Saturday, February 25, 2012

Best Mutual Funds to Invest in 2012

In the previous post 'Has the Bull Returned to the Indian Markets', I had outlined the reasons for the sudden bull-run in the Indian stock market and the outlook for the next few months. Investing in the Equity Markets through Mutual Funds is the best Way for Investors, who either do not have the time or the expertise to identify & buy/sell stocks at the right time. As mentioned in that article, below are the top performing Mutual Funds, in each of the various categories.

Large Cap Funds

These are Mutual Funds that invest predominantly in Large-Cap (Blue-Chip) Stocks. The Fund Managers decide on which blue-chip stock to invest and when to buy/sell them. The Best 3 Large Cap Funds as of now are:

1. Franklin India Bluechip Fund
2. HDFC Top 200 fund
3. ICICI Prudential Focused Bluechip Equity Fund

Diversified Equity Funds

These are Mutual Funds that invest in a variety of stock sizes. The Fund Manager decides on the exposure to large-cap, mid-cap and small-cap stocks. Based on the market movement, investment decisions to go heavyweight or underweight on a category of stocks too will be taken. The Best 3 Diversified Equity Funds as of now are:

1. Fidelity Equity Fund
2. Franklin India Prima Plus
3. HDFC Equity Fund

Midcap Funds

These are Mutual Funds that invest predominantly in the small to medium sized company's. They identify potential blue-chip company's and invest in them. The best 3 Mid-cap & Small-cap funds as of now are:

1. DSP BlackRock Small & Midcap Fund
3. HDFC Mid-Cap Opportunities Fund
3. IDFC Premier Equity Fund

Balanced Funds

These are Mutual Funds that have a healthy exposure to Fixed Income Instruments, apart from the equity exposure. They invest around 60% in Equities and the rest is invested in Debt instruments. This gives them a chance to preserve a portion of the capital, while trying to achieve growth through equity exposure. The best 3 Balanced Funds as of now are:

1. HDFC Prudence Fund
2. ICICI Prudential Balanced Fund
3. DSP BlackRock Balanced Fund

Happy Investing!!!

Disclaimer: Mutual Funds are Stock Market based instruments. As with any stock market related instruments, losses are a very real possibility. Past Performance may or may not be sustained in future. The reader is requested to perform his/her own research before taking the Investment decision. The Author does not hold units of the Mutual Funds outlined above.

Friday, February 24, 2012

Has the Bull Returned to the Indian Stock Market?

The first 6 weeks of 2012 have been nothing short of AWESOME for the Indian Stock Markets. Since the Inception of the new year 2012, the Indian stock markets have grown by double digit %'s. A double digit growth in one year is considered great, but a double digit growth in less than two months? Thats great news isn't it?

This post is about, what caused this bull run and an outlook, as to whether the bull will continue to run amock or will it be Tamed by the All-Powerful Bear...

Shall we get down to business?

Note: All Numbers are as of Feb 15th 2012. The numbers may not match the live/current Market values.

How much have the Indices Gone up Exactly?

The Exact Numbers (In %) by which the various major Indices in India have gone up are as follows:

1. BSE Sensex - 18%
2. Nifty (NSE) - 20%
3. BSE Midcap - 26%
4. BSE Smallcap - 27%

What Caused this Sudden Bull Run?

Well, there are multiple reasons for this sudden (but, good) Bull Run. They are:

1. Foreign Institutional Investors (FIIs), who stayed away from the Indian Markets last year, made a triumphant return. Nearly 23,000 Crore Indian Rupees has been invested in the Indian Markets by the FII's in the first 6 weeks of 2012. This has been one of the key driving factors behind the bull run

2. Better Economic Data from the US and easing Euro-Zone debt worries have brought some relief to global investors. The Uncertainty towards the global economy has come down and the prospects of recovery/growth are looking bright

3. The Domestic Economic Scenario too has been very positive in this time period. The CRR Rate Cut in January, a possible rate cut in March, Stabilizing Inflation Rates, Good December Quarter End Results by Major company's etc have been contributing factors to the bull run

Will this Bull-Run continue?

Well, there is no clear-cut answer to this question. If my life depended on this question, my answer would be

"I think so. There is 70-30 kind of probability for the Bull to Continue Running and for the Bear to bring the Bull to a halt"

Nonetheless, the following factors may directly influence the continuation of the bull run or the return of the bear...

1. The Results of the Ongoing State Elections & the Union Budget that is expected in March will be key drivers to the Market Movement
2. The tensions between European countries & Iran over crude oil supplies may cause the crude oil prices to explode. If it happens, it may have a direct bearing on the Market
3. FII's have been net-buyers so far and their continued support or pull-back may have a significant effect on the Market

With the possible Greece Sovereign Default out of the way, the chances of any major global economic downturn are significantly low. The European Union seems to be on a road to recovery and the economic scenario in the US looks positive as well.

All said and done, the stock market can be expected to be volatile. There will be no clear-cut Bull Running Wild kind of scenario. Investors try to book profits whenever they see the markets move-up. So, such profit bookings may drag the market down in the short-term (A few days of downward movement). Even after such corrections, the market can be expected to get back on its feet and continue the upward movement.

So, all in all, the overall outlook for the Indian Stock Markets is positive over the next few months. The chances of any major/drastic market corrections (downfall) are low and the outlook & investor sentiment will continue to be positive.

How should we Invest in Such a Situation?

This again is an extremely tricky question. If you ask me, I would suggest the following:

Fixed Income Instruments: 60%
Equity Mutual Funds: Around 30%
Equity Shares (Direct Stock Holdings): 10% or less

Tracking the Market and identifying buy/sell timelines is very difficult in such volatile market scenario's. Unless you feel, you can enter or exit a stock at the right moment, I would suggest to take Equity Investments through the Mutual Fund Route. Afterall, experts are always better at this and most importantly, that is what they get paid for. Don't they?

Aren't you Curious to ask me, Why I suggested the above Investment Mix?

Well, any investment decision needs to have a Justification. The Justification for my decision (outlined above) are as follows:

1. The Interest Rates offered by Fixed Income instruments like Bank FD's, Bonds and Corporate FD's are in the double digit. On any given day, any returns of over 10% is very good and if the returns are guaranteed, then it is all the more better. That is why I have given a 60% weightage to debt instruments.
2. Equity Markets though will be positive, will also be choppy. Predicting the movement would be very tricky, even for experts. That is why I have given a less than 10% exposure to direct stock investments and a 30% to Mutual Funds. Picking a well performing Mutual Fund is half the battle won. The fund manager will fight the rest of the battle for you.

If you are wondering, what the best Mutual Funds would be, to Invest right now, just wait until the next post. The next article is going to be on the top performing Mutual Funds which you can invest in. To read that post Click Here

Happy Investing!!!

Tuesday, February 21, 2012

Mutual Fund of the Month - ICICI Prudential Focused Bluechip Equity

Well Folks, this is the second time I am writing an article like this. Last year, we had taken a detailed look at HDFC Prudence Fund. I had initially planned to write about one fund every month, but unfortunately, I havent had the time to do so again, till now. Here we are and the Mutual Fund of this month is "ICICI Prudential Focused Bluechip Equity".

