1. The most common bonds in most portfolios are the infrastructure bonds and other bonds bought as part of 80 C, 80 CCF etc. These bonds usually give lower than market rate returns and have a stringent lock in period etc. If you intend to buy such bonds then ALWAYS GO FOR THE ONE WITH COUPON RATE. This way only your capital would be locked and interest (which is about 8-9% of your capital) would be returned back to you annually for reinvestment (probably in another tax planning instrument for next year) This way one can recycle the capital to ensure maximum tax benefit with least amount of capital being locked away.
2. Default risk: Simply put most companies irrespective of how harsh the times are somehow manage to pay the interest rate. However when the time comes to pay back the principal, the company faces issues. This is primarily because companies tend to prefer to roll their debt. i.e. issue fresh bonds (from retail or via banks/FI) and if their standing in the industry falls, this could become difficult. Looking at the recently open issue (10.75% interest over 15 years) 10,000/- has a maturity amount of 46,255/- So if I were you, I would prefer to get an annual coupon rate, reinvest it in another bond and diversify so that even in case of default I am able to capture back 36,255/- of the 46,255/- maturity value. However if you are subscribing to public sector bonds/bonds with explicit/implicit sovereign guarantee then move to point 3.
3. Interest rate trend: If you believe that interest rate are going to go up in the future then go for shorter duration bonds and in that one with most frequent interest payment (monthly/quarterly/semi-annually). More frequent the coupon payment, lesser would be Macaulay Duration and hence lesser sensitivity of your portfolio to interest rate hikes.
4. Trading: As mentioned in the previous point. If you don’t intent to hold the bond till maturity and sell it once the interest rate falls then probably you would make more money by going for the cumulative bonds.
5. Liquidity requirements: Pension holders prefer monthly income bonds which allow them to cover a part of their monthly expenses by bond income. On the other hand if you are young and intend to save money in bond so that you could buy property/car etc. then go for cumulative bonds that way your savings would be inflation proof (at least partly)
6. Your job/financial security: You won’t find this in any book, but for guys like me who are expected to bring food to the table but don’t have a secure government job, I prefer periodic interest payment. My logic is that these interest payments would ease my liquidity crunch which could arise due to sudden loss of job/income source. This way I don’t have to dip into my investments (which like selling gold ornaments could be very depressing) and if I don’t need the interest money, I could always reinvest and increase the diversification in my portfolio.
7. On the other hand if you are the secondly breadwinner (usually the wife) or have a secure govt. job, then all things equal I would go for cumulative bonds. Again based on your personal preference even a mix and match would not be something I would proscribe.

I hope you found this useful. Please feel free to add to this post or highlight the fault in my logic.

Contrary to popular perception, one can actually lose money in a guild fund. When the interest rate goes up, the bond becomes less valuable. (as bonds offering higher interest rate are available in the market) For more details please refer to Macaulay Duration (http://www.investopedia.com/terms/m/macaulayduration.asp) Also fund managers are required by law to disclose their portfolio and they usually don’t churn their portfolio frequently enough. So if I were you, instead of investing in a guild fund, I would invest directly into the individuals bonds and save on the Fund Management fee, exit fees etc.

Why my financial planner never told me about them. Simple look at who is paying them…. Usually it is the firm selling the financial products. So if you invest in a 15 year bond then he/she can be assured that you won’t touch that money for the next 15 years. So there goes all the commission that could be made when you switched from one fund to another every 6 months.

PS: There is a slight difference in tax implication in various instruments, but since I don’t have an official degree in Tax, I would advise to consult your tax planner.

1. Sovereign guarantee: RBI offers banks a lot of protection enabling them to raise capital from public and RBI itself at a very discounted rate (sometimes at a cost lower than then that of government borrowing) and in return RBI forces a lot of lending norms to ensure a healthy balance sheet and growth in the nation.

What it means: There is an explicit insurance that all customers who have deposited money with the RBI approved bank would get back at least a minimum assured amount. Also what has been seen is that generous bailout packages and doles are given to sick banks enabling them to not default.

1. Flexibility: You can walk into a bank (or order online/phone) anytime and open up a Fixed deposit of whatever tenure that suits you. Also after paying a nominal penalty, one can also close the deposit and withdraw the money back
2. Best interest rate: If the interest rate are up, no problems. You can close the fixed deposit and reopen it at the prevailing rate.
3.

Benefit to senior citizens: I have never understood the financial logic of offering higher interest rate to senior citizens, but they do exist. Bonds make no such distinction.

Compared to that Bonds offer:

1. Higher interest rates: Remember the Risk Return Graph (CAPM http://en.wikipedia.org/wiki/Capital_asset_pricing_model )
2. Higher risk: The bonds of a firm are worth something only as long as the issuer is capable of paying you back (or as in case of Essar… willing to honor its debt). So watch out for shady firms with weak balance sheet issuing debt. However a lot of public sector firms and blue chips regularly issue bonds so there is no scarcity of good issues, but care needs to be made while selecting.
3. Longer duration: 10-15 year bonds are not uncommon, while rarely people go for fixed deposit with maturity of more than 3 years. Hence good quality bonds make an excellent retirement portfolio addition.
4. Less Liquidity: Companies don’t raise capital (from public) everyday and looking at the previous few issues it is a seller’s market. The company decides the interest rate, the terms and conditions (esp. the call schedule) and also when they want to issue the bonds. Also except on the explicit put/call dates it is very hard to get the money back from the company. Also most bonds are very thinly traded.
5. Demat: Now days most bonds are issued in demat format. This helps in liquidity a lot. Even if the bonds are not being traded, you can transfer it to one of your friends or relatives for cash/other consideration. I have done this OTC transaction for both bonds certificates in physical as well as demat format and trust me demat is so convenient (provided you have a buyer)
6. Convertible option/Debentures: A lot of company sweetens the deal by offering a convertible option. Shares for a predetermined price. So if the stock market rises, people can convert their bonds into shares at a discounted price. Else they can always get their money back.

Bonds allow you to capture the wealth created due to interest rate fluctuations. Interest rates are quite high these days and RBI has ruled against possible rate hikes in the future. (not very trust worthy as policies can change in the next quarter) Now say 2 years down the line you have a FD which gives you a solid 10% return and the prevailing FD rate is only 6%. Of course it is very frustrating because the bank will not compensate you for this extra interest rate that you are foregoing. Also FD are not transferable (you can take a loan but sometimes it does not make logical sense), however bonds trade on the basis of YTM (yield to maturity) and allow the holder to exit at a profit hence capturing the benefit of fall in interest rate. (beware you could lose also because of it)

Please look out for a post on Bonds vs Debt Mutual funds.

Being 28 years old with a stable job and a family’s future to secure, I am under tremendous peer pressure to invest in real estate. However I have second thoughts in investing 40L (about $100,000/- USD) for a small 1000 square feet big apartment or 1,200 square feet plot.

If I look at the affordability metrics, then I believe anybody earning 6L p.a. should be able to afford a 2 BHK house by paying no more than 40% of basic (or about 30% of his post tax take-home). So that is about 150,000/- INR per annum or 12,500/- per month. The rental for a decent 2bhk is around that value (this includes maintenance), but the opportunity cost on the house value is not of this level. Because by this calculation a 2BHK should not cost more than 15,00,000/- which is about 40% of the current valuation.

