Commitment Rewards

This article was originally published in Postnoon on September 14th, 2012

http://postnoon.com/2012/09/14/commitment-rewards/72810

I saw Abhi waiting for me again near my office. He had applied for a home loan about two weeks back. I had explained the process of applying for the home loan and also how the EMI's work. I wondered what's brought him back to me so soon. I didn't have to wait long. He had his papers out, even before I could open the door to my office.

Abhi: Nicky, the bank has sent people over to my house to check if I actually live there. They even called and visited my office.

Nicky: That's routine. Nothing to be worried about. They are just doing their job. Due diligence.

Abhi: Yeah, yeah. I understand. I am not here for that. Yesterday, my friend told me about a scheme that Axis Bank has come up with. He told me that if I take a loan for a period of 20 years and keep paying all my EMIs on time, without any defaults, the bank will waive off my last one year installments (that is last 12 months' installments).

Nicky: Oh yes, I heard about that. You need to be locked with them for 15 years time to avail of that offer.

Abhi: How does that matter?

Nicky: Oh it does. Because it means that you cannot avail this benefit if you decide to prepay your loan before 15 years. It also means that you cannot avail this benefit if you transfer your balance to another bank, if they offer to charge a lower rate of return.

Abhi: Does this mean that the scheme is useless?

Nicky: Not at all. I'll explain this with an example. A person taking Rs 50 lakhs as loan, for a period of 20 years, at 11%p.a. interest, will need to pay an EMI of Rs 51,609 per month. According to this scheme, he will be able to save Rs6,19,308 after 15 years, the equivalent of one year's EMI.

Abhi: That's quite a lot of money!

Nicky: Well. So it seems. But then, you see, the value of money 15 years down the line, is not the same as the value of money today. So its present value, after accounting for an average inflation of say 7%, is just Rs 2.24 lakhs. The value could be lower if you take a higher inflation or a higher opportunity cost.

Abhi: You are getting into a lot of jargons. Just tell me what should I do?

Nicky: Take an informed decision. All other terms being same, with no intentions to default, or switch your lender and if you are sure that you will keep the loan for at least 15 years, then this scheme is for you. The benefit in present value terms is not as big as you think. But it is definitely a benefit.

On the other hand, if you think you might want to repay earlier or might want to change the lending bank sometime in the future, then this scheme may not benefit you and this scheme should not be the deciding factor for choosing a home loan provider.

Understanding EMIs

This article was originally published in Postnoon on September 9th, 2012


http://postnoon.com/2012/09/07/understanding-emis/71082

A week after our first set of discussions about home loans, Abhi came back to me for further assistance with understanding home loans. He told me that he had approached his bank and started the process of getting a loan sanctioned. He had already submitted self attested copies of four months pay slips, six months' salary bank statements, past three years Form 16s, ID proof, address proof, PAN Card and the employee ID.

Abhi: Nicky, tell me, what are EMIs and how are they calculated?

Nicky: Equated Monthly Installment or EMI, as they are popularly known as, is a fixed amount of money that you return to the bank, on a specific date of each month. The EMI consists of part repayment of principal and the interest. It is calculated in such a way that over a period of time, if you pay all the EMIs on time, your loan will get completely repaid.

Abhi: Why don't we just pay the interest every month and repay the principal after the term of the loan is over?

Nicky: Well, you could do that. But that would mean that you pay interest on the entire principal throughout the term. Also, when the term gets over, you may not have enough money to repay the principal. In EMIs, because you are also repaying a part of the principal every month, the interest component keeps decreasing every month. Every month, you pay interest on a lesser principal.

Another advantage is that the principal repayment is spread over many months, typically 240 or 120 months, relieving you of the burden of paying a very large amount at one time in the end. For example, if you were to take a loan of Rs10 lakhs at an interest of 11%, you will need to pay an EMI of Rs10,322 per month. This is equal to Rs1,23,864 per annum. If you look at the Table, you can clearly see that every year, your payment towards interest is coming down, as the interest is calculated only on the balance of the principal amount. If you keep paying Rs10,322 every month, for 20 years, you would have cleared your entire loan, along with all the interest.

Year Principal Repayment Interest Paid Outstanding Principal

Abhi: That's very comforting.

Nicky: And that's not all. You can also avail of tax benefits on both the principal as well as the interest paid.

Abhi: Hmmm...I just wish that my sanction letter comes soon and we are able to move into our new home as soon as possible!

Paperwork Check Must

This article was originally published in Postnoon on August 31st, 2012


http://postnoon.com/2012/08/31/paperwork-check-must/69584

My recently married cousin, Abhi, was contemplating buying a home. After putting all his savings together, he was still short of around Rs20 lakhs to buy the house that his wife and he liked. Being an engineer by education and by profession, he always found it difficult to handle financial matters. It is more a mental block than the capability to understand or deal with finances.

He came to me to understand the home loan process.

Abhi: A lot of the banks advertise that the home loan will be processed, sanctioned and made available within a week or 10 days. Is it so simple?

Nicky: Abhi, that's what they say. But you have to be realistic. It's not so simple. You first need to get a whole lot of documents in place like your recent bank statements, salary slips and job offer letter, Form 16 issued by the company, passport sized photographs, Pan Card, Address Proof, Agreement of Sale etc.

