Inflation Indexed Bond

The RBI has launched inflation-indexed bonds (IIBs) to cushion your savings against rising prices. These financial instruments are meant to encourage savings and wean investors away from gold.

Why we need IIBs

Inflation erodes the purchasing power of money. Most debt products such as fixed deposits (FDs) or regular bonds provide returns that are not protected against inflation. If a bank FD pays an interest rate of 8.5% p.a.and inflation averages 9.5% that year, the investors loses money in real terms.This is where IIBs T come handy. These bonds adjust the principal investment to the inflation so that the investors earns a higher interest. For example, if a 10-year bond has a face value of 1000/- and the annual coupon rate is 10%, then investor will get 100/-. Now, if the inflation index in the next year rises by 12%, the principal will be adjusted the inflation rate and get raised to 1,120/- [1,000 * (1+12)%]. So, the next year the investor will earn 112/- as interest, which is 12% higher than the original amount. The way the returns from the investment will be safe from the incessant march of rising prices.

The calculations

The Wholesale Price Index will be used for adjusting the principal. The calculation will take the WPI index with four months' lag. For example, the final WPI for December 2012 and January 2013 will be used as reference WPI for adjusting the principal on 1 June, 2013 and 1 July, 2013 respectively. On maturity, the investor gets back the higher of the adjusted principal or the face value.

The disadvantages

Although inflation-indexed bonds prove beneficial during times of high inflation, they under-perform when the economy goes through a deflationary phase and prices actually come down. In such situation, the IIB will give lower than coupon rate because the principal would get adjusted below 1000/-. However, this is only a theoretical risk. A decline in whole-sale prices is not even a remote possibility in India.

Another drawback of these bonds is that they have been indexed to the WPI and not the Consumer Price Index (CPI). For most investors in bonds, the CPI is the more relevant index. Consumer prices matter to them in day-to-day life than wholesale prices. 

Can these Bonds beat inflation?

• Inflation -indexed bonds were first issued in the UK in 1981 and became popular in other countries as well over the past two decades.
• In the US they are referred to as TIPS (Treasury Inflation Protected Securities) and form an important part of investor portfolios.
• In India, the Capital Index Bonds 2002 were issued in December 1997. But only principal repayments at the time of redemption were indexed to inflation.
• With the launch of these bonds, more investors may not opt to save via a financial instrument instead of buying gold.
• One big drawback is that these inflation busting bonds are linked to the WPI and not the more relevant CPI.

Hoarders vs Investors

How hoarders can make a transition to investors

Enough has been written about investors' obsession with gold and real estate. Hard facts about long-term returns have been published, showing that these assets may not be a good long-term choice. However, investors view such research with skepticism. They continue to prefer physical assets to financial ones, and hold an abnormal amount as cash. Are we mere hoarders of wealth? What does it take to become investors?

First, we are guided by the nominal value of assets. What matters is the real value, after adjusting for inflation, but that is not very intuitive for most investors to perceive. When we are told no one loses money in real estate, we believe it because we have only heard of rising prices. That fact is that with a positive rate of inflation, assets prices move up over time. This is true not just for gold and property, but also for rice, dal, petrol etc. A nominal increase in price does not mean that an asset has become more valuable. As hoarders, we are happy with nominal value; as investors, we will ask about the real value, after inflation.

Second, we like assets even if they do not work for us. Assets are acquired for their ability to earn a return. This should come in the form of a regular  income, such as dividend, interest, rent, or by way of appreciation in value, which we can actually realize when needed. Assets create a sense of security and represent accumulated wealth. They are, therefore, social symbols, which tell the rest of the world that our incomes are far higher, and that we own assets acquired only by the wealthy. Ostentatious display of jewellery and lavishly decorated homes are all social symbols of wealth. When we want to belong to this class, we accumulate assets without caring for the income or the intent to realize gains. We are also reluctant hoarders, unwilling to sell these assets and strip down our social status. As rightly put by ace investor Warren Buffet - "If you buy things you don't need you'll soon sell things you need". As investors, we want the assets to work hard for us and earn returns.

Third, we obsess about the protection of invested capital. The notion is that an asset should have undiminished value dominates our choice. A physical asset, which can be seen and felt, is the obvious choice for the hoarder. Since inflation increases its price, there is a false sense of security about increasing value. The long-term return from assets that do not work cannot be different from the rate of inflation. We see the steadily rising price as hoarders, and expect this from all assets. As investors we know that what goes up will certainly come down and vice-verse. As hoarders, we fail to see the economics of asset prices.

Fourth, we do not understand the dynamics of markets. We prefer an oversimplified version of the way prices should behave since we seek a linear growth in the assets we hold. Assets prices are not influenced only by demand and supply and could also be distorted structurally. The real estate and gold markets in India are dominated by holders of black money. The unaccounted for cash invested in these assets is generated and stored outside the banking system, and is not sensitive to the changes in borrowing costs that the RBI tries to manage. Large-scale tax evasion, ill-gotten bribes and payoffs, and unaccounted for incomes hidden from the taxman feed these assets purchases.

It is a combination of these factors that turns several investors into happy hoarders. When the government says it wants to do something about this preference, it needs to work towards ensuring that the large hoarders and evaders stop distorting these markets. Before blaming the small hoarder, who is unable to make the transition to an investor, we need actual asset builders who will guide. That is the missing link

Can't Pay Home Loan EMI

Here's how the bank will react to the situation and how you can negotiate with it to resolve it

Buying a house is the most expensive purchase you are likely to make, so you may need help in funding it in the form of loan. What if you take a home loan, but after some time, find yourself unable to ay the EMIs? There could be several reasons for this, from losing your job to depleting your savings for a medical exigency. Will the bank seize your property if you miss 2-3 mortgage payments? No, not immediately, but if you continue to default for six months, the bank will take over your house.

Attaching a property is the last thing a lender wants to do. Though banks have the power to enforce the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, (SARFAESI) to recover non-performing assets without the intervention of a court of law, this is the last step they prefer to take.