The primary reason for this mismatch is inflation/property appreciation. Rental in India is about 3% of the property value (i.e. a 10,00,000/- property would be rented out for 30,000/- p.a. or 2,500/- per month) and the owner expects that the rent and property value should increase for 7% per year (for an apartment).

But these days I have beginning to doubt this very hypothesis.

Firstly being a firm believer in the affordability pricing theory of assets, I would say that an antique, an autographed book, or even a stamp is worth what an collector can afford to pay. Land has become so expensive that no longer it is possible for someone to buy it unless they are ready to commit 60-70% of their income in housing. That includes lost interest on your own money; bank EMIs, maintenance of the property etc. So unless the salaries continue to grow at 15-20% per year for eternity, I don’t see housing expenses going down to 30-40% of take home, which to me is the worldwide average (and also the comfort zone for most individuals).

Secondly, I have beginning to doubt the very notion that an apartment is an asset. A land might be an asset which appreciates over time, but I know for sure the concrete structure crumbles over time. Periodically one has to pay to keep it from crumbling down and yet it will not last forever. Any civil engineer will corroborate, but no-one designs the structure to last for more than 60 years. With the quality of construction that our contractors do in order to meet their schedules and cut coroners, I would be surprised if they lasted for more than 40 years. After 20 years the apartment is labeled as old-fashioned, not too much attractive etc. and its value goes down. So after 20-40 years what is left is part ownership in a tiny piece of land. Surely that is not what you would intend to leave for your kids as your legacy and their inheritance.

Thirdly, the notion that the land prices will increase and the city will keep on expanding indefinitely forever is not what I am comfortable with. Pick any city and you would see the most coveted areas shifting over time. Old areas become too crowded for the rich and affluent people to live in. New malls/commercial centers/offices cause a shift in people’s commuting habits. Metro/ring roads/flyover encourage people to locate near them etc. Hence if I buy a prime property today, it might not be so much valued after 10-20 years. Buying land in the outskirts and hoping it to appreciate become the city would move in its direction is akin to speculation. My parents bought a house in Greater Greater Greater Greater Noida… So even though he calls it in Delhi, it took me 3 hours from the Railway Station (Connaught Place) to reach the spot. I if soon builders would be quoting land in Jaipur by saying just 6 hours away from Delhi… would be recognized as part of Delhi in another 5 years.

Remember whenever you buy a house look at the average occupant. If he/she cannot afford to pay the interest on the property price, then probably the property is overvalued.

It might be return of the saying “Fool make houses for the smart to rent into” but then I have not seen the future and I might be wrong. Comments/directions/guidance are more than welcome.

Maybe now one might not get the context of the joke, but at that time Reliance Industries was one of the most widely held companies in the world (not just India). For most people (esp. Gujarati) NIFTY/Sensex performance meant nothing, their entire portfolio consisted exclusively of RIL shares. (Of course many Indians also owned UTI’s Unit 64, but at that time it was never perceived as a mutual fund, it was classified as an fixed deposit scheme with annual dividends)

However there has not been any other Indian firm that has ever enjoyed so much of investor loyalty. HDFC has a simple and effective scheme. It offers its shareholders 25bps higher interest rate. Not too high to create a dent in its income statement, but just high enough to entice non-traders to consider buying the stock. (typically customers investing in Fixed deposit schemes are likely to be investors who invest in a stock and forget it for a couple of years… and not the typical trader/speculator which invests in indian companies)
Most Indian companies don’t pay much attention to shareholder relations (so forget shareholder loyalty). The quarterly results are not published in time, transcripts of earnings release are not published, annual report is sketchy etc.
However it seems that HDFC has realized that, thanks to BASEL norms for higher capital adequecy requirements, and robost growth in credit demand, no bank can grow at 15-25% yoy without having to tap into the stock market every couple of years.
Hence the determining factor between a bank that is able to grow and one that is not is its shareholder loyalty. Diverse shareholding pattern can help stock price survive bear runs. Hence enabling firms to grow in spite of the Dalal street sentiments.
Also firms are increasingly issuing ESOPs to retain talent. This would be effective only if the firm shows consistent growth in its share price. And the only way to do that is to attract investors rather than speculators.

PS: This post is less about how good HDFC banks are but more about why firms should develop shareholder loyalty programs and how little it costs them.

Till recently, Food Corporation of India (FCI) accounted for a bulk of its purchases. Now, the company is actively expanding its client base by entering branded retail rice segment. Last year, the company entered into the high-margin basmati segment by processing and exporting PUSA 1121 Basmati rice to Middle East.
Apart from rice, the company also operates in other food grains and oils. The company also recently started 30 MW captive energy generation from rice husk which is to be expanded to 105MW in a couple of years. The company is also known as “Lakshmi Energy and Foods Ltd (LEAF)”

Financials
The company’s financial year ends on 30th September. The company recorded a topline of Rs.1166cr in FY10 and a bottomline of Rs.84cr. The topline has been growing erratically @ 23% over the past five years while the profit margin has stayed between 5% and 15%. Raw material expenses contribute to 75% of the total revenue (down from 86% five years ago).
The company has ~1 year of inventory days, which is a feature of basmati rice companies. The company’s debt translates into interest expense of less than PAT, which is manageable.
The cash flow from operations has been erratic due to increase in inventory level. The company has been consistently raising cash from the market to invest for growth for the past five years. Recently the company has approved a dividend payout for its investors.

Risks
The company is highly susceptible to acts of nature like floods or drought. However, the company has demonstrated great resilience in controlling its expenses in the past.

The company is also dependent on policy matters of the government related to export of non-basmati rice. Recently, the ban on export of non-basmati was partially lifted. FII holdings in the company is gradually going down, but I presume that is because the US market is recovering and most FII are re-balancing their portfolios to invest in the US Market.

Positives
The company announced a decision to buy back its shares in Nov’10. Now, the company has only two months of the 6-month period left to act upon this decision. Buy-back will accompanied with a rapid price rise.

Recently, the promoter of the company was involved in a legal case due to death of a few workers in his factory. The investigations are going on but the result is not expected to have a significant impact on the
stock price.

The stock price of the company recently fell to its all time low. This forced the institutional investors to liquidate their holdings which resulted in the stock being available at an even cheaper price. However, due to strong fundamentals of the company, the stock is expected to move up significantly to its fundamental value.

Analysis
The company is currently trading at a P/E of 3.6 and EV/EBITDA of 5.4 which is ridiculously low considering the strong expected growth. I would recommend a strong buy for this stock.

Disclosure: Of course I have a position in the company and intend to square it when the price goes up.

2. After seeing what happened on last thursday, I intend to stay away from Futures and options for a while. Just 30 minutes before the monthly closing of the options/futures, some traders forced the market down by selective high volume trades.

3. I think my fav strategy is back and this time with leverage….
i recommend buy 27th jan Tata Motors DVR futures contract… and short the Tata motors contract for the same period….
Assumption: the spread will reduce over time from 37% now. unfortunately the volume is too low as dvr was added to the fno segment last week only.

4. I did a stupid transaction 3 years ago… Invest in tax saving ELSS. Now that the lock-in period is over, I am liquidating them. I have already liquidated 1/3 of my mutual funds portfolio yesterday.