After you submit these to the bank's sales team, they will then send it to their loan processing officer. Who will, rest assured, ask for more documents. You provide those, they will ask for something else.

Abhi: But why does this happen?

Nicky: That's because of inadequate training to the sales team and their half hearted efforts. They do not give a complete list to begin with, to the customer. They do not check the documents properly and take it from the customer. If they did, they would know that the photo in the ID proof is not clear and hence the loan processing officer will not clear the file. Or, the amounts in the bank statements showing the down payment to the builder do not add up to at least 20% of the value of the property.

Once they collect the cheque for the processing fees, their motivation to help you is lost. So they keep coming back to you and asking for more and more documents. And they will always justify by saying that the 'regulations have changed'.

Abhi: This is de-motivating. If the process is so tiresome, why would anyone take a home loan?

Nicky: Do you have any other choice? Can you get a loan from somewhere else? Well, the answer is No. For most of us. So, whether we like it or not, we are stuck with this system. And then look at it this way, after you get the loan, you will be the owner of your dream house. So keep your cool. Patience is the key. You will get your loan.

Abhi: That's true. How about the interest rates and the EMI?

Nicky: Ah that! Can we do it later? I have a class now...

Algorithmic Trading

This article was originally published in Postnoon on August 24th, 2012


http://postnoon.com/2012/08/24/algorithmic-trading/67942

From time to time, Algorithmic Trading (AT) or High Frequency Trading (HFT) hits the headlines, mainly due to regulatory concerns. The main concerns of the regulators being transparency, fairness and systemic stability.

A couple of days back, they were back in the news as the Delhi Highcourt issued notices to the regulator, Securities Exchange Board of India (SEBI), the exchanges: NSE and BSE, the Finance Ministry and the RBI. The notices were sent as a result of the plea of Intermediaries and Investor Welfare Association, which has alleged that AT "discriminates between rich and influential brokers and common investors/retail investors and creates inequality and finally casts a deceptive data to common investors and retail investors while trading in shares and securities on online trading platforms of BSE and NSE".

Let's look at what is AT in today's article.

Definition

According to wikipedia, AT, also called automated trading, black-box trading, or algo trading, is the use of electronic platforms for entering trading orders with an algorithm deciding on aspects of the order such as the timing, price, or quantity of the order, or in many cases initiating the order without human intervention.

A special class of algorithmic trading is (HFT), in which computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.

Characteristics

• Very high speed of trading due to the use of high speed computers

• Use of algorithms to process data feeds and take decisions to buy and sell automatically

• Use of co-location services

Concerns

The International Organization of Securities Commissions (IOSCO), reported in July 2011 that AT also contributed to the flash crash of May 6th, 2010 in the US when the benchmark index, Dow Jones Industrial Average crashed and then quickly recovered.

In India too, in the last couple of years, there have been instances where the markets have lost a large amount of money in a very short span of time and then recovered quickly. Once such instance happened during the Muhurat Trading on Diwali day of 2011.

These events brought to light the highly correlated nature of trading strategies using AT. This means that the markets can quickly become one sided. AT also results in very high short term volatility which could be detrimental to retail, non algorithmic traders.

Pros

AT enhances the speed of information dissemination and its supporters claim that it helps in making the markets more efficient. Large and multiple trades can be processed and carried out quickly. Complicated strategies can be implemented through algorithms. 75% to 80% of total trades in US and UK can be attributed to AT.

These are also the very reasons why the Intermediaries and Investor Welfare Association has accused the regulators of being "silent spectators". AT gives unfair advantages to institutions or brokers who have of co-location facilities and high speed computer prowess which are not available to the common man or ordinary retail investors.

SEBI, exchanges and the Ministry clearly need to put some thought into the advantages of speed over fairness to all.

We object Mr. Chetan Bhagat

This article was originally published in rediff.com on August 22, 2012

http://www.rediff.com/getahead/slide-show/slide-show-1-specials-we-object-mr-chetan-bhagat/20120822.htm

Do the young Indians really just want a job and a girlfriend? Which India is Mr. Chetan Bhagat talking about?
Chetan Bhagat became an instant hit with the Indian youth with his first book, "Five Point Someone". The book took the youth through a journey of three engineering students at the prestigious Indian Institute of Technology, which every young Indian either related to or wanted to be able to relate to. It was easy to read and witty, but no literary masterpiece. His subsequent books, One night @ the call centre, The three mistakes of my life, and 2 States, too went on to become bestsellers but established Bhagat as a 'dud' in literary circles.

Bhagat's latest book, 'What young India wants' is a non-fiction, unlike his previous books, and an attempt by Bhagat to establish himself as a serious, thinking, author. The book title indicates that Bhagat is trying to capitalize on his popularity with the Indian youth. The book may go on to become a bestseller, but he has clearly chewed more than he can bite this time.
There are essays in the book which have nothing to do with the youth or the young India. They are plain criticisms of politicians, policies and processes. And we are all on board there. Even though some of the observations are a bit over the top. For example, comparison of cricket with opium or suggesting that Indians are 'suckers for power'!