Before we begin: All the data outlined below is accurate as of Jan 31st 2012.

ICICI Prudential Focused Bluechip Equity Fund

Details of the fund - ICICI Prudential Focused Bluechip Equity

Below are the key details of the ICICI Prudential Focused Bluechip Equity Mutual Fund Plan.

Fund Name ICICI Prudential Focused Bluechip Equity
Asset Management Company ICICI Prudential Mutual Funds
Fund Type/Category Open-Ended/Equity Large Cap Fund
Scheme Options Dividend Plan & Growth Plan
Launch Date 07-May-2008
Minimum Investment Rs. 5000 for One time Investments (first time)
Rs. 500 for SIP (Monthly)
Fund Manager Manish Gunwani (Since Jan 2012)
Entry Load 0%
Exit Load 1% (If Redeemed within 1 year since purchase)
Assets Under Management Rs. 3532.16 Crores
Address of Fund House 3rd Floor, Hallmark Business Plaza,Sant Dyaneshwar Marg,Bandra (East), Mumbai 400051
Email Address

Fund Objectives - ICICI Prudential Focused Bluechip Equity Fund

ICICI Prudential Focused Bluechip Equity Fund, an open-ended equity scheme, aims to maximize long-term total returns, from a focused and optimally diversified portfolio that is invested in equity and equity related securities of about 20 companies belonging to the large cap domain. This strategy has the potential to generate positive returns from being overweight on certain high conviction stock picks.

Investment Pattern

This fund invests in about 20 equity and equity related securities, and seeks to generate long term capital appreciation. The portfolio is mandated to select stocks from among the Top 200 stocks in terms of market capitalization on the NSE. This fund adopts a bottom-up approach to Stock Selection and the fund manager has the flexibility to choose between stocks across all themes, sectors and investment styles.

The fund aims to have an equity exposure of over 90% with a small exposure to Debt instruments to meet liquidity and redemption requirements

About the Fund Manager

Mr. Manish Gunwani has been Managing this fund from Jan 2012. He has over 15 years of experience of which 8 years is in Equity research and 1.5 years is in fund management.

Asset Allocation % of ICICI Prudential Focused Bluechip Equity Fund

ICICI Prudential Focused Bluechip Equity Fund is a Fund that invests a healthy portion of its assets in Debt and other Fixed Income Instruments. The Asset Allocation % on the various asset categories for this fund is as follows:

Equity - 94.09%
Index Futures & Options - 2.39%
Debt - 3.52%

Sector Weightage for ICICI Prudential Focused Bluechip Equity Fund

ICICI Prudential Focused Bluechip Equity fund invests over 90% of its assets in Equities (shares) and has a diversified asset allocation spanning the various sectors of company's available. The Sector Weightage (%) for this fund is as follows:

Sector Name Weightage %
Petroleum Products7.14%
Non-Ferros Metals4.71%
Ferrous Metals1.92%
Construction & Infra0.77%

Top Stocks in ICICI Prudential Focused Bluechip Equity Fund's Portfolio

ICICI Prudential Focused Bluechip Equity Fund invests in a number of large-cap and blue-chip company stocks. Some of the top stock holdings of this fund are as follows:

Stock Name Weightage (As a % of their Overall Assets)
Reliance Industries7.14%
HDFC Bank5.74%
Bajaj Auto5.69%
Axis Bank5.24%
ICICI Bank4.91%
Bharti Airtel4.81%
Hindustan Zinc4.71%
Bank of Baroda4.37%
Cairn India3.3%
TATA Power3.29%
Power Grid Corpn3.25%
Punjab National Bank2.94%
Grasim Industries2.77%
Cadila Healthcare2.6%
TATA Steel1.92%
HCL Technologies1.02%
Larsen & Toubro0.77%
Kotak Mahindra Bank0.01%

NAV Movement:

NAV Stands for Net Asset Value. You can learn more about how a Mutual Fund works and how the NAV is calculated by Clicking Here

ICICI Prudential Focused Bluechip Equity Fund - Dividend Scheme

1. NAV As on January 2009 - Rs. 7.29
2. NAV As on June 2009 - Rs. 10.820
3. NAV As on January 2010 - Rs. 13.670
4. NAV As on June 2010 - Rs. 13.780
5. NAV As on January 2011 - Rs. 17.370
6. NAV As on June 2011 - Rs. 15.620
7. NAV As on December 2011 - Rs. 14.54
8. NAV As on January 2012 - Rs. 13.850
9. NAV As on February 2012 - Rs. 15.270

ICICI Prudential Focused Bluechip Equity Fund - Growth Scheme

1. NAV As on January 2009 - Rs. 7.29
2. NAV As on June 2009 - Rs. 10.820
3. NAV As on January 2010 - Rs. 13.670
4. NAV As on June 2010 - Rs. 13.780
5. NAV As on January 2011 - Rs. 17.370
6. NAV As on June 2011 - Rs. 16.370
7. NAV As on December 2011 - Rs. 15.240
8. NAV As on January 2012 - Rs. 14.520
9. NAV As on February 2012 - Rs. 16.0

All NAV's As on the 1st of the Calendar Month.

Net Returns:

The ICICI Prudential Focused Bluechip Equity Fund has been one of the best performing Equity Mutual Funds in India over the past 3 years. The Net Returns of this fund over the past years is as follows:

Time Period Returns %
1 Month 12.4%
3 Months 11.7%
6 Months 13.3%
1 Year 7.9%
2 Years 13.1%
3 Years 34.6%
5 Years NA

A point to note here is that, even though the NAV Movement may seem higher on the Growth Scheme when compared to the Dividend Option. That is because, the Dividend Scheme pays a periodic dividend (Usually once ever year) and hence the net returns inclusive of dividends earned in the Dividend Scheme will be comparable to the Growth Scheme. Don't worry, the Dividend history is available in the next section.

Dividend History - ICICI Prudential Focused Bluechip Equity - Dividend Plan

Since, this is a comparatively new fund (Only started in 2008) it hasn't declared much dividends yet.
Dividend Date Dividend Amount (Per Unit Held)
25-Jan-2011 0.75

Sample Returns Comparison - ICICI Prudential Focused Bluechip Equity Dividend Plan & Growth Plan

Date of Investment: 01-Jan-2009
Amount Invested: Rs. 25,000 (Each in Dividend & Growth Plan)
No. of Units: 3429.355 (Growth) & 3429.355 (Dividend)
Current Value of Investments: Rs. 58,264.75 (Growth) and Rs. 55,589.85 (Dividend)

Dividend Earned in Dividend Scheme:

1. On 25-January-2011 @ Rs. 0.75 per unit = Rs. 2,572/-

Net Dividend Earned = Rs. 2,572/-

Net Value of Investments in Dividend Plan (Including Dividends) = Rs. 58,161.86/-

Though the Net value of Investments in the Dividend Plan is Rs. 2,674.90/- less than the Growth Plan, if you consider the fact that you you have earned a Dividend of Rs. 2,572/- in Jan of 2011, the net value of investments in both the dividend and growth plans have a difference of only Rs. 102.89/-. If we assume that you kept the dividend in your bank account (savings) which earns a 4% rate of returns you would have earned Rs. 102.88/- in the one year period starting January 2011 to January 2012.