5. I don’t see myself investing actively till Feb 2011. This is partly because some personal financial commitments have sapped my liquidity and partly because I believe that outlook of the market is completely changes itself every quarter. At present the market has reached its optimal level and would only oscillate (more downwards than upwards)

All you have to do is buy the nifty futures that expire after 90 days and hold it till the maturity date. On the maturity date you roll over the contract. I.e. pay 60-70 points premium and buy a new contract that matures after another 90 days. If the market goes down, the nifty contract will also lose the same amount hence making it a perfect hedge. Another advantage is the ability to leverage. Irrespective of the margin requirement, I believe that leverage higher than 5:1 in Indian market is risky. Hence by a minimal investment of 60,000/- you can have a market exposure of 300,0000/-

Note: consult your financial adviser before following the strategy blindly.

What is surprising is that throughout its 2 century of profiteering, the company did not make much wealth for its investors. In 1772, no one was ready to loan money to the Company because of rampant corruption in the ranks. The top man, Warren Hastings was impeached on corruption charges and his predecessor Robert Clive also faced many corruption charges. In 1773 (when company was at its heights) the British Government passed Regulating Acts to control corruption. However Company’s finances never recovered and in 1857 it declared bankruptcy and transferred its assets (right to rule India) to the Crown.

I do not want to start a patriotic debate, but just want to raise the importance of corporate governance while choosing one’s stocks. Traditionally Indian businessmen were infamous for over-invoicing and pocketing part of the proceeds raised from banks/government and stock market. The practice has been slowly changing, but still there is no dearth of company which makes huge yoy profits and yet little or no dividend/capital growth.

History has taught us that booms are followed by a bust. Yet every time when the Sensex zooms up, experts say this time it is different. Today the market closed at above 20K figures, so I went ahead to research why this week was chosen by so many promoters. Here is the list:

1. Most investors go for the relative valuations. i.e. if the PE in the industry is 20, and the IPO is at 17, its fairly priced. With stock market at 20k, promoters are getting a good price.
2. 2 year long bear run has made many firms desperate for capital. Hence they want to cash out before the mood changes bearish/cautious.
3. Coal-India. The interesting thing about all these IPOs is that it gives investors ample time to invest the money, wait for a day or two before selling the shares, another 3 days before the money is back in their accounts and ready for investing in Coal India. Now if a company does not go for listing now, it will have to wait for 5-6 weeks before those who invested in Coal India would be ready to invest in that IPO. Who knows where the market would be heading by then.
4. shraadha: September 24 to 7th October is considered inauspicious for any major purchases. No wonder all the IPOs were bunched so close together.
5. I recently discovered that any firm hitting the IPO market after 30th Sptember, would have to publish its Q2 results. No one wonder promoters with inside information want to cash out before they publish any disappointing results.

Usually I share my analysis for important issues. Unfortunately this time there are too many of them for me to publish my research. All I can say is that I did invest 2,00,000/- in Career Point IPO with the belief that I won’t be allotted more than 6-12k worth of shares. So the downside risk is minimal.

Today there are 2 term insurance plans that are available online. They require minimal/zero documentation. Since they eliminate the commission agent, you can get a 30 year term insurance cover of 10 million INR (1 cr.) for less than 10,000/- a year.

These are:

1. i-protect by ICICI Prudential
2. i-term by Religare-Aegon

To set the perspective right, a 5 million INR (50Lakh) term insurance cover for 30 years via an agent would cost me:

1. 15,000/- p.a. from LIC Amulya Jeevan
2. 11,000/- p.a. from ICICI- Pure Protect Elite
3. 11,912/- from Aviva Life Shield Plus.

So a saving of almost 50%.

Note: The above rates are for a 28 years old average Indian male. Please consult your financial advisor before investing.

It has 4 different schemes with 5 year lock in and provides 7.85% to 7.95% p.a. interest for 10 years.

Note: Even though IFCI is a PSU, not so long ago it was on the verge of bankruptcy.

1. Be proactive: One of the primary reasons why Income Tax deducted by the employer is high is because the person had not communicated his/her intentions to the accounts department well in advance.
2. Collect all bills. Certain expenses like communications and medical reimbursements, LTA, company expense account etc which were incurred are tax deductable only if the employer’s form 16 reflects it. So don’t be lazy in submitting these bills.
3. India is in a progressive taxation environment. As a result as the income rises, so does the taxation rate. As a result if you are employed for only 6 months, don’t be surprised if your IT goes down by not 50% but 60-70%. This is the major source of IT arrears. There are 2 ways around it.
1. Inform your company well in advance that you would be terminating your employment in the mid year.
2. Reduce your IT projection so that the income tax gets revised downwards. This can be done by claiming for all the tax reliefs possible, even if it is fictitious. You can file that you intend to take a home loan (50,000/- tax relief) or donate money in one of the tax exempt funds. This will reduce your tax liabilities and IT arrears.

PS: Please consult your tax consultant.

Current Indian income tax rules promote tax savvy individuals to take on bank loans. However most individuals are in so much hurry to pre-pay their mortgages that they miss out on this opportunity.

Firstly government allows individuals to get tax rebate on 1.5 half lakh rupees of interest expense on home loan. So that is a cool saving of 50,000/- per annum in tax.

Secondly as per the current income tax laws, an individual has to pay income tax on the rental income. 15% of the income can be offset as maintenance. However if one takes a small loan against that property, then its interest expense can be deducted from the rental income and save tax.

One can get home loan for 8.25% p.a. and save tax using the above mentioned procedure, then effective interest rate would be 5.45% p.a. (tax rate of 33%). One can use this loan to clear the higher interest rate debt or reinvesting the money received in tax (and risk) free securities that earn a higher return one can save tax.

E.g.: post office PPF generates 8% per annum tax free returns.

PS: I am not an authorized tax consultant. So please check with your financial/tax planner before taking out such a loan.

Have you chosen the right manager?

I don’t know how many people use linkedin to investigate about the company they intend to invest in, but looks like in the services field I would be using it more often.

Have you also found any other investing use of social networking sites?

In 2006 Essar had went to court against Argo’s Cayman Island Branch. Here is a brief summary about it. So in 2010 Argo is finally having its own sweet revenge.

Prax had a wonderful theory: According to him, Big media houses officially get lucrative pre-placement/private deals. After that they promote these dubious offerings and cash out.

PS: I don’t hold rights to this image, nor i know anyone who does.

Sold:
Reliance Communications
NMDC (pure short term gamble)
Idea Cellular
Asian Paints (profit booking)
mutual funds (50% holding)
alok Industries (big mistake)
Kesoram Industries

1. Please don’t look at the pre existing price of the stock because the govt share-holding is 98.36%. Which basically mean that there is hardly any shares for trading.

2. The company has made other profit of 884cr which has increased from 105cr over the past 5 years. This constitutes more than 10% of sales (not profit) Hence its EPS figures are under question.

3. When a company engaged in mining makes a profit of 4.3 thousand cr on a sales of 7.5 thousand cr, I become suspicious about how sustainable this high margins are

4. In a capital intensive industry like mining, the company has depreciation of less than 1% of sales. This raises question of how old the machinery is and how long will the company able to operate.

5. The company has 9.7 thousand cr of cash in its balance sheet. Which is more than 1 year of sales. WHY?????

6. PE of 39.22 of a company which has no plans to buy/operate new mines in the near future?

All this makes me think that the price of NMDC is unsustainable in the long term. One might still invest in the stock for listing gains.