However, he has got the pulse of the youth wrong in many place in the essays which are related to the title of the book, "what young India wants". And the biggest one in my opinion is that according to him Indians lack a good set of values and are a confused bunch of people.

Indians are definitely not confused and have solid set of values.

The young India I know wants to fulfill the aspirations of their parents. We want to bring home a boy or a girl whom our parents would approve of. We want to come home for Diwali, wherever in the world we might be. We want to take care of our parents in their old age and protect our children, always.

We believe in God. We know the right from the wrong. We know the difference between honesty and corruption. Sometimes we deviate from our values to survive. To survive the same processes and policies which Bhagat has so lucidly criticized in his book.

We are fighters who get to schools, colleges and offices, running behind buses, dangling through the door, because of inadequate frequencies and public transport. Would we ever reach the destination on time if we were to form a queue? Queue works when 10 or lower number of people board a bus with 10 empty seats. But if 20 people need to board a bus which is already full, it will not work. Have you seen Indians break queues in the developed countries?

The youth of the nation know that all service providers are bad. We stick to a service provider as long as we don't decide to change, on a bad morning, in frustration. But the change is not in anticipation of better service. Same goes for their votes. Bhagat suggests that change can be brought around if everyone decides to vote for honest politicians. Isn't that an oxymoron in India? There are no honest politicians to vote for. Whether it's one party or the other, they are all corrupt.

We look up to our corporate czars because they survived and found their way through this corrupt system. Even if they inherited, as against innovated, they stayed afloat. And the suggestion that Indian youth does not look up to innovators or entrepreneurs is a bizarre one. Narayana Murthy (Infosys), Kiran Mazumdar Shaw (Biocon), Sunil Bharti Mittal (Airtel), and many more, are all first generation entrepreneurs, and we look up to them!

In spite of the education system, Indians think (unlike what Bhagat suggests)! We think, therefore a significant percentage of the scientists, doctors and academicians in the US are Indians. The fact that they go to the US and invent or innovate, and not in India, is a reflection on India's processes and policies. Not on the quality of our brains.

And seriously, the comparison between opium and cricket, is inane by any stretch of imagination. Yes there was a controversy. The business part of it isn't transparent. There are glamorous people involved. But what does that have to do with the game? Indian's enjoy watching the game, the country has some world class players, they idolize some of them, how's that different from basketball in the US or Football in Brazil? And trust me Mr. Bhagat, no child in India thinks about or sees "cricket as yet another example of India's rich and powerful treating the country as their fiefdom".

Truly, there is only one thing wrong with India. Its politics and the politicians. That is the root cause of our socio-economic troubles. And all we want, as youth of the nation, is a country free from these corrupt politicians. There is no confusion about that!
Author: Chetan Bhagat
Title: What young India wants
Publisher: Rupa Publications India Pvt. Ltd.
Pages: 181

Plan Bond Purchases Well

This article was originally published in Postnoon on August 17th, 2012


http://postnoon.com/2012/08/17/plan-bond-purchases-well/66652

Srikanth was already waiting in the cafeteria when Prof. Nicky walked in for her morning cup of coffee.

Prof. Nicky: Good Morning Srikanth. What pulls you out of your bed at this time?

Srikanth: (Offended), well I am generally awake by this time. But today I am here to show you an sms and ask you about what it means.

Nicky: Alright, let me see the sms.

Srikanth: Here it is- "Shriram Transport Finance Corporation launches the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue closes on August 10, 2012. The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively".

Prof. I know that a bond is an instrument which allows one to invest in a company (corporate bond) or with the government (government bond), for a fixed period of time and with a fixed return. In the case of this sms, a corporate bond is being offered for a fixed period of either 3 years or 5 years and will give a return of 10.25 and 10.5 percent respectively. But I have a few more questions.

First, What is coupon rate? Is it same as return?

Nicky: Let me make a correction in your previous statement, related to your question. 10.25% and 10.5% are not returns. They are coupon rates. Coupon rate is the interest that the bond issuer pays on the face value of a bond.

Srikanth: Face Value?

Nicky: Face Value of the bond is the amount which is returned to the investors by the issuer when the Bond matures. The price or the market value of the bond may be different depending on the attractiveness and demand for the bond.

Let me explain. If the prevailing price of a similar bond, with same coupon rates, in the market is say Rs97. Nobody will be willing to pay more than Rs97 for another bond. Hence the company will have to sell their bond at a discount of 3% on the face value. On the other hand, if the other similar bonds in the market are being sold at Rs105, the company will not be willing to sell their bond at the face value of Rs100. So, they will sell their bond at a premium of 5% on the face value.

Now, if the bond is bought at the face value, and held till maturity, it will give us a return which is equal to the coupon rate. But, if it is bought at a price less than or more than the face value, we will incur a capital loss or gain on maturity. This results in our return from bonds being different from the coupon rate. In finance parlance, the return on a bond is known as yield.

Srikanth: But why will a bond price be Rs97 or Rs105?

Nicky: That's because, a bond need not be held till maturity. It can be traded in the market. Its transferrable. So a bond which is more in demand due to its higher coupon rate, its price increases. Whereas a bond which has a lower coupon rate, its price decreases.