A bank usually lets one mortgage payment default slip by, but for the next one, it will mail you a reminder to inform you that your payments are late. After three defaults, the bank will send a demand notice, asking you to pay your dues as soon as possible. If the borrower doesn't respond to any of the mails, the bank sends a legal notice through its legal department.

A bank waits for three months before declaring an asset a non-performing one. After the end of this period, the bank can officially term the home loan an NPA and start the process of recovering the property through the SARFAESI Act.

Even after invoking the Act, the bank gives the borrower a 2-month notice period to repay the dues. Finally, five months after the first default, the bank sends a notice, stating that it has valued the property for a certain sum and that it will auction the house on a particular date. This is usually set for a month from the date that the bank mails you the auction notice.

Banks and financial institutions are more interested in recovering the money than in starting legal proceedings as the procedure of attaching and auctioning a house is lengthy and takes time. So, they will persue the matter for at least six months before taking legal action.

The last state is usually when a borrower gets a notice from the Debt Recovery Tribunal (for loan amounts of more than 10 lakh). It is compulsory for you to attend the hearing that is set by the tribunal, where you can reach an agreement with the bank.

If you are serious about paying your dues and have a good repayment track record, the bank will be willing to offer a leeway. The first step that bank takes is to understand the reason for the default since a home loan is a secured one, with the bank having more control over the asset. If the bank is satisfied that the problem is genuine and that the borrower will start paying the EMI soon, it will be willing to wait for some more time. However, banks take such decisions on a case-to-case basis. In fact, a bank will allow you to reclaim your property even after it has seized it, though this has to be done before the auction takes place. Even if the auction date has been announced, the borrower can come in at any stage and pay the dues to save his property. However, if the bank has incurred any charges for announcing the auction, the borrower will have to pay these.

The main reason you need to start paying the EMI again, other than avoiding possession of your home by the bank, is to ensure that your credit score is not adversely affected. About 30% of your credit score is based on repayment history and a significant part of this usually depends on how regularly you repay your home loan, if you have taken one. Even one or two missed payments can negatively impact your credit score, and a continuous default will dent it severely, making it difficult to get loans or credit cards in the future.

However, if it seems that the situation may not improve even after six months, a better idea may be to sell the property. You can talk to the bank about this and use the sale proceeds to prepay the loan. Ensure that while the sale negotiations are on, you continue paying the EMIs. This will prove to the bank that you aren't taking it for a ride and will ensure that your credit score doesn't dip.

Rajiv Gandhi Equity Savings Scheme (RGESS)

Who is Eligible?

RGESS is available to all resident individuals whose gross total income is less than 12 lakh and who are investing in equity for the first time. A first-timer has been defined as the one who has not opened a demat account as a 'first holder' before the notification date of 23 November 2012, even if his name appears in a joint demat account opened before this date. The investor who has opened a demat account as first holder before the notification date but has not bought any shares or traded in the futures and options segment will also be considered as a first-time investor.

How can you get tax benefits?

To avail of tax deduction, an investor has to open a new RGESS designated demat account or designate for this purpose his existing demat account, where no trading has taken place before 23 November. He needs to submit a declaration in Form A, certifying that he has not traded before 23 November 2012, to the depository participant, who in turn forwards it to the depository for verifying the status and designate him a new retail investor. He can then start buying the eligible securities, which include stocks from BSE-100 or CNS 100 index. The listed shares of navaratna, maharatna and miniratna pubic-sector undertakings, and initial public offers (IPO) of PSUs, whose turnover is more than 4000 crore, are also eligible for investment. One can avail of tax benefit by investing in the eligible mutual fund schemes too.

What's the lock-in period?

Unlike other tax-saving schemes, the lock-in period here is split in two. The first year is a fixed lock-in and the investor cannot sell, pledge or hypothecate the shares. The next two years are flexible and he can sell, but has to buy other eligible securities with the proceeds. All eligible securities in an RGESS designated account are automatically subject to the lock-in periods. If an investor wants to buy more designated shares and keep these outside the lock-in clause, he has to give a declaration in Form B within a month of the transaction date. The tax benefit under Section 80CCG is withdrawn if these conditions are violated, but if the changes are due to involuntary corporate actions it's not affected.

What are your savings?

While there is no restriction on investment, only 50,000/- is considered for tax purposes. Of this, only 50%, or 25,000/-, is allowed as deduction. Since RGESS is for people with income less that 12 lakh, they will fall in the 10% or 20% tax bracket. The maximum savings under this will be 5000/- for people in the 20% tax bracket and 2500/- for those under 10% (beyond the Section 80C benefits). Besides, the tax deductions will be available for the all the 3 years.

Stocks or mutual funds?

Since direct investment in equity needs expertise and first-time investors are unlikely to have it, they should refrain from investing directly in the market. The risk is also high because 50,000/- is not enough to create a well-diversified portfolio. A better option is to go through the mutual fund route.  Various mutual fund houses have also started filing offer documents for eligible schemes with Sebi, while their new fund offerings (NFO) too are expected soon.

:: SCORES ::

SEBI REDRESS COMPLAINTS SYSTEM

 

How to Approach SEBI with your Complaint 

(The market regulator has initiated a centralized online system for lodging and tracking complaints. Here's how to redress your grievances.)

1. File the Complaint

For registering a complaint, access http://scores.gov.in and click on the 'Complaint Registration' tab under 'Investor Corner'

2.  Enter your Details

(a) Enter your personal details and select a category among the following options

• Listed companies/registrar & travel agents
• Brokers/stock exchanges
• Depository participants/depository
• Mutual Funds
• Other entities
• Information to Sebi

(b) Enter specific details of the complaint in the specific category.

3. Supporting documents

Supporting documents up to 1 MB can be attached in the PDF format. In case the data to be loaded for each category is more than 1 MB, it can be sent by post to any of the Sebi offices.

4. Registration number

 

On filing the complaint, a unique registration number will be generated, which can be used for future correspondence. An e-mail acknowledging the complaint with the complaint registration number will also be sent to the e-mail ID entered in the complaint registration form.