In Islam all assets (money, land, property etc.) are considered a gift of god and so is the time. So interest (riba) is viewed as making profit solely due to passage of time by exploiting the plight of those in need by those in excess. A man should not be able to make money from the mere fact that he/she has and others don’t. This is against the fundamental principle of social, economic and political fairness and hence is against Islam.

To confirm with the Islamic principles of finance, one has to abide by Sharia. However it is an abstract form of law capable of adaptation, development and interpretation. The most acceptable form of Sharia used by the financial world today has evolved from the interpretation of the text of Quran, Sunna, ijma and ijtihad/qiyas by the 4 independent schools Hanafi, Maliki, Shafi and Hanbali. However because of the minor differences in opinions and thoughts most Islamic banks consult from time to time a religious committee of religious scholars which supervise their investment activities and make amends.

Following 3 principles are common between the 4 main schools:
1. Riba/Interest: Under Islam interest is banned. Instead it is replaced by a profit and loss sharing agreement. So in essence there is no guaranteed rate of return and the banker has to share the risk. So in essence a lender of capital should not make money which is calculated on the basis of how long the money was borrowed but on the basis of how useful the money was for the borrower.

2. Gharrar/Gambling: One should not bet on chance, uncertainty or speculation.

3. One should not invest in ventures that can destroy the humanity eg: alcohol.

Note: I am neither a Muslim nor an expert in the ways of Islam. Hence please correct me if you believe my interpretation had overlooked some important aspects.

Normal commercial insurance is not Islamic because
a. It is perceived as gambling or a game of chance. The insurance company issues the policy with the hope that it will make money and if the stated even occurs loses money.
b. It invests its surplus money in interest bearing instruments

Because of these reasons the Islamic world had come up with 2 very good insurance instruments.

• Mudharabah Model
• Wakalah Model

The essence of these models is that all the investors pool their money together and promise to pledge each other in case of death or financial distress. In a good year the corpus will have more money than it needs and hence would return them back to the policy holders. Hence creating a cooperative society which shares its risks by hedging them.

This is how the insurance started. A group of workers (esp. lumberjacks) setting aside a small sum to pay for the medical expenses in case of an accident at worksite. Most insurance companies issue policies worth many times more than their net worth. If the various models used by securitization experts can fail, so can the mortality predictions of the actuaries in insurance agencies. Monoline Insurance companies have failed; nobody knows the real net worth of the financial institutions. Hence it’s time for the insurance companies to return to the basics.

I could find a few Malaysian and Middle eastern firms issuing such policies for businesses, however I am yet to find a personal insurance policy in India following these principles. Its probably because of IRDA rules.

After spending a couple of hours listening to his idea, this is what we came up with:
1. Don’t confuse investments with tax planning. First decide in which financial instrument you want to park your money. This is because whether you want insurance, property, FD/bonds or mutual funds, there is always some tax saving instrument to help you.

2. At any given point of time have liquid assets to cover for 6 months of expenses. This could be parked in savings bank, or FDs or other financial instruments that can be prematurely encashed instantly without attracting much penalty. This cash often comes handy when you are between jobs, during emergencies esp. medical and when family/friends need you. I strongly advise that an individual should not dip into it and also refrain from any long term investments until this reserve has been created.

3. Work towards reducing your loans. If you have a education loan which costs you more than the Bank Fixed deposit (even after accounting for the tax break it provides) then it is advisable to retire it before doing any financial planning.

4. I would recommend you to keep your personal finances separate from that of the parents. However, what good of is all the money if it is not there for those who need it, when they need it. If your parents/family needs money or has taken a high cost debt, work towards retiring that.

5. After taking care of all these, I would recommend you to read this amazing book “Rich Dad, Poor Dad”. This simple book gives a remarkably different insight about how one should classify various assets and investment options.

Now some serious stuff…….
6. FDs are a good place to park the money. You can be sure that your money is safe and will be there when you need it. However the returns this generates is hardly sufficient and inflation eats into it. Hence One should invest in the Stock Market linked instruments (Shares, Mutual Funds, ULIPs etc.) Early on when your savings are small and risk appetite sufficient, then one should park upto 50% of the money these instruments.
However it is also advisable to reduce it as you age. The best way I found is to put an artificial cap of 3 years of Salary on your Market portfolio. 3 years of salary is large enough that it will be a substantial part of your investment. Yet at 15% p.a. expected returns, it won’t be able to generate half of what you earn from 8-10 hours of labor. Hence the market performance will not be a major distraction from work.

7. Now comes property/home: Some people who want to take less risk want to buy a property immediately after graduating. However I would recommend you to push off this decision by a couple of years. The reason for this is that even if land prices don’t fall, it often involves taking a EMI on floating rate. With EMI payments exceeding 50% of the salary, the financial flexibility one has to cope up with unexpected events is severely limited. Once you have sufficient savings and/or a working spouse, then investing in property is advised.

8. Insurance: It is one of the most mis-sold financial instrument. An insurance is neither an investment avenue, nor a tax saving instrument. It is taken to enable a person to take care of the unexpected. The best times in life to buy a life insurance are:
a. When you take a long term loan (for property/education etc.)
b. Marriage (esp. to a non working home-maker)
c. Planning for Kids
Also whenever possible, please buy Term Insurance (huge insurance cover for a small premium) and medical insurance.

So to summarize we have covered liquid assets, market linked portfolio, property and insurance. Last is tax.

9. Most tax savings happen under 80c. If you buy an insurance, its contributes under this segment.
If you plan to go for bonds: then NSC, Infrastructure bonds, PPF are few of the avenues
If you want to invest in market then ELSS (Equity Linked Savings Scheme)
If you want to invest in property then Home Loans give you tax shields.
Hence you should first look into what lock in period you are looking for and what risk/return profile you fall into and then select the tax saving instrument accordingly.

I hope this really long and boring post helps. How different is your investment philosophy?

If you get a chance, read this research paper. They analysed mutual funds from various countries in different periods to arrive at these results.

I am advertising this paper here because it goes well with my original stance 1 and 2

1. Company must have been listed for minimum period of 3 months.

Exceptions:

a. The Company can be directly listed in group ‘A’ provided the market capitalisation of a company being listed, based on its issue price, is higher than the average market capitalisation of 100th company in the existing group ‘A’ as per the ranking based on preceding 3 months data.

b. Any company permitted to be traded in F&O segment from date of its listing shall be directly listed in group ‘A’.

c. Companies listed subsequent to any corporate action involving merger/ demerger/ capital restructuring etc.

2. Companies traded for minimum 98% of the trading days in past 3 months shall be considered eligible.

3. Companies with minimum non-promoter holding of 10% as per the shareholding pattern of most recent quarter shall be considered eligible. The criteria of minimum 10% non-promoter holding shall not be applicable to public sector undertakings (PSUs).

4. The weightage of 75% and 25% shall be given to ranking on three monthly average market capitalisation and traded turnover respectively to arrive at the final ranks.

5. The list derived, based on final rank shall be screened for compliance and investigation. Based on this screening, the list of top 200 companies shall constitute group ‘A’.

6. The group re-classification shall be reviewed twice in a year i.e. February and August.

7. On inclusion of any new Company in group ‘A’ based on criteria 1(a) or 1(b) detailed above, the last company in the existing group ‘A’, based on its final rank calculated on data preceding three months shall be excluded.

8. All companies not included in group ‘A’, ‘S’ or ‘Z’ shall constitute group ‘B’. The division of group ‘B’ into group ‘B1’ and ‘B2’ is being discontinued.