Srikanth: Ah...Demand and Supply at work here too! Economics everywhere!

Nicky: Absolutely. No wonder it is known as the mother of all subjects!

Better Safe than Sorry

This article was originally published in Postnoon on August 11th, 2012

http://postnoon.com/2012/08/11/better-safe-than-sorry/65297

Prof. Nicky had not been to Laxmiamma's house since sometime and on her way to the campus, decided to stop by her house to relish her Irani chai and enquire about her well being. On her advice, Laxmiamma had opened a savings bank account and had also started saving through a recurring deposit. She was happy with this arrangement as it gave her peace of mind and assurance of safety for her money, as against the constant fear of theft when she kept it at home.

There was an agent at the bank who was advising her to invest her money in Systematic Investment Plans (SIP) rather than in a recurring deposit. So as soon as Prof. Nicky came in, after the pleasantries and having settled on the sofa with the chai, Laxmiamma asked him about SIPs.

Laxmiamma: This man at the bank says that SIPs give a much higher return when compared to the recurring deposit. What are SIPs? Is it true that they give more return? Why and how do they give more returns? Why did you ask me to put my money as deposits when SIPs give more return?

Prof. Nicky: Now, now...slow down amma! Let me answer your questions one by one.

What are SIPs

SIPs are instruments which allow you to invest in Mutual Funds on a periodic basis, as against a lump sum. SIPs are to mutual funds, what recurring deposits are to fixed deposits.

Performance of SIPs

When you put your money in a SIP, every month or every quarter, depending on your preference, the money is used to buy the units of mutual fund schemes. The units are bought at the price or the NAV of the fund on a specified date of that month/quarter. In this way, you get more units when the NAV is lower and lesser units when the NAV is higher. So it helps you average out the highs and the lows. This means that is helps reduce risk by spacing out your investments.

But, we cannot say that they will perform better than recurring deposits. Because the performance of the SIPs will depend on the performance of the fund in which you are putting your money. And the performance of the fund depends on where the fund put their money. If it is an equity fund, the performance of the fund will depend on the performance of the stocks in which the fund invested. So yes, they may give more returns than recurring deposits on some occasions and give lesser returns on the other.

Risk and risk taking ability

A person who can take the risk of either getting lesser returns or even losing a part of their principal, should invest in SIPs. They are less risky than investing directly in Mutual funds and even lesser risky that investing directly in the stock markets, yet, they are risky. On the other hand, recurring deposits are safe instruments, with practically no risk, unless the bank goes bankrupt.

Laxmiamma, you are too old to take risk. And you are not so rich that you can afford to lose your hard earned money. That's the reason I asked you to invest in recurring deposit rather than SIPs.

Laxmiamma: Ah...next time that agent bugs me, I can now tell him that I do not have the risk taking ability to buy SIPs. I wonder if he will understand it though (winks)! More chai?

The Village called the Globe

This article was originally published in Postnoon on August 4th, 2012

http://postnoon.com/2012/08/04/the-village-called-the-globe/63760

Pax Indica-India and the World of the 21st Century by Shashi Tharoor, hits the stores at a time when India is struggling with policy making at the domestic front. While our Prime Minister, Dr. Manmohan Singh is heard at International forums, he has been accused (and rightly so) of having lost his voice at home. In an environment which is mired with serious lapses in policy making at the home front, takers for a book on foreign policy may be few.

Having said that, there is no denying that if there is anyone suited to write a book on India’s role in shaping the world’s ‘dreams’, it has to be the former UN Under-Secretary general and the former external affairs minister of state, Shashi Tharoor.
The premise of the book is vasudhaiva kutumbakam and focuses on the relationship of India with the members of the world family, past, present and suggestions for the future. Continuing with his obsession with Pandit Jawahar Lal Nehru, the book starts with a reference to the “tryst with destiny” speech and goes on to establish the role that India has been playing on the ‘global stage’ since the Harappan civilization.

It goes on to give a detailed account of India’s diplomatic relations with Pakistan, China, US and UN, but just offers a glimpse of the relations with the other regional and neighbouring countries, which might go a long way in shaping the policies of an India of tomorrow.

The book lacks the wit and spontaneity of his early books like The Great Indian Novel or Show Business. But it gives a good insight into the foreign policy making process in the country. Heavily advocating the use of social media, Tharoor emphasises on the need for change in the ‘intellectual and institutional infrastructure for foreign policy making in India’.

Name: Pax Indica-India and the World of the 21st Century
Author: Shashi Tharoor
Pages: 449
Publisher: Penguin Books India

Use RTI Superhighway

This article was originally published in Postnoon on August 3rd, 2012 (Co-Author: Anuj Hetamsaria)


http://postnoon.com/2012/08/03/use-rti-superhighway/63511

The Right to Information Act (2005) became effective in October 2005 to empower every citizen to ask questions from the Government. This Act has given the Indian citizens the right to seek information and take copies of government documents on one hand and made the public officers accountable on the other.

The application may be submitted electronically or in a hard copy to the designated Public Information Officer (PIO). Every government department now has a PIO who is responsible to provide the information to any and every applicant.