Sending a reminder

If you want to send a reminder for the lodged complaint, click on 'Send Reminder' under 'Investor Corner' on the home page. Provide details like registration number, reminder details and the security code.

If you are not satisfied with the response

You can file a fresh complaint, send a mail to the officer entrusted with the complaint, take up the complaint with senior officers, or initiate legal proceedings against the entity.

Track your complaint

To check your complaint status, click on 'View Complaint Status' under 'Investor Corner' on the home page

• Provide the complaint registration number which was allotted at the time of registration
• Enter your password 
• In case of online complaints, your e-mail address is your password.
• In case of physical complaints, send to Sebi, enter the password send to you by Sebi in the acknowledgement letter.
• On verifying the correctness of registration number, password and security code, the current status of your complaint is displayed.

How complaint is processed?

The complaint is scrutinized by Sebi  to see if the subject falls under its purview. If it does, Sebi forwards it to the concerned entity with an advice to send a written reply to the investors and file an action-taken report within 30 days.

Your complaint may not be taken up if

• ...it is incomplete or not specific
• ...the allegation is not supported by documents
• ...you are simply offering suggestions or seeking guidance/explanation
• ...you want to seek explanation for non-trading or illiquidity of shares
• ...you are not satisfied with the trading price of shares
• ...it is about non-listing of shares of a private offer
• ...it concerns disputes arising from a private agreement with companies/intermediaries.

Points to Note

1. A complaint that has been taken up with the company concerned can be registered on SCORES if the investor is not satisfied with the response.
2. Unlisted companies and entities not registered with Sebi are not covered by SCORES.
3. An investor, who is not familiar with SCORES or has no access to the website, can lodge a complaint in the physical form by mail to any Sebi office. Such complaints are scanned and uploaded in SCORES for processing.
4. You can also call up Sebi's toll-free helpline service number for guidance

• 1800 266 7575   OR

• 1800 22 7575

          (The service is available in 14 languages)

Investment Tax

How are your investments taxed

All financial instruments go through three stages -- Investment, Earning and Withdrawal. Since the tax rules vary across these phases, find  out how much tax you will have to pay on your investment.

• PF & VPF  - This is the most common investment. The interest rates are decided by EPFO Trust. 
• PPF - This assured return scheme is market linked, with 1 lakh annual investment limit. 
• Insurance Policies - Budget 2012 says that for tax benefits, the cover should be 10 times the annual premium. 
• ELSS funds - TAx-saver with the shortest lock-in period of three years may get scrapped under the DTC.

TAXATION 

(E-E-E)

The Exempt-Exempt-Exempt model means all three stages are tax-free. You get tax deduction at the time of investment, the earnings are tax-free, as are the withdrawals.

• Unit linked pension plans - Upto 33% of the pension corpus withdrawn on maturity is tax-free. Rest to be put in annuity. 

• Pension policies - Annuity income is taxable as income at the normal rate applicable to the investor. 
• NPS - Launched with much fanfare, it has not done too well. May be overhauled and improved soon.

TAXATION

(E-E-T)

The Exempt-Exempt-Tax regime gives tax deduction at the time of investment and the earning is tax-free, but withdrawal is taxed as income at marginal rate.

• NSCs - These are now market linked like the PPF and available in 5 and 10 years options.
• Tax-savings FDs - Best tax saving option for risk averse investors. Higher rates for senior citizens.
• Senior Citizens Savings Scheme - A popular option that is market-linked, and has an investment limit of 15 lakh per person

TAXATION

(E-T-E)

The Exempt-Tax-Exempt arrangement offers tax deduction to investment but earning is taxed. The withdrawal is tax-free given the tax is paid out at the growth stage.

• Stocks - If held for more than a year, no tax on capital gains. You pay 15% tax if sold before a year.
• Equity funds - Just like stocks, there is no tax if held for more than a year. All dividends are tax-free
• Balanced funds - Though up to 40% of portfolio can be in debt, these enjoy the same tax benefits as equity funds
• Tax-free bonds - These bonds issued by infrastructure companies carries a low coupon rate 

TAXATION

(T-E-E)

No tax deduction here for the investor. He invests post-tax income but the earning and withdrawal are tax-free if the investment is held for at least one year.

• Non Equity hybrid fund - After a year, profit from sale is taxed at a lower rate of flat 10% or 20% after indexation.
• Debt funds -Tax-efficient way of investing in debt. After a year, profits are treated as capital gains.
• FMPs - Similar to FDs, but profits are taxed at a lower rate. Very popular among HNIs

TAXATION

(T-E-T)

Here again, the investor puts in post-tax income. While there is no tax during the growth stage, the earning is taxed at the time of withdrawal.

• Recurring deposits - Lock into high rates even if you don't have a lump sum. No TDS, so must pay tax yourself.
• Post office MIS - Monthly income is fully taxable without any TDS. Onus is on the investor to pay tax.
• Fixed deposits - TDS only up to 10% if interest is more than 10,000 a year. Here, too onus is on investor.
• Bonds - Income from tax-saving bonds is taxable. Pay tax if you fall in the higher tax bracket

TAXATION

(T-T-E)

This is possibly the least tax-efficient regime with no tax deduction offered and earning fully taxable. With income taxed every year, there is no tax on principal at maturity.

Wealth Tax

Wealth tax came into existence on 1st April 1957. It is termed as most significant direct tax. As per the wealth tax act, wealth tax is applicable to the following: 

•  An individual person
• A group of people who own a property
• A company or organization  
• A Hindu undivided family (HUF)
• A representative or heir of a dead person
• Non corporative tax payer

Wealth tax is the most neglected child of the direct taxes family. However, remember that ignoring wealth tax can lead to serious problems for a taxpayer, with the penalty ranging from 100% to 500% of the unpaid tax. In extreme cases of willful default, a taxpayer may be punished with imprisonment ranging from six months to seven years.