9. In addition to these groups, scrips may be classified in group ‘T’ and ‘TS’ as part of the surveillance measures.

The revised list of ‘A’ group companies shall be announced through a separate circular on February 18, 2008 and it shall come into effect from March 3, 2008.

Sourced From: MoneyControl

In the US market, we often hear about Class A, Class B shares. Even wondered what they are? Let me give you an example.

Berkshire Hathaway Inc. has two classes of common stock designated Class A and Class B. A share of Class B common stock has the rights of 1/30th of a share of Class A common stock except that a Class B share has 1/200th of the voting rights of a Class A share (rather than 1/30th of the vote). Each share of a Class A common stock is convertible at any time, at the holder’s option, into 30 shares of Class B common stock. This conversion privilege does not extend in the opposite direction. That is, holders of Class B shares are not able to convert them into Class A shares.

Similarly at GOOGLE:

There is two classes of Google stock — one (Class B shares) with “super-voting” rights of 10 times those of the other (Class A) shares. This two-part equity capital structure ensures that power remains firmly in the founders’ hands. In addition, Class B shares will be convertible, whereas Class A shares will not.

What it means?
The founders use this tool to separate ownership and control of the company (i.e. they take the investor’s money without actually selling the company or giving any seat on the board.

eg: Ivar Kreuger (one of the biggest matchstick men) controlled his 600 Million Dollar empire (in 1920s) by owning just 1% of the company stocks.

Today L&T, posted over 50 M$ losses over Zinc futures.

A year ago Hexware software lost several millions on forex speculations?

Why are Indian companies taking the risky speculations. ICICI bank might be pardoned because it had taken huge quantities of US dollar bonds so it may have an intention of hedging it (but there are hundreds of analysts that are saying it was pure greed and not hedging). But what is L&T doing with Zinc futures.
Its main business is infrastructure (which requires concrete, steel), machine tools (which needs copper) and ship building ( which needs steel aluminum). But why Zinc??????

Indian CEO should realize that they should concentrate their attention in their core business and securities and trading are mere distractions. Most of the derivatives are zero sum game (i.e. losses = gain and no wealth is generated) but for them its a lose lose scenario. I.E. if their firm makes a loss, then the company stocks would be trashed, however if they make money then it won’t have any effect on the stock because stock market looks only at the future prospects of the company and these profits are not repeatable. Infact some analysts might downgrade the stock because speculative trades adds uncertainty to the company’s performance

courtesy Jonathan J. Miller

courtesy Karthi

On a serious note, does anybody knows a decent mutual fund scheme (>6 months old, diversified and with assets >500cr) which fell by less than 10% over the last 10 days (while the market fell by over 20%) Because if so, then I should invest in that fund manager.

* Reliance Power:
NTPC has 30 years of fabulous track record. It is the world’s 6th Largest Power producer, World’s 2nd Most efficient Power Utility Company. It has an impeccable project execution track record and is the lowest cost Producer (highest profit margins too) of the Nation. In spite of having 26,850MW capacity of fully owned plants and 27,904MW capacity of Jointly owned plants and several plans near to commissioning, this company has a market capitalization of just 169,567.98 cr INR or 43 Billion Dollars.

Relaince Power on the other hand was valued at 30 Billion dollars at the time of IPO and looking at the hype should reach 60 Billion Dollars at the day of listing. So much hype in spite of the Group having ZERO experience in electricity production and the fact that the first revenue will come only after 18-20 months.

* Reliance Communications:
Bharti telecom (last quarter) had a revenue of 6059.89cr and Profit of 1619.15Cr.
While Reliance Communications had a revenue of 3328.39cr and a profit of 801.24cr. So how is it that a company that has half the profits of Bharti, lesser profit margins is valued almost the same as the giant? (PS: both companies are growing at almost the same rate) If I compare the results with BSNL or some International Giant, then the valuation is more screwed up.

* Reliance Energy:
Although reliance Energy and Tata Power have the same revenue (tata has higher profits), Why is it that this company is worth Twice?
They raised money for the power projects, then transferred all the contracts to Reliance Power and again raised the money. So its like selling the same asset twice.

* Reliance Capital
Same story.
A banking company with a sales of 1,400 Cr (profit is even lower) is valued at 53,000cr.

* Reliance Natural Resources
If you visit its website, it describes the company as:

Reliance Natural Resources Limited (the “Gas Based Energy Resulting Company”) was originally incorporated on the March 24, 2000, under the Companies Act, 1956 as Reliance Platforms Communications.Com Private Limited. The status of the Company changed from private limited to public limited on July 25, 2005. The name has since been changed to its present name, viz. Reliance Natural Resources Limited under Fresh Certificate of Incorporation consequent on change of name dated January 9, 2006.

In terms of the Scheme of Arrangement (“Scheme”) with Reliance Industries Limited, as sanctioned by the Hon’ble High Court of Judicature at Bombay by its Order dated December 9, 2005 and which has became effective from December 21, 2005 the Company is vested with the Gas Based Energy Undertaking of Reliance Industries Limited as defined in the Scheme.

Does it make any sense??????
Let me know if it does. The company has no assets, all it owns is exploration rights to 4 Coal Based Methane beds.
No wonder a company with an annual sales of 40Cr INR is valued at 30,000 Cr.

Call me skeptical, but what I am unable to understand is why a guy with no track record, prior experience, without any significant sales/revenue is valued at 2-3 times the peers which have shown repeatedly stellar performance.

BTW, I feel the primary reason for today’s market crash was Reliance Power issue. Usually when the market falls (significantly) the investors pump in a lot of money to build up a portfolio (and arrest the fall) while the speculators short sell in the hope that it will go down further.

Future group got over-subscribed 100 times, the Power issue got bids worth 7.52 trillion rupees (191 billion dollars), which sucked up all liquidity from the retail/HNI, and mutual funds making it impossible for people to buy any further shares. hence the bears were having a field day (which lasted for more than a week) The biggest proof of this theory is that usually when the market fluctuates a lots, the volumes increase dramatically. (because of increased intra-day activity and the fresh infusion of capital from the long term investors) However today in spite of the fact that the market fell sharply, the volumes were low… indicating a serious liquidity crisis.

It will take another 10 days before the refunds will start coming. And I do not know what will happen by then.

Ever wondered why your portfolio goes up while the Sensex/NIFTY are flat? Or why your portfolio does not rise in sync with the market? It might be because you are comparing it with the wrong basket/index.

BSE Sensex: represents a basket of 30 Large cap shares
S&P CNX NIFTY: represents a basket of 50 large cap shares. (about 41% of the market volume and 56% of the total market capitalization
CNX Nifty Junior: 50 most liquid stock in the market (which are not part of the NIFTY) They represent about 9% of the market capitalization and 14% of the trading volumes.
CNX IT Index: index for 20 IT stocks (96% of the market capitalization and 91% of the transaction value)
CNX Bank Index: 12 top banks (74% of the trades, 79% of the market cap)
CNX 100: top 100 stocks(66% of the market cap and 56% of the trades) for all practical purposes you can consider it as a sum of NIFTY + Nifty Junior.
S&P CNX Defty: (used only by FII) it accounts for dollar fluctuations and the nifty fluctuations… basically the value of NIFTY stocks in USD.
S&P CNX 500: top 500 companies (90% of the stock market capitalization and 80% of all trades)
CNX Midcap: 100 midcap companies. (market capitalization of the range of 1000 to 5000 cr INR)
Nifty Midcap 50: 50 midcap companies.

