Author: Jagoinvestor

I am Jagoinvestor Admin

How needs and wants are different from each other?

Posted on by Jagoinvestor

One of the important aspects of Financial planning is spending money wisely. Now, what does it mean when I say “Spending money Wisely”?

All the expenses & spending activity we do can be classified under two sub heads ‘Needs’ & ‘Wants’. Improper handling of money happens when you spend too much on your Wants and too less on your Needs.

The aim should be to spend/save money for your needs and then take care of your wants. Once you prioritize all your expenses/goals in these categories, planning your finances becomes easy!

needs and wants

What is the Difference between Need and Want?

Needs:

A need is something which is essential for you irrespective of the financial situation/conditions. These are the things you have to take care first and only then comes other things which you can do without.

Needs Example

    1. House Expenses
    2. Child Education
    3. Saving money for Retirement
    4. Medical Expenses
    5. School/College fees and expenses
    6. Family Vacations and outings (in limit)

Wants:

These are things which you wish to have but they are not above your Needs. For example a Car is a Want when compared to your Child Fees or Education saving. You can live your life without car but Child Education is Vital and cannot be compromised.

Some people’s Wants can be a Need for others and vice versa. It all depends on personal life style and attitude. But the main point here is that you have to differentiate between your Needs and Wants at short to medium term time frame and Long term view.

Wants Example

  1. Extra Vacation
  2. Expensive clothes above your normal requirement
  3. Expensive Car or any vehicle above your budget

Note: Understand the point that Wants are not something which you should avoid but your Needs can/should not be compromised because of your Wants.

Watch this video to know the difference between Needs and Wants:

Why is it Important these days?

These days almost everyone live their life in a unplanned manner especially their finances are Unplanned in a Big Way. People spend first and think later/late about it. But money spent once will not come back.

Once you prioritize things well and have a proper road map on your spending pattern you can take care of your Needs first and then move towards fulfilling your Wants.

Let us take a case Study

One of my friend spends his money in a pathetic manner. He earns around 30,000 per month and is already in job from last 2 yrs. He spends a lot with his friends on parties on weekend and buys branded shoes which he is very fond off. Great …!! He does not understand the value of what small savings can do.

Just before the year end he asked me how can he save the tax and wants to invest some money.

On further inquiry I come to know that his Parents are dependent on him (though he is not sending any money at this moment to his home). So he needs good amount of Insurance, he has no savings till now! Finally he is not left with any money to even pay insurance premium this year (2009), not invest any money in some mutual fund.

What is the point?

This person has spent his money on all the things he wants and nothing on his needs- which are essential. He has violated fundamental rule of Financial planning which will affect him very badly.

Once all your needs are taken care of and if you are left with surplus, I, myself would encourage you to spend your money on satisfying your Wants like no tomorrow!! But first comes important things- you can live without your Wants, but not without Needs.

Imagine you are going for Golf Games and you are not left with money that is enough to take your Family out sometime on vacations.

 

First Step of Financial Planning : Planning

Posted on by Jagoinvestor

This post will tell you all about why Planning is the most important and first step in the process of Financial Planning!

Any action that is to be taken needs a proper and precise planning before implementing it. I have seen many people pinging me about their investment plans or decisions to take Term Insurance or Investment plan through mutual funds for next 10 yrs through SIP.

Financial Planning

I would like to congratulate them on their decision and action. They are ahead of most of the other people.

“A good plan today is better than a perfect plan tomorrow”

But is it enough? Is that all? Is that the initial step everyone should take? The answer is NO!! A lot of people have gone directly to the second level and skipped the very first basic level, which is Planning!

First Step of Financial Planning

The first step not making investments but planning for everything and then executing it, Why is planning important? Most of the time people concentrate too much on action and not planning. If you take actions without planning things, there will be lack of clarity ,and it will bring doubt in your mind about investment.

A friend of mine invested in mutual funds through SIP. For the last 6 months markets did good and his portfolio showed upward movement, later the market crashed and he stopped his SIP payments. I asked him why is he not continuing his SIP. To this he answered that markets are going down.

But he also said that he don’t need this money any sooner and he is making investments for his Child Education which is 12 yrs later and his investment is for long term in stock market.

His decision of starting investment is great, but investing without any planning and not knowing exactly why you are doing it is like driving without knowing were to go. You will eventually go somewhere, but that may not be your desired destination.

So what are the steps that needs to be taken before the action of Investment?