Other Merits to this Fund:

CRISIL has ranked this fund as "Rank 1" which indicates that this is one of the best performing Mutual Fund Plans in India.

Important Disclaimer:

Past Performance May or May Not be Sustained in Future. The Fund House does not Guarantee any returns. As with all equity market related investments, the value of the investment will move in accordance with the stock market and may go up or down depending on the world economic situation. Investors are advised to exercise caution before investing in the above mentioned fund. The Author does not endorse or recommend this fund to investors. The purpose of this article is just a Fund Review and should not be treated as Investment Advise.

Top Mutual Fund Schemes in India - Based on AUM

In the Previous Post Top Mutual Fund Houses in India - Based on Assets Under Management, we saw the AUM( Assets Under Management) that is managed by the various MF houses in India. As seen in that post, HDFC Mutual Fund, Reliance Mutual Fund and ICICI Prudential Mutual Fund are the big three fund houses in India. In this post, we are going to find out the top 10 Mutual Fund Schemes in each of these 3 Fund houses, based on the AUM's in each of the schemes.

HDFC Mutual Fund

S. NoFund NameAssets Under Management (In Lakhs)
1HDFC Top 200 Fund - Growth Option6,96,469.78
2HDFC Equity Fund - Growth Option5,84,206.01
3HDFC Liquid Fund-PREMIUM PLUS- Growth5,73,150.59
4HDFC Cash Management Fund Treasury Advantage - Wholesale Plan Daily Dividend Option5,70,048.19
5HDFC Cash Management Fund Treasury Advantage - Retail Plan Daily Dividend Option3,57,309.72
6HDFC Top 200 Fund - Dividend Option3,57,235.99
7HDFC MF Monthly Income Plan-Long Term Plan-Growth Option3,55,433.32
8HDFC Equity Fund - Dividend Option3,33,675.85
9HDFC Prudence Fund - Growth Option3,15,217.16
10HDFC Prudence Fund - Dividend Option2,94,823.79

Reliance Mutual Fund

S. NoFund NameAssets Under Management (In Lakhs)
1Reliance Liquidity Fund-Growth Plan-Growth Option7,65,875.76
2Reliance Liquidity Fund-Dividend Plan-Daily Dividend Reinvestment5,31,704.16
3Reliance Growth Fund-Growth Plan-Growth Option3,51,245.64
4Reliance Money Manager Fund-Institutional Plan Growth Option2,90,948.44
5Reliance Money Manager Fund-Institutional Plan-Daily Dividend Option2,86,318.98
6Reliance Gold Exchange Traded Fund-Dividend Payout Option2,53,524.88
7Reliance Monthly Income Plan-Growth Plan2,42,973.86
8Reliance Regular Savings Fund-EQUITY OPTION-Growth Option2,23,016.04
9Reliance Growth Fund-Dividend Plan-(D)2,10,862.73
10Reliance Equity Opportunities Fund-Growth Plan-Growth Option1,94,491.13

ICICI Prudential Mutual Fund

S. NoFund NameAssets Under Management (In Lakhs)
1ICICI Prudential Liquid Plan - -Super Institutional Growth Option10,37,129.92
2ICICI Prudential Flexible Income Plan Premium-Daily Dividend Plan4,40,620.53
3ICICI Prudential Flexible Income Plan Premium-Weekly Dividend Plan2,92,088.87
4ICICI Prudential Liquid Plan - -Super Institutional Dividend Daily2,72,823.45
5ICICI Prudential Dynamic Plan-Growth Option2,53,998.87
6ICICI Prudential Flexible Income Plan Premium-Growth2,42,230.29
7ICICI Prudential Focused Bluechip Equity Fund - Retail Growth Plan2,09,696.77
8ICICI Prudential Dynamic Plan-Dividend Option1,38,799.2
9ICICI Prudential Focused Bluechip Equity Fund - Retail Dividend Plan1,38,766.84
10ICICI Prudential Infrastructure Fund-Growth1,28,489.66

Note: All the information above was gathered from the Internet, based on the statistics released by each of these fund houses, which is Mandatory at the end of each financial quarter. All the data above is correct as of December 31st 2011. The Next update will be released by these fund houses by end of March 2012.

Monday, February 20, 2012

Top Mutual Fund Houses in India - Based on Assets Under Management

India has over 40 Mutual Fund Company's that have MF Schemes that are available for Purchase for Investors. As you might already know, AUM stands for Assets Under Management. It refers to the total amount of money that investors have invested, and is being managed by the Fund Management Company. For ex: If we sum up the AUM's of all the individual MF Schemes that are run by HDFC Mutual Fund, we will get the total Assets Managed by HDFC Mutual Fund.

This post is about the Top 25 Asset Management Company's in India, based on the Assets they manage in their Mutual Fund Schemes.

S.NoFund Management CompanyAssets Under Management in Lakhs (INR)
1 HDFC Mutual Fund8862802.61
2 Reliance Mutual Fund8230580.65
3 ICICI Prudential Mutual Fund6936779.24
4 Birla Sun Life Mutual Fund6037726.7
5 UTI Mutual Fund5781734
6 SBI Mutual Fund4155151.16
7 Franklin Templeton Mutual Fund3564162.94
8 DSP BlackRock Mutual Fund3056490.31
9 Kotak Mahindra Mutual Fund2973805.82
10 IDFC Mutual Fund2647593.33
11 Tata Mutual Fund2147330.74
12 Sundaram Mutual Fund1477477.78
13 Deutsche Mutual Fund1331435.43
14 Religare Mutual Fund1181399.82
15 Fidelity Mutual Fund879687.03
16 Axis Mutual Fund859813.71
17 Canara Robeco Mutual Fund735603.37
18 JM Financial Mutual Fund691535.25
19 JPMorgan Mutual Fund675871.93
20 LIC NOMURA Mutual Fund622257.13
21 IDBI Mutual Fund610188.9
22 HSBC Mutual Fund489722.26
23 BNP Paribas Mutual Fund480524.14
24 L&T Mutual Fund461609.32
25 Taurus Mutual Fund459976.29

As you can see, HDFC Mutual Fund is the largest Fund Management company in India, that is managing over 88.6 Lakh Crores of Investory Money. As expected Reliance is at No. 2 and ICICI Prudential follows at No.3. These are 3 big giants of the Indian Mutual Fund Industry.

The Top 5 Fund Houses, HDFC, Reliance, ICICI, Birla Sun Life & UTI put together, manage more funds that all the other Fund Houses put together.

There are nearly 20 more MF houses that sell MF's in India. They are not included here because, they don't manage as much assets as these top 25. However, for those curious folks among us, that want to know the top 5 MF houses, that manage the least Assets (AUM) the list is as follows:

S.NoFund Management CompanyAssets Under Management in Lakhs (INR)
1 IIFL Mutual Fund2577.22
2 Bharti AXA Mutual Fund16119.76
3 Quantum Mutual Fund17329.62
4 Escorts Mutual Fund20479.82
5 Motilal Oswal Mutual Fund23213.49

To Wrap up - Do you want to know the total amount of Investor Money that is managed by these MF houses???