Now the question arises how to choose the appropriate index:
1) See if your stock is a part of any index. If so, then that index is the best choice.
2) In case of the stock being in multiple index, then choose BSE over NIFTY and NIFTY over Bank/IT index.
3) If it does not belong to any index, then see which is the core area of business and fit it accordingly.
4) otherwise check its market capitalization. i.e.
a. if it is more than 5000 cr, then its best to put it with Nifty/Sensex.
b. if between 1k to 5k crore, then choose the midcap index.

5) If it is a small cap (<1000 cr) and does not fit in any sector index too, then as a rule of thumb expect the stock to give twice the return of Sensex/NIFTY. If it does not, then you are probably taking too much risk for no additional returns.

1) Typically people make a short term investment in penny stocks, small caps and unknown companies because the stock price is usually low and fluctuations are high. So with a small increase of buying interest, you can make even 10-20% in a single day. However penny stocks exposes one to the risk of unstable management and unsustainable prices. Hence a better option is to bet in the futures of the index/blue chips. Because they are well researched and the chances of nasty surprises are negligible.
2) In secondary, typically people make money only when the market is rising. But in futures all that is required is that you correctly pick the trend and you can make money both in rising as well as falling markets.
3) Even when you have no idea whether the market will rise or fall, you can take opposite positions so that you can make money in volatile market, as well as flat market.
4) Margin/intra day trading requires you to square off the trade by the end of the day. In futures, you can have open positions for upto 3 months.
5) The margin is usually 10-15% of the trade value (lower in case of options) hence it allows you to make big bucks with a small bankroll.
6) You can generate a trading limit against your existing portfolio. (without any charges or interest cost) So effectively you can trade without having any bank roll.
7) You can leverage on market imperfections and place arbitrage and make assured money.

I have just 6 months experience (30 contracts) in trading with derivatives and I usually within a week, I either double my investment, or lose it entirely.

Now lets see how it works:
For the preview of this discussion lets take NIFTY (minifty)
The NIFTY Sensex was trading at 6157/- and has a lot size of 20.

How to make money in FUTURES:

31st Jan futures was trading at 6160/-
28th Feb was trading at 6160/-
27th March was trading at 6150/-

which is very close to the present market value.
1) If you know by those given dates, the market is going to rise/fall… then you can buy/sell accordingly of the respective month. The margin money you need to pay is 12% of the contract value (i.e. with only 14.7k, you can make upto 3 months far transactions worth 123k) and every 1% rise in the NIFTY would deliver 8.3% returns on your portfolio….
So who says Blue Chips and Sensex is boring and you can only make money in small caps?
2) Arbitrage: In this example, the future price is very close to the present price. However if the difference between the future and the present value is more than 2%, then you can buy stocks in the secondary and sell it on the future (or reverse) and make assured money. This is what all the arbitrage funds do.

How to make money in OPTIONS:
The biggest problem with derivatives is that your liability is unlimited. (i.e. going back to previous example, if the NIFTY falls by 1%, you lose 8%) This problem is solved using OPTIONS.

Put at 6200 on 31-Jan-2008 was trading at 133.00
GET at 6200 on 31-Jan-2008 was trading at 170.25

1) So your losses would be capped to 170/- in case of Get and 133/- in case of PUT. (If you buy a PUT Option at 5500, then you can reduce your loss limit significantly, similarly if you buy a GET Option at 6500/- then the price would be much lower)
2) Options which are way off the present price, can be bought at as low as 1% of the trade value. So you can make some really huge trades with just your pocket money.

3) it offers is to make money during volatile/flat market.
If you think that market is not going to change much from the present value then simultaneously write a PUT and GET option. You would make 133 + 170 = 303/- and if the market is within the range of 6200 +/- 303, then you can pocket the difference.
If you think that the market is going to be volatile (go up/down, but do not know in which direction) then buy a simultaneous put and get option. In the above example, if the market goes beyond the bound of 6200 +/-303 then you are poised to gain from the difference.

This post is formed out of the info at the back of my mind. For more details plz go a very good book forwarded by Ruhi.
That link will explain advanced positions like Bull spreads, bear spreads, butterfly spreads etc.

Take a farmer (the earliest form of hedging): you expect to grow wheat and expect the price to be 800 per quintal with a cost of 600/- for you. Now if the price of wheat after 6 months is 700/- , your profit reduces by half, without any fault of yours. Similarly increase of price to 900 will increase your profit by a third. So:

1) So you take the price fluctuation as an act of god and live with it (or maybe even commit suicide).
2) You fix the price with the grain merchant by having a futures contract with him. So irrespective of the market prices at the time of harvest you will be paid 790/- per quintal. You lose 10/- but it removes the uncertainty from the mind of the farmer. On the other hand the merchant earns an extra 10/- plus he is assured of the grain even if the prices go sky high. So for a small fee, all the uncertainty is transferred to a second party.
3) The farmer might not want to lose on the windfall he might make if the price rises. So he instead of the derivative, he buys an insurance policy (the option contract). This contract gives the farmer a legal option to sell at 800. For the merchant to bite this bullet he pays him a sum upfront say 15/- (which is non returnable). So if the price falls, he sell it to the merchant at 800/- and is shielded from any losses. However if the price of the wheat rises above 815/- he actually makes a profit by selling it to the open market.

Point 2 is an example of futures, while point 3 is an example of options. Together these 2 constitute the derivatives market which is used for hedging your stocks.

Now I agree that it is beneficial for the consumers. But was it a much needed reform? This move will do more harm than good. Here is why:
In spite of the fact that we have very high taxation rates and our savings rate is also amongst the highest in the world, most Indians do not understand financial markets or tax planning. Mutual funds have been valuable learning ground and one of the best stepping stone for these individuals and has helped them to understand how the markets operates and what are returns.
It teaches people how the growth in economy translates into increase in valuations of stock market and how they can tap into it and make money.
The mutual funds disclose their portfolio and hence gives chance to a common man what good companies are and how to pick and choose a company.
the sector funds help us identify the areas where growth is likely to happen
and the debt funds teach us what inflation is and how the interest rates are expected to behave in future.

In gist, in the past 5 years, through mutual funds Indians have been able to channelize their money into stock market and not only benefited from it, but also helped several industries to raise funds, expand their operations and fuel the growth of the nation.
But the real warriors which helped the mutual funds bring in such a revolution were the Agents. They painstakingly sat with each individual, explained them the risks, benefits, the strategies etc and helped the mutual fund market grow to proportions it is today. If the mutual fund industry was not there, then a few thousand Indians and FII would have cornered the entire market kept the entire benefit of the growth in indian economy.

Few years ago, when I had a good entrepreneur idea, a wise man had said:
“Its a good idea and you can help thousand of people with it. But the only problem is that you cannot make money out of it. It is almost impossible to hope that Indians will pay the right price for any service/advise/assistance. They will pay thousands for a piece of equipment, but they want all their software, and advise for free.”

Thats exactly what has happened with the mutual funds. If you want to reform them, reduce the Asset Management Charges (which are the highest in the world), do not starve the poor agents. With one stroke of pen, SEBI killed an entire booming industry

Another reason why I say this step was counterproductive because already there were several funds which charged zero entry/exit load.
1) Exchange Traded Funds
2) Index Funds
3) Liquid funds
4) NFO (the entry load is hidden)
Yet they were not popular and most people are not aware of their existence. Had people be as cautious as the SEBI claims towards the entry load, then we would have seen more and more money flowing towards these funds and this would have put a competitive pressure on the traditional mutual funds to cut costs.