The laxity on the part of the government has encouraged taxpayers to ignore their wealth tax liability. Though financial assets do not invite wealth tax, real estate and gold, two favourite investment options of the rich, are included. In the past 4-5 years, crores of rupees has flowed into real estate, while gold prices have more than doubled in the past three years.

However, this is not reflected in the wealth tax collection, which has grown at a tardy pace, to say the least. However, this could soon change. A committee has been formed which has sought stricter punishment for tax evasion. The panel wants the minimum imprisonment for income tax and wealth tax evasion to be three years.

Most investors in real estate have no idea about the t ax implication of buying a second property. A second house won't attract wealth tax only if it is rented out for at least 300 days in a year. It can be a double whammy for the owner if the house is lying vacant, for he will not only have to pay tax on the notional rental income, but the value of the house will be added to his net taxable wealth. This is why savvy investors prefer to put money in commercial real estate, which does not attract wealth tax.

An increased focus on wealth tax compliance can bring in significant revenue for the government. The best part is that there cannot be any political opposition to such a move because the law already exists. All that the government needs to do is invoke it more seriously, that's it.

However there is good news in store. The original DTC had proposed to raise the threshold of assets for wealth tax to 50 crore INR and reduce the tax to 0.25%. It had also sought to bring financial assets under the tax ambit. The revised DTC has not specified the limit, but has hinted that financial assets will bot be included and that the threshold limit needs to be raised.

Till that happens, make sure you pay your wealth tax and file the return to avoid a massive from the tax.

Quick facts about wealth tax

What is Taxable ?

Wealth tax is payable if the value of the following unproductive assets exceeds 30 lakh INR on the last day of the fiscal year.

• More than one property, if it is unoccupied
• Gold and ornaments
• Art and artefacts
• Luxury cars, watches, yachts and aircraft
• Over 50,000 INR in cash.

 How much is taxable ?

• The tax is 1% of the value of the assets exceeding 30 lakh INR. For example: If the value of these assets adds up to 75 lakh INR, you have to pay 45,000 INR (1 % of 45 lakh) as wealth tax.
• There is no surcharge or cess on wealth tax 

What is exempt from wealth tax ?

• Any one residential property. Taxpayer can choose whichever property he wants to exempt
• Commercial property
• Financial assets (stocks, bonds, Ulips, mutual fund, gold funds and bank balance)
• Any outstanding loan taken to purchase the asset on which wealth tax is payable.

Filing deadline and form to use

•  Wealth tax return has to be filled by 31st July. If the assessee is liable for an audit, the last date of filling in 30th September
• You have to use the four-page Form BA for filing the return
• If you miss the last date, you can still file the return before the expiry of one year from the end of the assessment year

What is the penalty ?

• 1% interest for every month of delay
• Tax evasion invites penalty ranging from 100% to 500% of the evaded amount
• In extreme cases, the imprisonment ranging from six months to seven years, with fine, if the wealth tax exceeds 1 lakh INR

Credit Score

It is derived from the 'accounts' and 'enquiries' sections of your Credit Information Report. Different credit agencies have different marking systems. For instance, CIBIL's scores ranges from 300 to 900 points while Equifax India's ranges from 1 to 999 points. The closer your score is to the upper limit, the better. Sometimes, one may get a score of NA or NH, meaning you're either new to the credit system or you're in the ownership category where you have access to credit but aren't responsible for paying back the loan. So lenders may hesitate to give you a loan if you don't have a credit record.

Financial Institutions check your credit score before extending you a loan. Apart from common mistakes, here are some moves that affect your credit. So beware

TOO MANY CARDS

Bankers won't like it if you are 'credit hungry'. Applying for too many loans within a short period or having too many credit cards can go against you and may spoil your chances of getting a loan. This is because it is a sign of desperation and will have a negative impact as well. Access to multiple lines of credit, which may include unused credit cards, also impacts the score as it signals over-indebtedness.

GUARANTEE WITH CARE

Don't be surprised if your application is rejected if your friend did not repay a loan you stood guarantee to. Credit information bureaus classify ownership of a loan, that is, the responsibility of repaying, into four categories -- single/individual (you are solely responsible for paying), joint (you share responsibility with someone), authorised user (when you have access to credit but are responsible for paying, as in add-on credit cards) and guarantor (when you guarantee to honour the obligation if loan taker cannot repay). So if you have guaranteed a loan and it hasn't been paid on time, it will impact your score. Keep track of add-on credit cards and monitor joint accounts as the other holder's negligence can impact your access to credit.

CROSSING LIMITS

Frequent use of full credit card limit will be a red flag for lenders. The figure appearing under Current Balances of the "Account(s)" section of your credit report helps the loan provider evaluate whether you'll be able to pay additional EMIs. A lower balance means you have a better change of repaying the loan. While high credit card spending may not necessarily be bad, an increase in the current balance on the card over time indicates a higher repayment burden and may negatively impact the score. Your repayment pattern and track records also influence the score. The payment history appears in the "Account(s)" section of your credit report. The Days Past Due, or DPD, shows how many days a payment is late that month. Lenders view anything other than zero negatively.

MORTGAGE MIX

Things such as how old your lines of credit are and the quality of the mix can make a huge difference. Credit is categorised into secured loans (backed by collateral) and unsecured loans (not backed by collateral). Loans that create an asset, for instance a business, house are considered secured, while credit taken for consumption, such as personal loan or credit card spending, is unsecured. A high share of unsecured credit affects the customer's profile. This is because this means large payouts are due owing to the high interest rates on these loans. Therefore, chances of default are higher.

GHOSTS FROM THE PAST

Ignoring discrepancies in credit information reports or credit card and loan repayment records may come back to haunt you later. If you spot a mistake, you can either approach the lender or a credit information company to get it rectified. However, it is better to approach the bank as a credit information company can't make any change in the report unless it gets the lender's written approval. So don't overlook on anything which you think is not right.

FOR THE FUTURE

Though, as of now, mobile phone bill payments do not get captured in the credit information, there is a possibility of it getting included in the near future. According to the Credit Information Companies Regulation Act of 2005, telecom companies are allowed to access an individual's credit report. However, there is no provision for telecom companies sharing data with credit information companies. So do not overlook this bill so that you will be able to meet the future requirements of your credit scores if regulation do get updated. To keep this account pristine, comply with current rules and use all official channels to settle disputes rather than just refusing to pay your bill.