Rs. 6,81,70,771.66 Lakhs

In Other Words it is 6.81 Crore Lakh Rupees.

Thats a Mind Boggling Number, Isnt it???

Happy Investing!!!

Friday, February 17, 2012

Best Tax Saving Options Available for Investment

With the financial year inching towards its end, we have less than 6 weeks to make investments to save/reduce our Income Tax Liability for this financial year. Most of us know the various tax saving options that are available for us. I have even written about them in some of my earlier posts like "How to Save Income Tax" and "Life Stage Based Tax Saving Portfolio". This article is just a recap/synopsis of the best tax saving options that are available to the Indian Citizen.

The Best Tax Saving Options are:

1. Employee Provident Fund
2. Public Provident Fund
3. National Savings Certificate
4. Tax Saving 5 year Fixed Deposits
5. Infrastructure Bonds
6. Life Insurance and
7. Health Insurance

If you are wondering, "Where are the ELSS and ULIP's? Don't they offer Tax Benefits under Section 80C?". Well, I have intentionally left out Equity Linked Saving Schemes (ELSS) & ULIPs from this List. Because:
1. ULIPs havent performed as well as their peer tax saving instruments. Moreover, the charges involved are still high and the markets are choppy and these ULIP plans have caused severe losses to Investors.
2. ELSS Schemes may not be part of the Tax Saving Instruments list, after this financial year. As a result, they may not perform as well as their peer MF schemes. To know more about this, visit my blog post titled Bad News for ELSS Investors

Though you might think that, getting a 30% tax rebate on investments this year would be a good enough return, remember that your investment will be returned to you only after a mandatory lock-in period of 3 or 5 years and by then, if the ELSS scheme or the ULIP doesn't perform well, your investment may not be worth even as much as you invested. That is why I left them out from this article.

1. Employees Provident Fund (EPF)

This scheme offers a total yearly exemption of INR. 1,00,000 as mentioned in the Income Tax Act Section 80C.

Average returns: 9.5%

Maturity period: One can withdraw the entire amount in instances of leaving job, retirement after 58 years of age or taking VRS. Partial withdrawal can be done for home, medical or marriage related expenses though. To know more about Partial Withdrawal of your EPF Click Here

How to Buy: Usually around 12% of your Basic salary is deducted every month from your pay and is remitted into your EPF Account and is automatically considered for your Tax benefits. So, you don't need to go anywhere to buy this.

Returns Taxable?: Yes, if you withdraw within 5 years, No, if you withdraw after 5 years.

Drawbacks: None

2. Public Provident Fund (PPF)

PPF is a long-term, statutory scheme run of the government. As with the EPF, this tax saving option too falls within the Section 80C of the Income Tax Act in India.

Average returns: 8.6% compounded annually

Maturity period: 15 years

How to Buy: State Bank of India or some of the Nationalised banks or at designated post office branches.

Returns Taxable?: No

Drawbacks: This is a long-term scheme with a maturity period of 15 years. So, it does not suit short-term needs.

3. National Savings Certificate (NSC)

This is similar to a Bank Fixed Deposit, only that, the deposit taker is the Government of India. This scheme falls under the Section 80C of the Income Tax Act of India. Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 5 years.

Average returns: 8% compounded half yearly

Maturity period: Usually 5-10 years.

How to Buy: Nationalized Banks, post office or any broker.

Returns Taxable?: Interest income is taxable but no TDS.

Drawbacks: This is a long-term scheme with a maturity period of more than 5 years. So, it does not suit short-term needs.

4. Tax Saving 5 year-Bank Fixed Deposits

Investment up to Rs 1 lakh in these special tax saving bank fixed deposits are eligible for tax deduction under Section 80C. This scheme neither allows the encashment of the money prior to completion of the 5 years term nor can this be used as the security against any loan.

Average returns: 9-9.5% annually. Rate of interest varies from one bank to another.

How to Buy: Available at any Nationalized or Private Bank.

Maturity period: 5 years

Returns Taxable?: Interest income taxable on maturity.

Drawbacks: This is a long-term scheme with a maturity period of 5 years. Plus, you cannot close or use this deposit as security for any loans.

5. Infrastructure Bonds

Over and above the deduction allowed by the Section 80C, you can save income tax on investments upto Rs 20,000, by investing in different infrastructure bonds. Covered by the Section 80 CCF of the Indian I-T Act, these bonds are becoming very popular. You can visit the article titled Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits

Average returns: The rate of interest varies from 8% to 9%.

Maturity period: 5 to 10 years.

How to Buy: Brokers, DEMAT accounts etc.

Drawbacks: This is a long-term scheme with a maturity period of 5 - 10 years. So, it does not suit short-term needs.

6. Life Insurance Premium

Any premium payable by an investor to provide Insurance cover to his life is eligible for deduction under Section 80C.

Average returns: 6-7%. Apart from that, this helps one plan for the unforeseen events in his or her life.

Maturity period: Depends upon length of policy.

How to Buy: Contact your nearest Bank that offers Insurance policies or contact an Insurance Agent

Returns Taxable?: No.

Drawbacks: None. Some insurance premiums may not be eligible for tax benefits. So you may want to visit the article titled Do Insurance Policies Really Help Save Tax? to ensure that your premium payments are eligible for tax benefits.

7. Health Insurance Premiums

Popularly known as Mediclaim Policies, these insurance schemes come within the Section 80D of India's Income Tax Act. These policies offers a maximum deduction of Rs 35,000 ever year. This deduction is calculated in addition to any other tax saving done as per the Section 80C or any other sections.

Average returns: None. Benefits available only when the Insured is ill or needs medical care

Maturity period: Depends on the length of policy.

How to Buy: Contact your nearest Bank that offers Insurance policies or contact an Insurance Agent

Returns Taxable?: No. No money is returned to the insurer at the end of the policy duration

Drawbacks: If you dont fall sick during the insurance period, the money you pay wont be returned to you.

Happy Tax Saving...

Wednesday, February 15, 2012

Are you an Innocent Tax Evader?

The Title is kind of confusing, isnt it? This article is kind of a continuation to the previous post "Some Common Tax Filing Mistakes". I have added the word Innocent because, a majority of us are law abiding citizens, who earn a salaried income (all-white) and pay the due taxes against our income. However, we may be evading taxes unknowingly. The law does not discriminate against wanted/intentional tax evasion and unintentional tax evasion. Anyone who doesnt pay all the taxes due from them, is a Tax Evader. I wouldn't want to be one. Do you? If you don't want to get into trouble with our IT Officials, then you must definitely read this post carefully.

Lets get down to business, Shall We?

"Tax Evasion" is a hotly debated topic. Especially, after the head of CBI declared yesterday that over 500 billion USD worth of black money is stashed abroad in tax havens by our people. So, What Exactly is Tax Evasion?