A lot of people still need hand holding, and by killing the financial advisory we have robbed them of their road to riches.

Similarly NIFTY (the most popular contract) has a lot size of 50. Being trading at 6218, it makes a single contract size of 310k INR.

This huge lot size has introduced illiquidity in the market. Because very few traders have the nerves to trade in such big lots.
Because of low volumes and huge margin requirements, nearly all the trade happen in the near month contract (i.e. ones that end on last thursday of the same month)
Also the spreads are very large. Which leaves a lot of room for arbitrage.

The solution would be to chop down the lot size to reflect the recent surge in the price. But NO, NSE had to introduce a new contract MINIFTY… (basically NIFTY with a lot size of 20)
I would have welcomed this change had it been a new index with a different basket of shares/weights, but it is no different than ordinary NIFTY.
I have no idea why the stock market has to complicate things so much?
Why should the same scrip/index trade under 2 different names?
Reducing the lot size from 50 to 20 is a welcome move, but is it that revolutionary that you need to rebrand it?

Also one more question… BSE sensitive index is the most widely recognized index to measure the market sentiments. But why doesn’t BSE’s index trade in the futures market like NIFTY and other sector index?

My theory says more business, higher revenues and profits. Not convinced, here’s how:

1) Little effect of Weakening of Dollar:
I agree that IT industry earns primarily in USD and spends in INR, but have you realized what are the margins in the industry?
Do you actually think that an industry which works on a profit margin of 30%+ would worry about a percentage point or two drop in the exchange rate?

2) No Fixed Costs:
Lets even assume that the dollar devalues so much that the margins in the IT industry are in trouble. But the beauty is that the single largest cost component in the industry is salaries. With the attrition being as high as 30% and the company recruiting at the rate of 25,000 employees a year, it should not be hard to cut costs and restore the margins back to the original levels. Also almost half to 1/3 of the salary is through performance linked pay, variable pay, or bonus, hence the HR has a lot of freedom to cull costs.

3) Desperate times need Desperate Measures:
If you have realized, one of the biggest problems that Outsourcing industry was facing was resistance from US nationals. This is the major reason why the outsourcing industry could not expand at the rate at which they want to. However when the US company itself is in danger of going under, they will see Indians not as a threat, but as a saviors which would help them cut costs and reduce the losses.

4) Revenue sharing model.
Recently indian IT companies are trying to move up the value chain by not only doing small projects but also becoming strategic partners. The entire IT is outsourced to India and in return the IT company gets a percentage of the company’s revenue. Software is like WindowsXP, making the first copy is expensive, but once that is done, churning the next 1 million copy does not cost much. Also once an indian IT company enters into one such contract, it would be virtually impossible to displace them. and sooner or later when the recession is over, everybody would reap the benefits.

5) Acquisition, expansion,
Just like the 2001 software bubble, this could be a wonderful opportunity to acquire new companies, open new office and grow globally.

6) Its a business cycle
Come on u did not believe in that there can be a perpetual growth. All businesses have their cycle, and thats part of life.

7) Debt free
Indian companies have almost zero fixed costs, no debts, huge margins and are sitting with stock piles of cash…. and u are worried about their fate?

8. currency futures/hedging
Most of the contracts have a fixed payout and a pre-negotiated time line. So any smart company would buy future contracts so that the rupee value of the existing contracts does not dip.

9) Europe:
The next big growth story is Europe and thats where India’s future and most growth is.

In short no matter what happens indian IT will continue to prosper.

The villagers seeing that there were many monkeys around, went out to the forest and started catching them.

The man bought thousands at Rs10 and as supply started to diminish, the villagers stopped their effort. He further announced that he would now buy at Rs20. This renewed the efforts of the villagers and they started catching monkeys again.

Soon the supply diminished even further and people started going back to their farms. The offer rate increased to Rs25 and
the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it!

The man now announced that he would buy monkeys at Rs50! However, since he had to go to the city on some business, his assistant would now buy on behalf of him.

In the absence of the man, the assistant told the villagers. Look at all these monkeys in the big cage that the man has collected. I will sell them to you at Rs35 and when the man returns from the city, you can sell it to him for Rs50.’

The villagers squeezed up with all their savings and bought all the monkeys. Then they never saw the man nor his assistant, only
monkeys everywhere!! !

Welcome to the ‘Stock’ Market!!!!!

This is also called Greater Fool Theory

What is a bonus issue?
This a mere book manipulation where a company increases the number of shares outstanding by giving a bonus share in a ratio called the bonus ratio and such an issue is called bonus issue.

What is a split?

Split is book entry wherein the face value of the share is altered to create more number of shares outstanding without calling for fresh capital or without altering the share capital account.
For example if a company announces a two-way split, it means that a share of the face value of Rs.10 is split into two shares of face value Rs.five each and a person holding one share now holds two shares.

Usually it is a much welcomed development and leads to a surge in the stock price. However, both of these are mere book manipulation the extra shares one gets due to these issues neither increase one’s holding in the company, change the company fundamentals, or create any extra wealth for the company.

Then why do the company does it:
1) To enhance liquidity:
Buying a stock is like carrying the currency notes. If you want to carry cash: you might not like to carry the entire amount in 1000/- bills for changing them for small bills would be cumbersome, nor you would like to carry then in 10p coins for that might mean lugging a sack around.
Similarly people often have reservations in investing in companies like Berkshire Hathaway because 136,500 USD per stock is much more than what many of us want to invest. nor do we want to invest in penny stocks… for it would be too cumbersome. Hence the companies come up with splits/bonus etc to modify the face value of the stock to keep it in the liquid range.

2) Tax Implications:
In India, tax on stocks is computed at the time of sale. So day traders often utilize this opportunity. They buy the stock before the record date and sell it the next day. So their book shows a loss on the difference in the price of the 2 shares + some shares (of the value equal to the loss) obtained at zero cost. This gives them tax breaks and is usually the reason why the prices surge before the split.

3) Generate PR:
There are over 800 stocks listed on the sensex and their numbers increase every day. So one of the best way for a medium size company to advertise itself and encourage people to invest/analyze its stock is to announce a split/bonus.

All said and done, the long term valuations/fundamentals of a company remain unaltered due to these cosmetic book changes. Hence an investor should not time his investment decisions based on a rumor/news of a split.

I think its high time that these mutual funds should stop concentrating on collecting funds, creating new funds and jazzy advertisements and start concentrating on creating wealth… because end of the day this is what matters.

Although some of our money is invested in risky financial instruments like Stocks and Mutual Funds, the bulk of our funds are usually parked in fixed return instruments like Fixed Deposits, NSC, ppf etc. Now although it always feels good to have as much wealth as possible, what good is the money if it is not there when you need it.

It is then when we realize that how the government and the banks exploit lack of market tradeable bonds for their own selfish needs. Money parked in NSC is locked for 6 years and no matter what one does, we cannot get a penny out of it. The only way one can take money out of a LIC policy or ppf is by taking a loan… So effectively I pay interest to LIC for my own money??????

