event an investor fails to pay subsequent premium installments. After this, ULIPs did not remain as lucrative for the agents as they were earlier. Hence they stopped pushing it to the investors. And the sheen faded.

Srikanth: Legal battle with SEBI?

Me: Yeah, SEBI claimed that ULIPs were Mutual Funds being sold as Insurance and hence they should have jurisdiction over ULIPs. Anyways, the result was a set of new regulations, which brought down the charges for the investors and increased the minimum lock-in period of ULIPS from three years to five years.

Earlier, most of the insurers charged higher during the initial years of the plan. But now, the charges have to be distributed evenly over all the years of the lock-in period. IRDA also mandated a minimum mortality cover and a minimum guaranteed return. The charges are capped between 2.25% to 4%.

Srikanth: That's good for the investors. But not for the insurers and the distributors.

Me: That's the reason the share of ULIPs has only gone downhill since 2010. LIC is now coming out with a ULIP product after almost two years. And even that may not be with the investors' in mind. As Vivek Kaul points out in his article on www.firstpost.com, it could just be a ploy to help the government raise money through divestment. Since the investor's may not be willing to pick up stocks in PSUs, LIC will bail out the government by picking up stake in those companies.

Srikanth: But why launch a ULIP product for it?

Me: That's because the premiums collected through traditional plans cannot be invested in the Equity markets completely. There is a cap of 15% on equity exposure for the traditional plans, according to the Insurance Act. However, in the case of ULIPs, the entire premium can be invested in equities.

Srikanth: Ah, so basically LIC may be hoodwinking the investors, in order to help the government.

Me: Hmmm...I did not think in that direction earlier. But after reading Vive Kaul's article, I feel that may be the real story! Ultimately, the investors must do their homework before making any investment decision!

Debit Cards, Credit Convenience

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!

Tax implications of buying versus renting

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.

Plan your retirement

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...

Gold on my mind

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.