To keep it simple: Any action, by which an individual avoids paying of all his tax dues to the Government, is considered Tax Evasion. For ex: If you visit your nearest grocery store and buy some stuff worth Rs. 100/-. The shopkeeper doesn't give you a bill, and you don't bother much about it either. Now, there is no proof that he actually sold you something as per his bills & records. This is an income which he is not going to declare and hence it will be considered "Black" and he is "Evading Tax".

Before we go any further, the purpose of this post is to raise awareness among the innocent population that does not know that, they have to pay taxes on certain situations and hence miss paying their taxes. This post is not for people who intentionally Evade Taxes. You can go back to the previous post "Some Common Tax Filing Mistakes" to learn more about the common mistakes people do with their Income Tax calculations.

Below are some common "I Did not Know" kind of Tax Mistakes:

1. Not Including Interest Earned on Investments done in the name of Spouse or Children

Any money received from a spouse or Parents is "Tax-Free" and you need not pay any taxes on it. However, if you invest that money, the income from that investment has to be added to the income of the giver and taxed accordingly. So, if you made any fixed deposits or recurring deposits in the name of your wife or kids and earned an income on it, you need to declare that income as part of your IT Returns. Note that, this is applicable only if your spouse or kids are not working/earning and you were the source of the funds that were invested by them.

So, if I make a Fixed Deposit in my wife's name, the interest we earn on it will be clubbed to my income (if my wife is a home-maker).

2. Pre-Mature Termination of Life Insurance Policies

In one of my previous posts titled Do Insurance Policies Really Help Save Tax? I had explained about the terms & conditions that are related to tax exemptions against insurance premiums. As explained in that post, there is a mandatory holding period of 2 years for all Insurance policies, if you wish to claim tax benefits on the premium amounts paid. So, if my policy is terminated intentionally by submitting a request to the insurance company or for not paying the premiums properly, I have to revise my tax returns and pay the Government the balance taxes. This amount will be equal to the tax benefit you enjoyed during the year you declared the premium under Section 80C.

You may be wondering, it is my life insurance policy, I can terminate it anytime I want. Unfortunately, if you had not used that premium to avail tax benefits, then you are free to terminate as many policies as you want and at any time you wish. But, once you submit the premium receipts for tax exemption under Sec 80C, you need to hold on to the policy for the minimum/mandatory holding period.

3. Selling a house bought on loan within five years

If you thought that the governments ruling on termination of Insurance Policies was bad, this next paragraph is going to make you feel worse. If a house is sold within 5 years from the date of purchase, all the tax benefits availed under Section 80C over the past years, are no longer valid. This essentially means that you have to re-calculate your tax returns for the past years where you claimed tax rebate on your home loan repayment and re-file your tax returns along with the arrear amounts. This amount will equal to the tax benefit you enjoyed over the past years (Up to a max of 5 years) summed together.

An Important point pertaining to the Insurance Policy Termination & Sale of House within 5 years is that "It is the Individuals Responsibility to pay the tax arrears". The IT Department will not scrutinize each and every individual or their policies or their home loans. However, if for some reason, your records are scrutinized and it is found out that you had not paid your arrears, the IT Department has the right to impose heavy fines & penalties on you. So, it is better to pay the small amount of tax arrears and stay safe, rather than risk paying the hefty fines and face legal charges.

4. Wealth Tax

Wealth Tax is something, not many of us know or pay. As per the Indian Wealth Tax Law, the following items are considered Wealth:
1. Second House (Not the one in which you live)
2. Gold (Jewellery, Ornaments, Bullion etc)
3. Art (Paintings, Statues etc)
4. Luxury Cars/Watches

If the total sum of the above mentioned 4 items is greater than INR 30 Lakhs, you must pay wealth tax. The amount would be 1% of the amount that exceeds the 30 Lakh limit. So, if your wealth is worth 40 lakhs, you have to pay Rs. 10,000/- as wealth tax for this year (1% of 10 lakhs that is above the 30 Lakh limit)

An important mistake people do is that, the current market price of gold has gone up through the roof over the past years. So, if you are someone who inheriting family gold from your ancestors, I strongly suggest you weigh and value it and pay the wealth taxes due against them.

5. Gift Tax

Gift Tax, like Wealth Tax is something, not many of us know or pay. As per the Indian Gift Tax Law, any gifts that were received from un-related persons whose total value is more than Rs. 50,000/- in a single financial year is taxable. Not all gifts are in cash. So, in such cases, a fair value is assigned to each gift and a total is calculated. If the total sum is greater than Rs. 50,000/- for the financial year, the excess amount will be added to your income for that year and taxed accordingly.

Note however that gifts received from Parents, Children, Siblings, Spouse, Siblings of the Spouse and Parents of the Spouse are not Taxable. Anyone who doesn't fall under any of these category is considered an unrelated person and that gift has to be considered for tax purposes.

Anoter strange addition to the Gift Tax rulee is that "When a real-estate (property) is bought for an amount that is less than the stamp duty value, the difference is taxable". If the difference between the sale price and stamp duty exceeds Rs. 50,000/- the excess amount is considered as a gift to the buyer and the buyer has to pay the tax on it.

If you are someone who asks "I use a Tax Consultant/Auditor to plan and file my Taxes. Will I still be in Trouble if I unintentionally miss on any of these items?"

Yes. As per the IT Laws, the Auditor or the Consultant is not held responsible if the Tax Payer (You and Me) has missed declaring any income or missed paying any taxes. It is the Individuals responsibility to ensure accuracy and correctness of all information submitted to the IT Department.

So, it is high time you forgot the "Sorry, I did not know that" tag-line and start knowing our Tax Liabilities and Rules!!!

Monday, February 13, 2012

Some Common Tax Filing Mistakes

Many of us have been working for years now and file our tax returns diligently every year. But, the truth is, even the most cautious & meticulous individual is prone to making silly mistakes while filing his/her income tax or while declaring details to their employer. This post is about some of those silly mistakes, which might seem too-little-to-worry kind of mistake but, if big brother decides to investigate, they can impose heavy penalties and punishments. So, it is extremely important that we file our tax returns truthfully and most importantly without missing any details.

Before we begin – The Tax Calculation Process:

In almost 90% or more cases, the tax payer works for a company that pays a salary and issues a form-16 to the individual. The tax payment process works as follows:
1. Employer debits a small amount of salary every month as TDS (Tax Deducted @ Source)
2. Employer collects Investment & Expenditure proof for areas like Sec 80C, HRA, Medical Expenses etc
3. Employer processes all documents received from employees and calculates the Tax Liability and deducts the TDS accordingly so that the employee’s net tax to be paid to the Government is as close as possible to “0”
4. At the end of the financial year, employer issues the Form-16 to the Employee
5. Employee uses this Form-16 to file his/her tax returns
The process is simple, isn’t it? The important catch here is point no. 2. That is why I have intentionally typed it in both Bold and Italics…

What are those mistakes?