In eras of fluctuating interest rates, banks should be grateful that somebody is prematuring closing a fixed deposit.
eg: I had a 6 month old fixed deposit which gave me 9.5% rate of interest. Since current rate is 8.5%, by closing this FD, I effectively save the bank 1% p.a. on interest alone. However instead of being happy about it, the bank coolly deducted half of the interest which I had already earned as preclosure penalty.

Had I had invested in bond market, I could have easily gone and encashed these bonds at NSE/BSE and even made a handsome profit because these high interest bearing deposits are worth a lot more than what bank gives me credit for.

I was living to all this crap thinking that since I do not transact very often, this high brokerage should not reduce my profitability much. If you charge premium prices, then give service worth it. But all you will get from ICICI is either very slow website or website down. Market (esp the midcaps are up today, but ICICI website was down all day. Hence I could not make the sale on time.

here is the snapshot of the most familiar page on ICICI-direct.

Luckily I do not indulge in Day trade or did not have any open futures contract, otherwise i cannot even imagine how big a fortune i would have lost.

Similarly, a couple of months ago a lot of global funds were launched which claimed to invest in international securities. I was keenly interested in them, because it would help me in hedging my risks, and reduce my portfolio’s dependence on the performance of BSE Sensex. However, yesterday, when I visited their website to check their portfolio, all I found that they were either sitting with huge stockpiles of cash or 90% of their portfolio consisted of either Indian stocks or ADRs of Indian stocks…. which totally contradicts their advertisements, or investment rationale.

Today there was an article in moneycontrol how all the index funds (irrespective of the fund house) have underperformed the index… Surprised!!!! well this is what happens when index funds does not invest in stocks which forms the index.

The point is that that please do not fall for the jazzy advertisements and facade…. go check the history of the fund and its current portfolio before giving them their money.

Often this preferential allotment is made in form of warrants. Promoters, who subscribe to such warrants, are required to pay upfront only a small portion of the warrant issue size and pay the balance amount in 18 months. Promoters, in most cases, exercise the option of converting these warrants into shares only if the share price of the company is higher than the pre-fixed price of the equity warrant.

By law each and every investor is an equal partner in any company. So why were the common investors not allowed to subscribe to this issue?
The management of all Indian companies are always rewarded generously for their efforts. They are given huge salaries, bonus, perks and even stock options (ESOS) I am OK with that, but these warrants are embezzlements. They dilute the holdings of the common investors at a throw away price and wipe out all the profits which we had expected. What hurts me the most is that most people are oblivious to this malpractice.

One of the biggest problem faced by Indian stock market is that even though by law, the investors are an equal partner, in the promoter’s minds, it still belongs to him.

Since I had earlier recommended my friends to buy Reliance Petroleum (at 65/-), a couple of friends were asking what do i think about it.

One word… Stay away from it….. don’t even think about it.

Essar are a bunch of cheats. I do not know how they do it, but all its companies always end up in bankruptcy while its promoters flourish. They have never ever made any money for their shock-holders or returned the money borrowed from the banks. Neither in my father’s generation, nor in my generation.
Crisil downgrade Essar Bonds from C grade to D grade.
They even managed to use their political clout to reduce the Coupon rate (interest) on their bonds.
Do you think that such a company can ever again raise fresh capital from the market?

This January they arbitrarily announced that they intend to delist Essar Steel and Essar Oil. They even offered to buy back the shares from the public … as usual at far below the market price… Hence trying to cheat the share holders of the fair value of their much deserved investments.

They indulge in insider trading, artificially manipulating the prices… Best example is that Essar Oil, which never traded above 70/- (and was trading at 61/- on 7th November) suddenly shot up to twice its value a week before the news was public? and not to mention that for the past couple of months the promoters have been buying stock like crazy.

BTW SEC has very stringent listing and compliance norms. The director of the company is personally liable for criminal charges in case of misreporting/insider trading. I am 100% sure the Essar group promoters are not foolish enough to list the company and then spend the rest of their life behind bars.

Its all noise, filter it out.. and if you can short sell the shares, then do it….. (UPDATE: I did short sell this stock on 2nd Jan .. when the stock was trading at 350/- and made quite a killing)

No investor Foreign or Indian will ever pay 2billion dollars at 200/- a share for a share of a company that consistently makes losses (even though refinery margins are at the highest levels ever) and has a meager revenue of a few tens of millions USD.

The company pays a healthy dividend and the stock is available at a PE of 5.5 so its not very pricey.

PS: I have holdings/interests in all the companies I blog about.

1) FD: one third to half of the portfolio… fixed returns, almost zero risk.
1) Blue chip shares (long term investment… medium risk, decent returns.. should constitute bulk of the equities you hold)
3) Mutual funds (unless it is an exotic, esoteric sector fund, it can be treated as a blue chip)
4) proceeds from IPOs: low returns (primarily due to high level of over-subscription and low allotments), low risks (unless you apply in all tom dicks and harry)
5) Short term investment: Any investment based on the short term market conditions.. usually made with a day/week time frame horizon… high risk but fabulous returns (it usually constitutes bulk of the portfolio for a trader)

Debentures is another exotic financial instrument which people can invest in. Unfortunately Indian debenture market is underdeveloped and hence very few people know about this low risk, moderate returns long term investment instruments. Hence I am writing this post. These are basically low interest rate unsecured bonds issued by companies which upon maturity could be optionally converted to fully paid shares.
More information about this instrument can be obtained at wiki

What does an investor gains:
1) Low risk: all said an done these can be treated as a fixed interest rate instruments. So even if the company stock price is not doing well (but the company is not bankrupt), you won’t lose your invested amount.
2) Stock linked gains: On the maturity date, you will have an option to convert them into equity (at a fixed price determined on the date of issue) In a hypothetical case, suppose the issuing company stock appreciates by 25% p.a. So potentially the stock would rise 3 folds over 5 years. So the investors can pocket the difference for an additional gain at the time of maturity.
3) Liquidity: Although they are not very actively traded, but unlike FDs you can sell them in the stock exchange whenever you need to money without attracting any foreclosure penalty.

Risks:
1) Unlike an RBI controlled bank, you are entrusting your money with an unregulated company. So if the company goes under, you risk to lose your entire investment.
2) Low interest rate: Since most companies are bullish about their stocks, almost all of these debentures have a very low coupon rate. So if the stock is not doing very well, even though you do not lose your investment, the inflation would potentially eat into its purchasing power.
3) Long gestation period: For all practical purposes, these are like bonds.. hence are not advised for individuals looking for a quick buck.

Why companies issue them:
1) Low interest rate: Because of this, debentures usually translates as the cheapest source of capital.
2) Because of the convertibility, the company is able to move these funds from debt to equity portion of the balance sheet and hence improve the leverage (debt to equity ratio).
3) Reward the investors: In most of the cases, the debentures are issued to the existing stock holders and promoters and not through an open offer. However, outsiders are permitted to buy them from the secondary market.

Here are some warrants/debentures I could find:
Bajaj Auto Finance Ltd.
Dalmia Cement (Bharat) Ltd.
Deepak Nitrite Ltd.
Kirloskar Ferrous Industries Ltd.
Orbit Corporation Ltd.
Sardar Sarovar Narmada Nigam Ltd.
Titan Industries Ltd.
Trent Ltd.

Since I do not have any exposure to debentures, If you looking to invest in them… contact your financial adviser. I know Indian Hotels intended to issue them a month ago, but I am not sure about its status.