The application should be accompanied with a payment of Rs10 towards processing charges for the Central Government Departments. The fees may vary from state to state for the departments at the state level. It can be paid in Cash, by a Demand Draft or by a Money Order. You must remember to take a receipt for the application fees paid.

Write or type the application in a clean, white sheet of paper. Frame the questions clearly with the intention for finding out reasons rather than accusing. For example, avoid using words like 'Why did you" and "How could you". Instead use words like "share the process followed" or "would like to know the manner in which...". There is no limit to the number of questions that can be asked. However, it is advisable to keep your list of questions short and queries precise.

The application must contain the name of the person asking for information, his/her signature and application fee details like DD or Cheque Numbers. The reason for seeking information need not be stated as any Indian citizen has the Right to Information.

The application may be rejected if the department is exempt from disclosure or if the disclosure infringes upon the privacy or copyright of a person other than the government.

The upper limit for providing the information is 30 days. However, it is only 48 hours in cases involving life or liberty of a person. It is 35 days if the application is given to the Assistant PIO and 40 days if the information concerns a third party from whom the department might need to get the information before responding to the RTI application. If the information is not provided within these time frames, it is deemed as a refusal to provide information.

One of the reasons for the success of RTI is that if the information is not provided within 30 days of application, it directly penalizes the concerned officer by deducting Rs 250 per day of delay up to a maximum of Rs 25,000 per application, from the salary. If wrong information is provided, a penalty up to Rs 25,000 can be imposed on the officer.

RTI is the right step to make the governance of the country more credible and transparent.

10 Steps to file I-T returns

This article was originally published in Postnoon on June 1st, 2012


http://postnoon.com/2012/07/27/10-steps-to-file-i-t-returns/61691

If you haven't yet filed your income tax returns, you can do it without much hassle at www.incometaxindiaefiling.gov.in. We will take you through the process of filing the income tax returns for a Salaried individual in this article. Once you are on this site, follow the following steps:

Step 1: Left hand corner, first tab says, Download. Click on AY2012-13 which will take you to a table describing the form that you need to use according to your income sources. For example, if you are a salaried person with only interest income apart from your salary, you can download the form ITR-1.

Step 2: Scroll down and download the relevant form on to your computer, that is ITR-1.

Step 3: The downloaded form is in excel format. Fill in the personal details. If you do not know the information about 'Income Tax Ward / Circle', it's okay to leave it blank. Or your Chartered Accountant from previous years may help you.

Step 4: Before going to the section on Income and Deductions, go to the next worksheet called 'TDS'. Fill in the details about the TDS on Salary and other income from Form 16 and Form 16A's. At this point, you must cross check the amounts that you have filled in with the Form 26AS. Form 26AS can also be obtained from the website mentioned above. You just need your PAN number to obtain it. Form 26AS is the statement of all taxes deposited to the Government under your PAN Number. If the amounts that you have filled in the form, exactly match with the Form 26AS, your tax return will sail through. But if they don't, sooner or later, the IT department will come back to you to explain the differences.

Step 5: Go back to the first worksheet and finish the section on Income and Deductions. For Salaried people, most of the items here can be filled in straight from the Form 16 that their employer would have given them. In case you did not give the details about your Life Insurance Policies or other deductible investments to your employer, you can include them here now.

Step 6: If you have made donations to approved institutions, fill in the fourth worksheet.

Step 7: Calculate your tax liability using the 'Calculate Tax' Tab on the right hand corner of the first sheet.

Step 8: Fill the third sheet according to the tax status. If you need to get a refund, you will need to give your bank account details. If you need to pay the tax, you can pay it using your online banking facility or by going to the bank. Obtain the BSR code and the challan details and fill it in Sheet 2.

Step 9: Using tabs on the right hand corner, validate all the four worksheets. If you want you may print the sheets for your records.

Step 10: Generate xml using the tab on the right hand corner of the first sheet, save it on to your computer and then upload it on the website under submit return/AY12-13.

You will get an ITR-V as acknowledgement of your returns filed. You will need to sign it and send it to Bangalore. The address is mentioned in the ITR-V itself.

There are instructions at every step. The income tax department has made it really easy for anyone to file their own returns. In fact, they have also started the facility of getting a Tax Return Preparer (TRP) to come to your house and guide you in the process or you can get help from them online or on the phone at 18001801961.

Bad monsoon- How it will hit key sectors of the economy

Published in the business section of www.rediff.com on 26th July, 2012


http://www.rediff.com/business/slide-show/slide-show-1-bad-monsoon-how-it-will-hit-key-sectors-of-the-economy/20120726.htm

Agriculture in India is majorly rain fed. Hence, monsoons and the rain god attain significance beyond proportions for the Indian farmers. From offering prayers in order to please the rain god to silly things like watching the tail of the cows (they say if the cow lifts its tail upwards, it signals bumper rains), they do it all! And why not? 55% of the Indian population is dependent on agriculture for their livelihoods.

Not just agriculture, monsoons are important for the hydro-electric power generation too, which in turn reduces the consumption of diesel and other forms of fuel. In addition, it also impacts industries like fertilizers, Fast Moving Consumer Goods (FMCG), Electronics etc.