Foreign Capital

In an attempt to increase overseas capital inflows and reduce the current account deficit due to higher imports, India has liberalised foreign investment in stock markets. Qualified foreign investors (QFIs) can now invest directly in Indian equities. Lets have an overview of such new feature introduction.

A QFI is an individual, an association or a group from a foreign country complaint with standards mandated by the Financial Action Task Force, an inter-government body that formulates policies to combat money laundering and terrorist financing. Foreign Institutional investors (FIIs) and foreign venture capital investments do not come under the QFI category.

An individual QFI can invest up to 5% of the paid-up capital of a listed company. Total investment by QFIs in a listed company cannot exceed 10% of its paid paid-up capital. Foreign investors will also be allowed to acquire equity shares by way of rights issue, bonus shares or equity shares on account of stock split, amalgamation, demerger or such corporate actions.

QFIs can invest only in listed Indian equities through depository participants (agents of depositories that provide accounts for holding securities in electronic format) registered with SEBI. Each investor will be allowed to open one trading account and one demat account with a depository participant but will not be allowed to open a dedicated bank account in India.

Depository participants will purchase equity at the instruction of QFIs within five working days. If a depository participant fails to execute the order within five working days, the funds would be repatriated back to the QFIs designated overseas bank. When QFIs sell their stock holding, the sale proceeds will also be repatriated to their designated banks within five working days. In addition, the depository participants wil ensure compliance with the "Know Your Customer" norms for QFIs. QFIs have already been allowed to invest in mutual funds.

The new scheme is expected to help increase the depth of the Indian market and in combating volatility beside increasing foreign inflows in the country.

Fund Statement

Reading a Fund Statement

So you've invested in mutual fund? What is the entry/exit load on it? What is your current net asset value, or NAV? If these seems Greek to you, you clearly haven't been taking a close look at the statement that your fund house mails to you. Much like a bank account statement, this document offers all transaction details carried out within a defined time period. It is also available online and indicates account changes whenever there is a redemption, additional investment or dividend declaration.

Here's look at some of the important details in the mutual fund statement, which should be checked regularly by investors.

Investor's personal details

The name, address and phone number of the investor and joint investors (if any) are mentioned in this section. Ensure that all these details are correct and updated, and if there is any discrepancy, it should be communicated to the broker or fund house.

Adviser Name

This indicates the source through which you have invested. If you have done so through an agent, the latter's name and code will appear on the statement. However, if you have invested directly, these parts should be blank on your account statement.

Bank details

Make sure your bank's name and your account number are accurately mentioned to avoid problems while redeeming units. If you want to change your bank mandate, fill out the slip at the bottom of your account statement and submit it to your fund house or agent.

Folio and account numbers

Most mutual funds offer one folio number and several account numbers in the same folio for all investments under the same unitholder combination. This makes tracking all your investments with the same fund easier. Make sure you keep tabs on the different account numbers within the single folio.

Current cost and value

The cost indicates the amount you invested in a scheme while the current value is the latest market value of your investments as on the date the statements is generated.

PAN details

You must give the correct Permanent Account Number (PAN), irrespective of the amount invested. Check your PAN details mentioned in the account statement and ensure there are no discrepancies.

Transaction summary

This section details the type of transactions you have opted for, such as purchase, systematic investment plan (SIP) and systematic withdrawal plan (SWP). Transactions like dividend payout or reinvestment are also mentioned along with percentage or rupees per unit at which the dividend is reinvested or paid.

Transaction slip

At the bottom of the account statement, there is a transaction-cum-service request slip, which can be used for buying additional units, redeeming and switching units between schemes. The transaction slip can also be used if an investor wants to notify any change in his/her correspondence address and bank details.

The back of the account statement is also worth a careful look. It contains important notes relating to investor services, KYC norms, additional purchase, switch, and the like. A little due diligence and careful monitoring by you can ensure the safety of your investment.

Trading Terms

A growing number of small investors is buying and selling stocks online. However, before you attempt to do it yourself, here are a few terms you should familiarize yourself with.

A. DAY TRADING

These orders are used for buying and selling shares in the normal course of stock trading during the day.

A.1 DAY ORDER

This order is valid only for a day. If it is not executed by the end of the session, the order gets cancelled automatically.

Eg: Tata Steel is trading at 440/-. You place a day order for shares at 430/-. It will be executed only if the share price dips to 430/- during the day.

A.2 IMMEDIATE OR CANCEL

This is for buying or selling a share as soon as the order is placed. If there is no buyer or seller at the specified price, its gets cancelled. Sometimes IOC orders are executed partially.

Eg: An IOC order is placed for 100 shares of Reliance Industries at 12.05pm when the share price is 900/-. Only 25 shares are bought before the price rises to 905/-. The order for the balance 75 shares is cancelled.

A.3 MARKET ORDER

This order is executed immediately, irrespective of the share price. The buyer gets to know the price only after the order has been executed.

Eg: In the above example, if it was a market order for 100 shares of Reliance, the buyer would have got 25 shares at 900/- and the balance 75 at 905/-.

A.4 GOOD TILL CANCELLED

Unlike the day order, this remains valid for a specified number of days till it is cancelled by the trader. The validity period is specified by the exchanges.  GTC orders help investors buy at a specified price without having to monitor the share price closely.

B. STOP LOSS ORDERS

Stop Loss orders limit the loss of the investor by buying back or selling a share if the price moves contrary to expectations. He doesn't need to monitor the price.

 

B.1 MARKET PRICE PROTECTION

This limits the price as a percentage of the last traded price. It is useful while trading in volatile stocks

Eg: You place an order for shares at 100/-, but by the time it is received by the system, the price rises to 106/-. In a market order, you will get shares at 106/-, but if you opt for 2% MPP, the order will not be executed if the price rises above 102/-.