The most common mistakes that we do as tax payers when it comes to Income Tax Calculations are:
1. Not declaring Interest Earned from Bank Accounts, Fixed Deposits etc
2. Double Declaration of Expenses like HRA, Medical Bills, etc
3. Not declaring other sources of income like Gifts
4. Double Calculation of Standard Deduction

Lets take a look at them one by one

1. Not declaring Interest Earned from Bank Accounts, Fixed Deposits etc

This is probably the simplest and most common mistake we do every year. Yes, you read me right. You need to include the Interest earned from your Savings Account, Fixed Deposits, Recurring Deposits etc as “Income from Other Sources”. You may ask me, Come On Anand, the interest I earn on my savings account is probably less than One Thousand rupees in a year. Should I still declare it as an income? Unfortunately, Yes. Irrespective of the amount involved, even if it is only One Hundred Rupees, you need to declare that as an income and pay the income tax due on it, even if it is just One Rupee.

TO-DO: Collect an Interest Earned statement from your Bank on all your accounts that might earn an interest (like Savings Account, Fixed Deposit, Recurring Deposit etc) and declare the amount as “Income Earned”

2. Double Declaration of Expenses like HRA, Medical Bills, etc

These days, both spouses working and that too in two different company’s is very common. Most company’s only ask for Xerox copies of documents like Medical Expenses, House Rent Proof, Investment Proof like Insurance Premium Receipt, Childrens Education fees etc. So, in such cases, some couples submit a copy each in their respective company’s. in all such cases, company’s take these documents as true declarations from their employees and calculate the tax liability according to it. In reality, for a single expenditure two people are claiming tax rebates. Which is obviously wrong.

If you are someone who asks, “Anand, I did not know about such a rule. If I did it by mistake, will I still be in trouble?”

Yes, you will be in trouble. Unfortunately for us the saying “Ignorance is Bliss” doesn’t hold true when it comes to our IT Department. You are liable for all mistakes irrespective of whether you did it intentionally or inadvertently.

If you are one of those smart guys that asks “We work in two different company’s. is there any way that our company or even the IT Department find this?”

In all probabilities they wont. But, if you are one of those unlucky guys (If you are someone like me, who always ends up on the unlucky end of everything) would you want to take that chance?

TO-DO: Declare each investment/expenditure only once. If both the husband and wife are sharing the expenditure, make sure that you share the declarations as well. For ex: If you have two insurance policies, each one declares one of the premiums. Or, if you have two kids, each person declares the school fees paid on one kid.

3. Not declaring other sources of income like Gifts

Today is Feb 13th and tomorrow is Valentines Day. If you are one of those loving lovers/prospective husbands etc etc who gift your fiancé/lover a costly gift, you may be causing some real trouble for your would-be wife.

Whoa!!! Did I just say that?

Yes, Of Course I did. As per the Indian IT Laws, any gift that is worth more than Rs. 50000/- in value has to be considered an income and will be clubbed along with your income.

So, if you got your fiancé a diamond engagement ring worth more than Rs. 50,000/- then your prospective bride to be has to pay taxes on the value of the gift.

Did I just dampen your Valentine Day Spirit? If so, Please Forgive Me. I would suggest you get a gift that isn’t worth more than Rs. 50,000/- and wait until your wedding to get those costly luxurious gifts to your wife. The fact here is that, the money you spend on the gift is your hard earned money, for which you have already paid Income Tax. So, there is practically no point in paying tax on something for which you already paid your taxes. Nonetheless, a rule is a rule.

However, this rule doesn’t apply under the following scenarios:
a. If the gift was received during a Marriage
b. If the gift is being given/taken from a family member which includes all direct blood relatives like siblings, spouse, parents, spouse’s siblings, spouse’s parents, children of any of these people.

TO-DO: Include details of all Gifts received from non-family members as income from other sources.

4. Double Calculation of Standard Deduction

This is a very rare scenario but one that can do a lot of damage. Let me explain. In 2007 August, I resigned from one company and joined another. Since, I had earned salary income from two employers during a single financial year, I had two form-16’s. Doesn’t sound complicated, or does it?

Unfortunately, both my employers had calculated a “Standard Deduction” of 1.5 lakhs (At that time) while calculating my tax liability. But, when I combined both my form-16’s, I had to shell out a large sum of money from my pocket to pay-off the remaining taxes. The problem here was, both my employers had calculated my TDS and deducted it after considering the standard deduction. The mistake on my part here was that, I did not declare my income from the previous employer to my new employer. As a result, I ended up paying a lumpsum from my pocket instead of it being deducted from my salary as small amounts.

TO-DO: If you switch jobs, make sure you submit details of previous income to your current employer so that, they don’t miss it.

Rationale: The Extra Income Tax you will end up paying, if you are careful in ensuring accuracy in the above mentioned points will be a few hundred or in some cases, a few thousand rupees. If you think about the trouble we will be in if authorities scrutinize our tax papers, this few thousand rupees isn’t even worth 1% of the trouble…

Happy Tax Filing!!!

Saturday, February 11, 2012

Indian Companies in the FORBES Global 2000 List

The FORBES Global 2000 list is the list of the top 2000 companies in the world. Only the 2000 of the largest and most successful companies in the world make it to this list. Did you know that 57 companies from India feature in that list for the year 2011?
Surprised, aren’t you? Well, I was too… This post is to list down those 57 companies that feature in this prestigious FORBES Global 2000 list along with their ranking/position in the list.

The Top 20 in the FORBES Global 2000 List

Before we look at the India companies that made it into this list, it would be unfair if we did not list down the Top 20 companies in this Global 2000 list.
1. JP Morgan Chase
3. General Electric
4. Exxon Mobil
5. Royal Dutch Shell
6. Petro China
8. Berkshire Hathaway
9. Petrobras
10. Citigroup
11. BNP Paribas
12. Wells Fargo
13. Banco Santander
14. AT & T
15. Gazprom
16. Chevron
17. China Construction Bank
18. Wal-Mart
19. Total
20. Allianz
Out of these 20, 8 are from the Banking Industry and 6 are from the Oil & Gas Industry.

What is the highest ranked Indian company in this list? – Any Guesses???

Well done if you had guessed it as “Reliance Industries”. Yes, Reliance Industries is the highest ranked Indian company in this FORBES Global 2000 list at position 121. The full list of 57 companies from India that feature in this list are as follows:

Rank Company Name
121 Reliance Industries
136 State Bank of India
172 ONGC - Oil & Natural Gas Corpn of India
243 Indian Oil
288 ICICI Bank
348 NTPC - National Thermal Power Corpn of India
418 Coal India
453 Bharti Airtel
499 Larsen & Toubro
512 TATA Motors
541 SAIL - Steel Authority of India Ltd
589 HDFC Bank
639 BHEL - Bharat Heavy Electricals Ltd
643 Hindalco Industries
653 PNB - Punjab National Bank
701 TCS - TATA Consultancy Services
735 HDFC Ltd
763 Bank of Baroda
769 TATA Steel
782 Wipro
789 Infosys
816 Canara Bank
820 Axis Bank
899 GAIL - Gas Authority of India Ltd
918 ITC Ltd
963 Bank of India
964 Bharat Petroleum
1008 Reliance Communications
1025 Mahindra & Mahindra
1054 Hindustan Petroleum
1076 NMDC
1119 Power Grid of India
1195 Power Finance
1204 Jindal Steel & Power
1241 Union Bank of India
1275 DLF Ltd
1353 Rural Electrification
1368 TATA Power
1388 NHPC - National Hydro Power Corp Ltd
1405 Adani Enterprises
1423 IDBI Bank
1492 Grasim Industries
1512 Kotak Mahindra Bank
1513 Central Bank of India
1515 Indian Bank
1546 Oil India
1560 Hero Honda
1591 Allahabad Bank
1613 Oriental Bank of Commerce
1639 Bajaj Auto
1645 Corporation Bank
1684 Sun Pharma
1709 UCO Bank
1780 JSW Steel
1782 Syndicate Bank
1806 IOB - Indian Overseas Bank
1831 Andhra Bank