The Indian Meteorological Department (IMD) downgraded its monsoon forecast from 99% of the long period average (LPA) in April to 92%, this week. While this is clearly not in the normal range, the IMD is still cautious about not using the word 'drought'. But clubbed with the disclaimer of errors that come with such forecasts using statistical modeling, gives enough reasons to be worried.

Given that India is currently struggling with below par GDP growth rate, low industrial production, high inflation, high fiscal deficit and weak rupee, the role of monsoons has never been as crucial as in this year. What will be the impact on each of these factors, if the monsoon is any less than normal?

GDP Growth rate: Agriculture contributes to about 15% and the rural economy contributes to about 40% of the GDP in India. Failed crops or lower yields will bring down the GDP further. When the country is still shaken with the fourth quarter GDP growth rate for the year 2011-2012, of 5.3%, a weak monsoon can push it below five. An analysis of the last seventeen years rainfall and GDP data, shows that the effect of rainfall on GDP is generally seen with a lag. For example, in the year 2000-2001, when the rainfall was 12% below normal, the GDP growth rate went down from 5.22% in 2000-2001 to 3.77% in 2001-2002. While there may be other factors as well for the decline in GDP, on an average, a below normal monsoon has resulted in a decline in the GDP in the next year.

Industrial production: Lower crop yield results in lower income for the farmers. This directly translates into low disposable income and hence lower rural demand for FMCG products and white goods.

Inflation: India has been grappling with high inflation since the last two years. Food and fuel comprise of 22% of the Wholesale Price Index. Pulses and Oil seeds are mostly rain fed and will become more expensive, adding to the inflation woes. In general, the price of all food grains, vegetables and fruits would go up too, as the yield would be lower.

Fiscal Deficit: For the financial year 2011-2012, the fiscal deficit of the government of India stood at 5.9% of GDP. Out of which, 2.34% (that is 40% of the total deficit) is accounted for by food, fertilizers and fuel subsidies. The fuel subsidy may go up as the generation of hydro electric power will go down. Also, more diesel will be used for irrigation using ground water.

The food and the fertilizer subsidy may not go up. The food subsidy in India comprises of the Government of India buying excess yield from the farmers at a Minimum Support Price (MSP), providing food at highly reduced prices to people below the poverty line and providing subsidy to the Food Corporation of India (FCI) to cover its costs.

The cost of food distributed at subsidized prices will not go up as the government will use food stored in their warehouses. However, more number of people may avail of this facility and distribution cost may go up marginally. Similarly, the costs of FCI may not go up due to a poor monsoon. But, if the yield is low, there may not be too much excess crop for the Government to buy. This will result in significant decline in the fiscal deficit.

In the case of fertilizers, after the de-control of fertilizers in the year 2010 (except Urea), the demand for fertilizers has been coming down due to 30 to 50% hike in prices of fertilizers. If the monsoons are bad, farmers will become more risk averse to deploying more capital into the farms and will avoid expensive fertilizers. This would hit the fertilizer industry. But the government may not get hit with more farmers seeking subsidies on Urea

Rupee: India is a large importer of pulses and edible oil seeds. A weak monsoon will add further pressure on the Rupee as import of edible oil and pulses will increase to meet the domestic demand for them.

A large scale farmer on the outskirts of Hyderabad quips "If IMD has predicted that the monsoon is going to be weak, then I am not worried! Then it will definitely rain. IMD has a dubious reputation for forecasting!"

IMD uses a statistical model, which takes in account the historical rainfall patterns along with factors like the surface temperatures, warm water volume and sea level pressures, etc. This year, IMD has also experimented with a dynamic model, which are recognized as better weather forecasting tool across the world now. In the dynamic model only the current environmental factors are considered for prediction.

Let's keep our fingers crossed and hope for a good monsoon, for a growing, prosperous India!

It need not be Taxing

This article was originally published in Postnoon on June 20th, 2012

http://postnoon.com/2012/07/20/it-need-not-be-taxing/60180

It is that time of the year again when we scramble to put together our salary slips, investments, collect form 16 and 16A's, run after Chartered Accountants, all in order to meet the deadline for filing our Income Tax returns. Most of us handle pretty complicated decision making scenarios with ease, in our respective work domains. However, this entire process of filing the tax returns seems unfathomable to most of us. The tax rate slabs, the deductions, the exemptions and the sections! This article lays down the basics of Income Tax returns filing for the Assessment Year 2012-13 (that is, financial year 2011-12).

Tax Slabs and Standard Deduction

The tax calculations for an individual depend upon the gender and the age of the person, apart from the income levels. There is a minimum standard deduction of Rs1,80,000 for a male individual below the age of 60. If we are doing the calculation for a woman, the standard deduction will increase by Rs10,000 to Rs1,90,000. Similarly, if the individual is a senior citizen above the age of 60 but below 80 years of age, the standard deduction is Rs2,50,000. For people above 80 years of age, the standard deduction is Rs5,00,000/-.

The Tax rates are 0, 10, 20 and 30%, depending on the level of the income. An illustration of how the tax rates are applicable depending on the income, is presented in Table 1.