B.2 SL LIMIT ORDER (SELL)

The stop loss order can also be set if shares have been bought.

Eg: An investor buys 100 shares at 175/- and sets a stop loss at 173/- with a limit of 170/-. The shares will not be sold if the price falls below 170/-.

B.3 SL LIMIT ORDER (BUY)

A limit order specifies the price at which the shares are to be purchased (or sold) after the stop loss is triggered.

Eg: If the limit for Axis Bank was set at 1107/-, the order would be executed between 1105/- (the trigger price)  and 1107/- (the upper limit). If the price rises to 1110/-, the order will not be executed. Limit order gives the trader some control over the price, but the purpose is defeated if the price moves beyond the defined threshold.

B.4 STOP LOSS MARKET ORDER

The stop loss is activated when the share price reaches the trigger price and is executed at the prevailing market price. The investor has no control over the price at which the order is executed after it is triggered.

Eg: A trader short sells 100 shares of Axis Bank at 1100/- and sets the threshold price at 1105/-. When the price rises to 1105/-, the order is activated for immediate execution. However, if the price jumps to 1110 or more before it is executed, the order will be executed at 1110/-. Once the trigger is crossed, the trader has no control over the price.

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INDEX-BASED CIRCUITS

These are trading barriers set up by the exchanges to prevent excessive speculation and panic selling, the circuits are activated when the market moves by over 10% and trading halts across the equity and derivative markets throughout the country. The circuits are currently applicable to two benchmark indices -- BSE Sensex and S&P CNX Nifty.

10% rise or fall in benchmark index

Before 1 pm => Trading halts for one hour

After 1pm but before 2:30 pm => Trading halts for 30 mins.

After 2:30 pm => Trading doesn't halt

15% rise or fall in benchmark index

Before 1 pm => Trading halts for two hours

After 1pm but before 2:30 pm => Trading halts for one hour

After 2:30 pm => Trading halts for the day

20% rise or fall in benchmark index

Trading suspended for the rest of the day.

Assured Returns

Don't be fooled by promises of guaranteed returns. It is critical to look for risks in an investment rather than seek assurances that are easy to give.

Investors love assurances. An assured return conjures up the image of a solid investment that will deliver on its promise. It seems like the best choice one can make with one's money. The truth is that delivering an assured return is the toughest act for an financial product. If investors think that assured return means a risk-free and safe investment, they should think again. The quality of the promise matters so much more than the promise itself.

Why is it tough to assure returns? The performance of an investment is primarily driven by the assets in which the investor's money is put to work. All assets are subject to risk. It is not possible to buy assets that will only appreciate in value. The degree of risk may vary, but no one can tell how an asset will perform in the future. Whether it is land, gold, houses, stocks or art, all assets are subject to the risk of price fluctuation. Prices are influenced by cyclical factors such as the state of the economy (the US housing prices crashed in 2008 triggering an economic recession), and structural factors that impact the specific asset. Some assets, such as property or equity, may face short-term risks that even out in the long-term, but they are risky anyway. All investment products are based on an underlying asset port-folio, which is risky by definition. Asking where, not how, the money will be invested is critical to understanding any assurance of return.

So, how do banks manage to assure returns on deposits? The answer lies in the balance sheet structure. A bank borrows from its depositors. Its assets are the loans it gives out to various borrowers using these deposits. The borrowers agree to pay a fixed rate of interest and return the principal, but their ability to keep the promise is again linked to their assets and performance. A person who has taken a home loan is likely to default, despite committing to a fixed rate of interest, if he loses his job or if his house drops in value significantly. Therefore, the bank's portfolio is also subject to risk. The bank does two things to keep its promise to depositors. First, it ensures that the loan portfolio is not completely risky and holds some safe investments in government bonds as well. Second, it does not fund all the loans with deposits, but ensures that a part of it is funded through equity investors who do not seek assurance. If the risk of the asset portfolio is borne adequately by equity capital, the bank is unlikely to default on its deposits. This is why capital adequacy is a regulatory requirement for banks that seek deposits from the public. This is also the reason that a bank with a poor quality loan portfolio or inadequate capital can default on it deposits despite assurance.

How does a company pay an assured return on its bonds? It does so by further extending the balance sheet structure used by a bank. Unlike a bank that holds loans, a company holds assets that are expected to generate future income. The risk associated with these assets can vary depending on the nature of the business. Therefore, a company has to be funded by its promoters even before it seeks any lenders. The lenders will, of course, want the company to have adequate equity capital already invested in it. They will ask an external credit rating agency to test the quality of assets that they are funding. As we know, these agencies can downgrade and change the rating unfavourably if a company is more likely to default.

How safe are government securities? The central government assures returns on its bonds and saving schemes because of its unique powers that provide it with three options to return the money it borrows. It can unilaterally increase the taxes, borrow internationally, or print money. We can, therefore, assume that the government will pay its liabilities. We know from the experiences in Europe that a government which borrows recklessly can also find itself in trouble, causing serious economic consequences for its lenders and citizens. Hence, the ability to assure returns comes either from the strength of the balance sheet in the case of a bank or company, and from special powers vested with a government. It is critical to learn how to look for risks in an investment, rather than seek assurances that are easy to give but tough to deliver.

MF Grievance

A  proper redressal system is in place to address the complaints of an MF investor.

Investing in a mutual fund (MF) today is easier than ever before. Now, you could invest not just through the distributor, but also online and without an intermediary. Servicing the MF investor, on the other hand, has always been an issue, though it's being tackled through a series of steps of late. The tardy and unfriendly attitude that characterized the MF industry in its infancy stage has given way to an efficient and personal face. Still, complaints do crop up, such as a missed dividend cheque, issues with a fund's NAV pricing, non-receipt of fact-sheet and annual reports, and so on. If caught on the wrong foot, you can follow the following redressal trail.