Friday, February 10, 2012

Good News for Tax Payers in India

The last post was about "Bad News for Home Buyers" and I was a bit upset about the same. But it looks like, there may be some real good, and I mean there MAYBE REAL GOOD news for all Tax Payers in India in this Union Budget that will be filed for the financial year beginning April 1st 2012 and ending March 31st 2013.

Before we begin, let me add a disclaimer that, this is only unverified/unconfirmed news and may or may not be part of the Union Budget this year. So, don’t get your hopes so high and let’s wait and hope for the best!!!

What is this Real Good News?

This Good News is:

The Finance Ministry is contemplating on hiking the Tax Slabs for exemptions from its existing levels. If what I hear about the proposals are correct they could be:

0 - 3 lakhs = 0%
3 to 10 lakhs = 10%
10 to 20 lakhs = 20% and
> 20 lakhs = 30%

Why would the Government Do such a thing?

If you are someone who wonders, why would the Government do such a thing? Wouldn’t they lose a lot of Tax Income? Then, the answer my friend is that, "These tax slabs haven’t been revised much for decades. The Government feels that Inflation over the past years has to be taken into account when tax slabs are calculated". That is why this radical proposition.

As said before, let us not get ahead of ourselves. This is just a proposition and this may or may not be approved & implemented this year.

Is this really good news?

Of Course it is. Anyone whose Annual Income is less than 3 lakhs (Which is probably a very big chunk of the Salaried Class in India) does not need to pay any taxes. The Amount of Tax individuals would have to pay will come down drastically. Let’s see how by taking a few examples with Mr. X who earns Rs. 6 lakhs, Mr. Y who earns 12 lakhs, Mr. Z who earns 20 lakhs and Mr. A who earns 25 lakhs every year respectively.

Note: All these are men and have no tax saving options. We are just considering their Tax Liability under the assumption that they have done nothing like HRA, Sec 80C etc. to save tax.

Below is a Summary of how much Tax Mr. X, Y, Z and A would pay as per the existing tax slabs, how much they would pay if this new tax slabs are implemented and compare the Savings.

Person Annual Income Tax Payable as per Previous Slabs Tax Payable as per New Slabs Tax Amount Saved % Tax Saved
Mr. X 6 Lakhs Rs. 52,000/- Rs. 30,000/- Rs. 22,000/- 42.3%
Mr. Y 12 Lakhs Rs. 2,12,000/- Rs. 1,10,000/- Rs. 1,02,000/- 48.11%
Mr. Z 20 Lakhs Rs. 4,52,000/- Rs. 2,70,000/- Rs. 1,82,000/- 40.26%
Mr. A 25 Lakhs Rs. 6,02,000/- Rs. 4,20,000/- Rs. 1,80,000/- 29.9%

As you can see, the most tax benefit is among the population whose income is less than 20 lakhs (which would probably amount to at least 90% of the tax paying salaried class of Indians).

To know about the Existing Tax Slabs "Click Here"

Some Last words:

News about taxation of property taxes, minimum income limits for mandatory tax filing, amount of tax exemptions under various sections like Sec 80C etc. are also being discussed. Concrete information about these things will be known once the Finance Minister files his Union Budget in the Parliament.

So, until then, let’s keep our fingers crossed and hope for the best.

Watch out for more news about the Indian finance world in my blog. Happy Reading!!!

Bad News for Home Buyers - Home Loans to get Costly in 2012

Yes, you read the title of the post right. "Home Loans are set to get Costly in 2012". As soon as you read it, you may be tempted to think that the Interest Rates are probably going up and that is why am saying so. Unfortunately my friend, Interest Rates have nothing to do with this. The Reserve Bank of India has issued a new guideline to all Banks that grant Home Loans. This article is about that.

What is the new Guideline?

Reserve Bank of India has asked banks to Exclude Stamp Duty, Registration Fee and other levies from the total cost of the home, while calculating the loan disbursement amount.

How does this affect us?

Registration fees, Stamp Duty, Taxes etc. that are part of the total property being purchased were considered while calculating the home loan amount. Going forward, these fees & taxes have to be borne by the home buyer and will not be considered in the home loan amount.

What are the Various Fee's we pay while Buying a Home?

Stamp duty and other levies vary from state to state. In Maharashtra, for example, stamp duty is 5%, while in Chennai & Bangalore it is 8%, Kolkata 7%, New Delhi 4% and so on. The VAT is 1% across the country and service tax is around 3% (varies from state to state)

Overall this works out to nearly 9-10% of the actual cost of property depending on which state/city you intend on buying your house.

A Real-Life Example:

Before you begin wondering how much this will affect you, let’s take a look at a simple calculation. Let’s say Mr. Ramesh wants to buy a house in Chennai. Below is the Total cost quotation as provided by the builder:

Total Area Cost Per Sq. Feet Undivided Share of Land Cost of Property Registration Fee & Stamp Duty Car Park EB & Water Supply Deposits VAT Service Tax
1200 Sq. Ft Rs. 3000/- 600 Sq. Ft Rs. 36,00,000/- Rs. 2,88,000/- Rs. 2,00,000/- Rs. 50,000/- Rs. 36,000/- Rs. 1,08,000/-

Note: This is just an example for illustration purposes only. The actual quotation you may receive from your builder may vary based on his specifications...

As you can see, the total cost of the house that Mr. Ramesh has to pay in order to buy the Apartment is Rs. 42,82,000/- (Rs. 42.82 lakhs)

Existing Home Loan Calculation:

Total Property Value: Rs. 42,82,000/-
Loan Amount that can be disbursed by the bank (@80%) = Rs. 34,25,600/-
Amount Mr. Ramesh has to come up from his pocket: Rs. 8,56,400/-

New Home Loan Calculation:

Total Property Value (Excluding Fees & Taxes): Rs. 38,50,000/-
Loan Amount that can be disbursed by the bank (@80%): 30,80,000/-
Amount Mr. Ramesh has to come up from his pocket: Rs. 12,02,000/-

As you can see Mr. Ramesh's initial payment amount has nearly become 1.5 times:
Banks will ignore the Service Tax of Rs. 1.08 lakhs, VAT of Rs. 36,000/- and the Registration fee of Rs. 2.88 lakhs. This works out to Rs. 4,32,000/-

Whoa!!! Hold On, Don’t Banks grant up to 85% of the Property Value?