For the current Assessment year, the tax slabs and calculations for a male individual or an HUF will be as follows:

Deductions

Various sub-sections of Section 80 specify deductions which can be deducted from the Income, to reduce your tax liability and to encourage people to save in the specified instruments. Once again, this is not an exhaustive list, but covers most of the popular deductions:

The section 80c, 80ccc and 80ccd cover premium paid for Life Insurance policies for self, spouse or child(ren); contributions to Employee or Recognized Provident Funds; Post Office Savings Schemes; Subscriptions to Unit Link Plans of LIC, Annuity Plans or Mutual Fund Plans; Admission Fees for upto two children (this is not an exhaustive list). The upper limit for deductions available under section 80c, 80ccc and 80ccd together is Rs1,00,000/-.

Section 80ccf allows for a deduction of up to Rs20,000 invested in long term infrastructure bonds issued by approved institutions. The investment has to be for a minimum period of 10 years, with a lock in of 5 years. Section 80d is the deduction for premium paid for mediclaim or medical insurance. It is Rs20,000 for senior citizens and Rs15,000 for everyone else. One may also claim for premiums paid for parents who are senior citizens, over and above their own premiums.

Section 80E allows for deduction of interest on loan taken for Higher education, while section 80G allows for deduction of donations paid to approved trusts and NGOs. Section 80 GG allows for deduction of house rent paid (HRA). The amount to be deducted for HRA is the lowest of the:

 the HRA received, or

 50% of salary for people residing in the four Metro cities and 40 % of salary for any other city, or

 rent paid in excess of 10 % of salary

Online Tax Filing

Taxes can be filed through a Chartered Accountant or a Taxation lawyer or one can do it online. If your income is below Rs5,00,000 lakhs, you are not required to file your tax returns if you are a salaried person and receive a Form 16 from your company. On the other hand, according to a notification by the Central Board of Direct Taxes (CBDT), if an individual or a Hindu Undivided Family (HUF) earns more than Rs10 lakhs, it is now mandatory to file the returns online.

You may directly file your returns through the official website of the Income Tax Department: www.incometaxindiaefiling.gov.in or you may file your returns through other sites which may charge you a nominal fees of around Rs200.

It is a good practice to recheck your tax return with the Form 26AS. Form 26AS is a statement of all taxes deducted or collected at source and paid to the Income Tax Department on your behalf, against your PAN number.

Insure Yourself to Skip Worries

This article was originally published in Postnoon on July 13th, 2012

http://postnoon.com/2012/07/13/insure-yourself-to-skip-worries/58783

Having realized the importance of Insurance, Mr. Mukherjee had bought a Life Insurance policy last month. However, he was still a worried man. He caught up with Prof. Nicky near the joggers park in their gated community.

Prof. Nicky: Hello Mr. Mukherjee. Good to see you. What brings you here? I thought you were not the jogging types.

Mukherjee: You are right. I never jog. I came looking for you. I bought a Life Insurance policy last month which will protect my family in the event of my untimely death. But what if something bad happens when I am still alive? What if there is a theft or a fire in my house? What if I meet with an accident and need a lot of money for the hospital? How will my family and me handle such an eventuality financially?

Prof. Nicky: What you need is insurance against these eventualities, for peace of mind.

Mukherjee: Exactly.

Prof. Nicky: There are insurance policies for fire, theft, accident, health, etc. These are together known as General Insurance and are sold by 'Non-Life' Insurance companies. In fact some of these policies are now a day's made mandatory by the Government. For example, the third party liability insurance if you own a vehicle. Many companies provide medical insurance to their employees as part of the compensation. Banks insist on an insurance on property if you are taking a loan against property.

Mukherjee: But what about me? I am a businessman. And I have not taken a loan against my property. Its ancestral!

Prof. Nicky: Then you buy it on your own. You must insure your property against loss or damages. Most of the General Insurance companies determine the premium based on the value of the property and the sum assured. When determining the sum for which you want assurance, you should keep in mind things like anticipated damage in the event of a fire or explosion. How much will it cost to renovate? What all do you want covered-Only the property or the fittings and fixtures as well?

Mukherjee: So you mean that the Insurance company pays for the furniture and fittings as well?

Prof. Nicky: Absolutely. Just your premium will go up. Not only this, they will cover injuries to you as well if you want, under a 'house holders policy'.

Mukherjee: Amazing. How about accident and medical plans?

Prof. Nicky: There are many different types of Medical and Health Insurance Policies. Depending on the terms of the policy, they can cover you expenses from hospitalization to diagnostic tests, to medicines, ambulance and other related expenses. Under accident covers, you may buy policies that cover you and your family for permanent or temporary, total or partial, disability. You may also seek cover for funeral expenses if you wish!

Mukherjee (gets angry): Professor, please don't joke.

Prof. Nicky: Mr. Mukherjee, I am not joking. It's true. I am just trying to tell you that you can buy a policy for anything now a days. It's you who has to decide what is important for you to secure and insure. For example, film stars ensure their body parts, because their fame and success depends on those attributes.

Mukherjee: You finance people are genius! You make a product out of everything!