The Fund House

Most snags get resolved at the fund house ---- the first step of the redressal ladder --- itself. In case of any clarification or complaint regarding your investment, approach your fund house or its registrar and transfer agent (R&T). Their contact details are there in the account statements or the fact-sheets that funds send to investors. You could also get them from the website of the respective fund house and its transfer agent. The  fund house or registrar will look into the complaint and, more often than not, resolve it then and there.

The Regulator

If, for some reason, the investor is not satisfied with the fund house's response and wants further intervention, the next contact should be the regulator -- Securities and Exchange Board of India (Sebi). A written complaint has to be filled with any of the four zonal offices, detailing the circumstances of the case, along with photocopies of the relevant documents. Complaints can also be filled online on Sebi's website www.sebi.gov.in. On receiving the complaint, Sebi will give a reference number, which will need to be quoted in all future communications with it. Sebi will follow up the case with the fund house. If the fund house does not resolve the complaint with three months of filing it with Sebi, you will have to sound out (Send reminder) the regulator again.

Investor's Association

If Sebi also fails to resolve a complaint, you will have to approach an investors' association. These are independent entities that help investors in grievance cases. You will have to write to one of the associations, attaching photocopies of relevant documents. Some of these entities provide the services for free, while others charge a nominal fee in the range of 200 - 500 INR. These associations take up individual cases too. To start with, the investors' association will do what Sebi does -- hear the investor's side of the story and follow it up with the fund house concerned. If it does not get a satisfactory  answer from the fund house, and it feels there is a case, it might advise the investor to take legal action. It could even help with the case.

Ministry of Corporate Affairs

'Investor Helpline' is a free, dedicated online portal to handle investor grievances administered by different authorities, i.e., the Ministry of Corporate Affairs, Sebi and the Reserve Bank of India, in a focused and sustained manner. It is sponsored by the Investor Education and Protection Fund under the Ministry of Corporate Affairs. Right from filing of the grievances to tracking their status and interaction with the administrator, all the steps have been made online to make it user-friendly.

The Courts

On rare occasions that your problem remains unresolved, the legal system is your last recourse.

Market Correction

Investing in uncertain times

There is mayhem in the markets. Here's what small investors should do to cushion their portfolios against the downturn

There is no hard and fast definition of the term "Market Correction". A stock market correction is when the stock market declines 10% or less in a relatively short period of time. It's a natural part of the stock market cycle. Corrections are inevitable. When the stock market is going up, investors want to get in on the potential profits. This can lead to irrational exuberance. This can make stock prices go well above their underlying value.

A correction is different from a stock market crash, which is when stock prices plummet more than 10%, often in just one day. Unlike a correction, a stock market crash can cause a recession. How? Stocks are how corporations get cash to grow their businesses. If stock prices fall dramatically, corporations have less ability to grow. Businesses that don't grow will eventually lay off workers to stay solvent. As workers are laid off, they spend less. Lower demand means lower revenue. This means more layoffs. As the decline continues, the economy contracts and you have -- Voila! -- a recession.

If a correction is relatively benign, and a crash can cause a recession, how can you tell the difference? It's not easy. A correction can turn into a crash if the stock market declines more than 10%. Trying to decide if a correction is turning into a crash is known as timing the market. This is nearly impossible to do, since there are so many factors that can influence the direction the market goes in. However, the markets soon regain their confidence, reverse course and begin to head higher once again.
The worst thing to do right now is panic. Over-leveraged speculators and panic-stricken investors were the only ones who lost money in the 2008-09 crash. For the disciplined long term investor, the spectacular decline in the markets that saw the Sensex hitting a multi-year low was actually an opportunity. A bit of data crunching would reveal that there is virtually no risk if you invest in stocks for the very long term (5-7 years on an average).

Here are a few steps that can help cushion the impact of volatility and ensure that investors don't get carried away by the predictions of doomsayers.

Don't stop the SIPs
Don't even think about terminating your SIPs at this point. It's the worst thing you can do to your portfolio and would defeat the very purpose of the SIP. If you stop now, you are effectively turning down the chance to buy more at lower prices. It's a common mistake that can prevent your attempt at rupee-cost averaging. The impact cost of stopping a Ulip premium is higher than terminating an SIP, so many investors opt for the latter.  The investors should automate their investments so that there is no discretion in their reaction to the noise emanating from the stock market.

Stick to Blue Chips
It's now amply clear that the economy will take some time to regain momentum. Slower growth rates, high inflation and high interest rates are here to stay. When the economy was growing at 9%, the tide has lifted all boats and the mid-cap and small-cap companies flourished. Now, with economies projecting a GDP growth of 7-7.5%, only large companies will be able to clock good growth, while the mid-sized companies will barely manage to stay in the green. Smaller companies will have to struggle and could easily slip into losses in the situation worsens. It's the best to stick to large-cap stocks at this time instead of risky mid-caps and smalls-caps.

Diversify your bets
The infrastructure sector has been badly beaten down but analysts expect it to do well when the economy revives. It's a good time to start nibbling at some infrastructure stocks at these beaten down levels. Even so, don't put all your eggs in the infrastructure basket. Spread your bets and risks -  across a basket of Metals, IT, FMCG and Banking sectors stocks at such throw away prices..

Rupee-Cost Averaging
The markets are down to attractive levels but there is no knowing where the bottom is. It's best not to anchor yourself to an index -  say 4000 (Nifty) or 14000 (Sensex). To avoid buying high, don't invest lump-sum amounts, but do so in monthly installments. In this manner, you will be able to gain the advantage of the rupee-cost averaging that the SIPs offer.

Investor Type

Your investment style will not only determine how you behave during a market crisis, but also help you take the right decisions.

Uncertainty, which breeds fear of the unknown, hinders an investor's ability to make rational decisions. When the markets are buffeted by negative news from around the world and the general consensus is that the worst isn't over, investors become confused about the course of action they should take. The overload of information and analysis makes things tougher. Ultimately, how he behaves during a crisis will depend on the kind of investor he is. The investors who are financially weak may not be able to participate in every kind of market and should know when to keep out. So, risky markets are not for a person who is, say, rolling over his credit card dues, or is paying a large EMI for house that is yet to be delivered, or is worried about not earning or saving enough. The investors who have a limited corpus or significant liabilities, and senior citizens with a low risk appetite are better off not taking drastic measures in risky markets else they can loose much more than they can afford.