Are you someone, who hit the brakes and thought of this? Did you?

Well my friend, unfortunately this isn’t true. In Dec 2010, in order to check excessive lending by banks, RBI had directed commercial banks against lending more than 80 per cent of the value of a property for loans above Rs 20 lakh and not more than 90 per cent for loans below Rs 20 lakh.

How does this affect Banks & Real-Estate Developers?

Paying up more Initial Money means, people will be hesitant to go for buying homes. If I have to come up with nearly 12 lakhs to buy a property that is worth nearly 40 lakhs, that’s a lot of money. I might need years to save up that kind of money in order to buy my house and go knows, how much property prices will go up by the time I finish saving up 12 lakhs. In all probabilities by the time I save up 12 lakhs (let’s say optimistically I can save it in 3 years) the cost of that property would have gone up to around 50 lakhs and I will still be short by 3-4 lakhs.

In the short term, this decision will put an additional strain and burden on the home buyer.

So, The number of people buying new homes can be expected to drop and The number of people going for Home Loans can be expected to drop.

All in All, the Real Estate Market may face a slowdown due to this move.

Why Exactly did RBI come up with this Ruling?

Experts believe the RBI's latest move is aimed at curbing speculation in the property market. RBI feels that, including all the fees and levies in the value of the property is actually overstating what the house is worth in reality. From a Banks perspective, below is how they may justify this new ruling...

Let’s say, Mr. Ramesh takes a home loan for his house and gets the 34.25 lakhs (including all taxes & fees) disbursed and declares bankruptcy after 1 year. The bank may not be able to recover its full loan outstanding amount. If you ask me why, which I am sure you will, below is how:

1. In the initial years of home loan repayment, Interest works out to almost all of the EMI amount. So, by the end of 1 year, Mr. Ramesh would have probably repaid Rs. 50,000/- in principle amount.
2. Cost of re-sale property isn’t usually as much as a new property. Depreciation will be considered, even if the house is only a few months old. Even if we assume property prices may have gone up in the 1 year period, the amount may not be drastically more than what it was 1 year ago. So, a property that is worth 36 lakhs if new will be worth only around 30 odd lakhs or lesser for resale
2. Cost of VAT, Stamp Duty, Taxes etc. cannot be claimed from the re-sale home buyer. It is not his problem as to how much taxes and fees were paid when the previous home owner bought the house.

All in All, the bank stands to lose a lot of money if Mr. Ramesh goes bust and fails to repay his loan.

Is there any Good Side to this "Anti-Housing" Ruling?

Every coin has two sides. This ruling, which may be perceived as an "Anti-Housing" Ruling too has its benefits. They are:
1. Property prices may stabilize. Making up more initial payments means, lower demand and hence lower hikes in property prices. In all probabilities, property prices won’t double as it has done over the past decade or so (Multiple times I must say). The cost per sq. feet in Chromepet area of Chennai around 15 years back was around Rs. 500 to 600 per sq. feet. Now it is Rs. 4000 or more. Literally it has gone up 7-8 times over the past decade and a half.
2. Lower home loan amount means lower EMI's and you can repay your loans even quickly

I would say, the first benefit is by far the best justification. Though I am not an ardent supporter of this ruling (I too have to come up with that extra money when it’s time for me to buy a home) in the long run, this will help curb the steep rise in property prices across India.

Let’s hope property prices don’t shoot up through the sky like it has over the past decade.

Before we wrap up, below are two articles that you may find useful in your quest for buying a new home:
1. Buying a Home
2. Documents Required for an NRI to buy a home
Happy Home buying!!!

Tuesday, February 7, 2012

Mutual Fund NFO's - Difficult Times Ahead

Are you wondering “C’mon, Stock Markets are volatile, don’t I know that MF’s will have a difficult time?”. Well my friend, the title isn’t about Mutual Funds having a hard time due to the stock market volatility. That is an imminent part of any Mutual Fund’s life “Dealing with Stock Market Volatility”.

I am going to talk about a new ruling that SEBI has come to an understanding with the MF houses that would make the life of a Mutual Fund Manager difficult.

What is this new SEBI Understanding?

SEBI has proposed that, a Mutual Fund New Fund Offer (NFO) will be approved only if it is able to attract a minimum level of investor interest. To be specific, it will be approved only if a certain amount of minimum corpus is invested in it by the public. For Equity Oriented funds, this amount is Rs. 10 Crores. For Debt Oriented funds, this amount is Rs. 20 Crores.
This essentially means that, lets say ABC MF launches a new fund “ABC Dynamic Equity Multiplier” to the public and the overall corpus to begin with is only 8.5 Crores. In such a situation, ABC MF’s NFO Request will be Rejected. They have to return all the money collected by them.

How this affects Mutual Funds?

Well, this is real bad news. MF Houses cannot offer NFO’s at their will and wish. If there is low investor interest and there are not many buyers, their NFO will be scrapped. This will make the lives of fledgling and small MF houses difficult because, until they can establish themselves in the Indian MF Industry, they wont be able to attract investor money. Unfortunately in this case, unless they attract atleast 10 Crores for equity funds (20 for debt funds) their MF will not even be approved. So, its like a double edged sword for the MF houses.

How this affects Investors?

This is a mixed news for Investors. The Good part is that, if a fund isn’t able to attract even 10 crores worth of investment, it wont probably be able to handle the fund well. Maybe investors don’t trust the fund house or the manager that much. By all means, you may be better off if you dint invest in the fund. The bad part is that, even if the fund manager is good and is unable to attract enough funds due to bad market scenario, the mutual fund may not be approved. But, if you ask me, the good news outweighs the bad news. In almost all cases, a fund managed by a competent fund manager and offered by a reputable fund house, will attract enough funds to be approved.

What happens if the Fund isn’t able to attract enough funds?

If the new fund is not able to attract enough funds (10 or 20 crores as the case may be), then the fund has to be closed and the money invested by the investors (The actual amount invested) has to be returned in the next 15 – 20 days. SEBI has also stated that, if the refund fails to happen within the next 6 weeks (from date of closure) the fund house is supposed to pay an interest of 15% to the investors.

Why this Sudden Move?

Have you ever tried to view details on the total number of mutual funds available for purchase in India? If you haven’t, I strongly suggest you visit and check out the sheer number of mutual fund houses and the thousands of mutual funds available for us. There are 50+ Mutual Fund houses and even if consider each fund house has one fund for each fund category, we are looking at atleast a 1000 funds.

SEBI feels that, fund houses just offer NFOs to attract investments and then lose interest in the fund if it doesn’t attract sufficient funds (As per their considerations). They devote very little interest on such funds and the investor interest is forgotten. Such funds generate dismal returns and investors lose their hard earned money. So, SEBI feels that, if a fund house fails to honor its commitment to investors in one fund, they may not be able to generate investments for any of their subsequent new funds and hence, they will take their jobs more seriously and always take investor interest as the primary factor when it comes to managing the funds.

Happy Investing!!!
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