Rain, Rain Pour Again

This article was originally published in Postnoon on July 6th, 2012


http://postnoon.com/2012/07/06/rain-rain-pour-again/57623

Professor Nicky left for her native village in the Karimnagar district last week. She needed a break from Srikanth and his questions on Derivatives. Nicky loved the smell of the countryside and secretly harbored the desire to retire and live on the farms one day. It is the rainy season and the best time of the year to visit her ancestral farms. The soil is moist and the seeds are sown, the saplings are just sprouting from the soil at this time.

Nicky had heard that the Indian Meteorological Depart¬ment (IMD) had predicted average monsoons this year, though slightly lower than their earlier prediction. For the sake of the country, she was praying for normal monsoons. The economy is as it is showing signs of a slowdown. A weak monsoon will push it further into lower growth path.

The Indian farmers are majorly dependent on the rainfall. They go to any extent to please Indra, the Rain God. In a village, they tie two frogs to a pole and get them married. They say that it brings good rainfall! On her farm, Nicky got into a conversation with Bhasker, the supervisor. Bhasker is more knowledgeable and well read than one would expect a rural farmer to be. Whenever professor visits the farm, he does not miss the opportunity to have a dialogue with her on the economy.

Bhasker: Professor, we farmers are worried about the monsoon. That is understandable. Why is everybody else worried about it? People come on the television and say that if it doesn’t rain, it’s going to be very bad for the economy. Why and how is that?

Nicky: Bhasker, the contribution of agriculture constitutes about 15 per cent of our GDP. In the last quarter of the year 2011-12, our GDP growth rate was only 5.3 per cent. If the monsoons are weak, the contribution of agriculture to GDP will go down further. And other industries like electronics and fast moving consumer goods will also experience a slow down since the rural demand for their products will go down if the farmers don’t make money.

Bhasker: Oh… so the impact is much deeper than what I though.
Nicky: That’s not just it. It’s in fact much more than that. Food inflation would also go up if the monsoon is weak. Lower yield will result in lower supply and hence higher prices. A few necessary food articles might need to be imported as well, driving up the demand for dollars, causing the rupee to weaken further. As it is in the last year, rupee has depreciated close to 25 per cent.
Bhasker: Hmmm…no wonder everyone in India so eagerly tracks the monsoon!
Nicky: Yes. It has a huge impact on the key economic figures like fiscal deficit, growth rate and inflation.
Bhasker: You just explained about growth rate and inflation to me. But what about fiscal deficit?

Nicky: The government has budg¬e¬ted Rs 43,580 crore as fuel subsidy for the year 2012-13. In the event of monsoon being weak, the gene¬ration of hydro-electric power will go down and the use of diesel to pu¬mp water into the fields will increase. Both of these will result in an increase in the import of fuel, causing the fuel subsidies to go up. This in turn will increase the fiscal deficit.

Bhasker: Professor I must run and tell my grandmother to tie two more frogs to the pole and get them married!

Understanding Options

This article was originally published in Postnoon on June 29th, 2012


http://postnoon.com/2012/06/29/understanding-options/56222

Srikanth: Hi Professor! Hope you have some time because I have a ton of questions!

Srikanth: How would buying an option differ from buying a stock?

Prof Nikki: when you buy a call option, you own the right to buy the stock. But you do not own the stock and therefore have no right over dividends. Also, the extent to which the price movement of the option imitates the price movement of the stock depends on the strike price and the stock price.

Also, you own a stock till you sell it, but an option expires. It is an instrument with limited life.

Srikanth: What do you mean by the strike price?

Prof Nikki: Strike price is the price at which you will buy or sell the underlying asset. The current market price, on the other hand, is known as the spot price.

Srikanth: So when would you suggest I buy options?

Prof Nikki: There are several scenarios when buying options would be a good idea. The first case I can think of is when the prices of a stock you own are falling rapidly.

This is a situation that no one likes. And to protect yourself from potentially large losses, you can buy a put option to sell the stock at a certain acceptable price.

Srikanth: A quick question here Prof, can I buy options in such a way that I can make a profit by exercising it right away?

Prof Nikki: Hypothetically, by buying an in the money call, that is, a call with strike price less than market price, you should be able to make instant profit. But in reality, the options are priced to take into account the time value of money. Which means, factors like interest rates, time to expiration, volatility of the stock etc. are taken into account by the market, making it very difficult to make money by exercising the option right away.

Srikanth: Hmmm… so what are the other situation where buying an option would be good for me?

Prof Nikki: Like I said earlier, there are several situations. Before I tell you more, I really need you to understand that options are instruments that offer immense leverage because you are paying only a fraction of the money in the form of the premium. You actually pay for the stock or the commodity when you exercise the option. While this seems like a good strategy, you should always be careful and manage risk.

Srikanth: I understand Professor… Do you think it would be a good idea to buy call options on a stock that I am optimistic about?

Prof Nikki: You are learning fast indeed! It is a good idea. But please remember that if you plan to actually exercise the option, you will need to have enough capital to buy it at the strike price.

As a matter of fact Srikanth, there are several strategies that one can use with different combinations of options. But the more complex strategies need to be managed regularly. It is advisable to take help of a portfolio manager if you are serious about investing in futures and options.