Strategic investors, on the other hand, focus on building long-term wealth. They are smug in the knowledge that 10 years on, the events that seem cataclysmic now will be pale into insignificance. They stick to an allocation pattern - say. 50% in equity, 30% in long-term debt, 10% in short-term debt, and 10% in gold -- and earn reasonable returns across market cycles. Sticking to one's allocation means continuing to invest in equity even as the market falls and keeping money aside in debt even if the equity market rises. A strategic investor does not care much for market cycles. Instead, he has faith in the power of  time to even out losses. For such an investor, panic-driven crashes in the market are opportunities to reduce the average cost and even out the expensive pricing of the preceding boom. The losses during the downside are taken in stride as an essential biter pill in order to be present in the market when it turns up. This breed does not use borrowed capital, and is not in a hurry.

Tactical investors are the ones who are tested the most during any uncertainty. This breed lies to predict how asset classes are likely to perform, and based on the macro picture that emerges, it tries to modify the portfolio to protect it from losses. For instance, a tactical investor would reduce his exposure to equity if he foresaw any risk to global flows. He would also increase the exposure to gold in an attempt to cash in on the clamour for a safe investment in turbulent times. In the face of an expected drop in a global demand, this group would reduce the exposure to commodities. or would avoid long-term debt if a jump in market and credit risk was on the cards. Obviously, not all calls can be accurate. Tactical investing needs expertise and skill in reading the market signals, as well as the ability to reallocate assets. The investors who see themselves falling short in either department should keep away.

Some investors enjoy event-based trading. Here, the temptation to buy an asset that is moving up is high. This group uses available information, even if it's partial, for a quick take on an event before making a move, hoping to make money from the resulting volatility. Such investors should focus on the capital in hand and be willing to book losses if their call goes wrong. The amount they allocate to an asset after reading the signs should not be too large a component of their wealth, as it can wipe them off. 

There are bound to be problems if the investor's behaviour in uncertain times does not match his type. So a strategic investors gives in to panic and quits the market in haste; an event-based trader stakes a large chunk of his portfolio in what everyone is chasing but fails to exit in time; a tactical investor assumes that all his calls will hit the bull's eye and borrows funds to add to a position he holds, making a risky bet riskier;  a financially weak investors hopes to make good an earlier loss but ends up repeating his mistakes.

Hence, it is crucial to identify the type of investor you are, to think through your action plan and focus on your wealth before you act on the market information.

Know your PAN

Whether you are an Indian citizen or an NRI, if you are filing taxes or have financial transactions in India you will almost always need a PAN card. 

What is PAN?
A Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department of India. Each set of numbers is unique to the individual, HUF, company, etc. (We will take a closer look at those numbers in a moment.). PAN is a permanent number, is unaffected by a change of address, even between states and is not transferable. It is illegal to own more than one PAN.

The PAN’s primary purpose is to bring a universal identification key factor that links and tracks various documents and information regarding taxes and financial transactions, such as loans, investments, buying and selling real estate and other business activities of taxpayers. By tracking the above it indirectly prevents tax evasion through non-intrusive means.

You can consider this number to be similar to the Social Security Number issued in the United States to USA citizens and other legal residents.

Structure of the PAN
The structure of the new series of PAN numbers is based using Phonetic Soundex code algorithm to ensure that each number is unique. The following list is “constant permanent parameters” that assist in the creation of phonetic PAN (PPAN) number:

• Full name of the taxpayer
• Date of Birth/Date of Incorporation
• Status
• Gender in case of individuals; and
• Father’s name in case of individual (including in the cases of married ladies). 

The Date of Issue (DOI) of the PAN card can be found on the right hand side of the photo on your PAN card.

The 10 Digit Alphanumerical Sequence
Let’s take a look at the breakdown of the 10 digit alphanumerical sequence:

1. The first five fields are called the core fields and are alphabetical in nature.
2. The first three letters of the core field are an alphabetical series running from AAA to ZZZ.
3. The fourth character of the PAN must be one of the following, depending on the type of assessee:

• C — Company
• P — Person
• H — HUF (Hindu Undivided Family)
• F — Firm
• A — Association of Persons (AOP)
• T — AOP (Trust)
• B — Body of Individuals (BOI)
• L — Local Authority
• J — Artificial Juridical Person
• G — Govt

(Example – Company = AAACA; Artificial Juridical Person = AAAJA; HUF = AAAHA; etc.)

     4.  The fifth character of the PAN is the first character of the following:

• Your surname in the case of “P” or;
• For all others you would use the first letter of the name of the Entity, Trust, Society, Organization, HUF, etc.

(Example - Atanu Gupta [Personal] = AAAPG4444A; Atanu Gupta [HUF] = AAAHL4444A; General Firm = AAAFG4444A; etc.)

     5.   The next four numbers are sequential numbers running from 0001 to 9999.

     6.   The last digit is an alphabetic check digit.

The New Phonetic PAN (PPAN)
The new Phonetic PAN (PPAN) helps to prevent the allotment of more than one PAN to assesses with the same or similar names. If a matching PPAN is detected, a warning is given to the user and a duplicate PPAN report is generated. In these cases, a new PAN can only be allotted if the Assessing Officer chooses to override the duplicate PPAN detection. Under this new system a unique PAN can be allotted to 17 crore taxpayers.

Myths Regarding PAN
Many people believe that PAN cards are used for tax purposes only. That is a myth. PAN numbers are required for the purpose of income tax but not the actual card itself. Photocopies of PAN cards are required as prove of identity in financial transactions such as opening a bank account, purchase and sale of property and motor vehicles, home telephone lines and investments, such as demat accounts and mutual funds, just to name a few.

In Conclusion
It is easy to see the importance of your PAN card and why you need the physical card as well as the allotted PAN number. If you do not have a PAN card, take the small amount of time need to apply for one today.

------investmentyogi