Knowing your Goals: First plan that why are you investing; what is the goal associated with your investment; Is it Buying Home? Buying Car? Vacation after 3 yrs, Retirement, Child marriage? etc…

Knowing your time frame, when you need money: This is very important because this will decide a lot of things

– The product you can invest in
– The risk you can take
– The amount you need to invest per month or year

This will make your path very clear, after this you just have to follow it without any doubt in mind.

Action and monitoring: Now you just have to take action and don’t doubt it again and again because you have cleared every doubt beforehand.

Case Study

Case 1: Unplanned Investment

Ajay is a regular reader of Jagoinvestor and after reading some articles on this blog, he decides finally that he will invest k per month through SIP

He starts a SIP with a mutual fund and now he is happy that he has been investing finally. He invests for 2 yrs and markets have gone up and down and at the end his investments are at same place where they started. So there is no appreciation in value.

He decides to take half the money out of his investments and uses in buying a car which was his plan from many years. Markets finally starts recovering, but as usual he realizes very late that this is the time to put money in markets (as all the general public realize this very late).

He starts his SIP again and now continues this for some years. He periodically takes money out of his investments on many occasions like for his vacation and his child education costs.

What is the problem with this approach?

– No predefined goals and hence no clarity on investment plan- No idea of how investment should be divided for different financial commitments and not investment as per risk-appetite and goal’s importance.

Conclusion: He started investments which was a good idea but Ajay jumped on the second step of the ladder. The first step was to plan for things.

Case 2: Planning everything

Ajay now knows that he can invest 20k per month and have to plan how to make proportionate investments for his financial commitments. He identifies his goals and how much money he would need for each.

He comes up with following things:

To do your own calculations, do it here

Now he exactly knows that for which goal where & how much he has to invest. There will be no distraction in between by equity markets going up and down or any other factors because in the start itself he has factored in all the possibilities. In short Now he has a clear path and he knows how fast or slow he has to walk on it. At the end if he keeps on walking on it the way he planned Success is guaranteed.

Conclusion

Planning your finances can be boring, but its vital and most crucial part of financial planning. A person who gives much time planning things has higher chances of achieving it. Take action is second step. Planning things in advance reduces doubts about certain things, provides clarity in financial life and hence reduces a lot of issues.

Question :

How much difference do you think will happen without planning as per your view?

Tax Exemption limit may be raised to 1.7-2.0 lacs

Posted on by Jagoinvestor

Today in morning newspaper, I read that in this budget Tax exemption limit may be raised to 1.75-2.00 lacs . What will that mean to a common person like us .

It simply means that we will be left with some extra surplus every year .

A male who has taxable salary of 4 lacs per year and has 1.5 lacs as exemption limit , pays around 40,000 as tax . Now , after the exemption limit is raised to 2 lacs (assumption) , there can be 2 scenarios .

Read How to calculate Tax and tax slab for year 2008-2009

Scenario 1 : Exemption limit is raised but tax rates are not . Current tax rate is not

10% for 1.5 – 2.5 lacs
20% for 2.5 – 5 lacs
30% for 5+ lacs

In this case , he will have to pay 35,000 as tax (assuming tax rates for 2008-2009) . This means a saving of 5,000 on tax from previous year .

Scenario 2 : Exemption limit is raised and tax rates are also adjusted. A common sense guess would be

10% for 2-3 lacs
20% for 3-5 lacs
30% for 5+ lacs

It must be something like that , this is the minimum we will/should get

In this case , the tax would be 30,000 , and savings would be 10,000 per year.

What can this small amount do ?

So we can save in range of 5,000 or 10,000 or someother amount depending upon the changes. What can be the value of this for us as investment point of view.

this money can be invested in a mutual fund through SIP monthly for next 30 yrs ,

5000 can make
14 lacs at 12%
29 lacs at 15%

10,000 can make
29lacs at 12%
58 lacs at 15%

Assumption is that the money can be divided in 12 equal installment and can be invested per month .

What do you think about this ?

Did you check video post for Basic formula’s in Personal Finance and How to choose Mutual funds ?

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Video post on Basic Formula in Personal Finance

Posted on by Jagoinvestor

This is a Video post by me , where I have tried to teach some basic formula’s for starters who should know important calculations using which they can calculate important stuff like Maturity value of Investment when they make SIP payments , or one time payments .

I am getting some questions like “I want to invest 2k per month for 10 yrs in mutual funds , Can i generate 20 lacs” type of questions . Seems like many readers do not know how to apply and use simple formula’s to calculate these stuff when they calculate how to generate wealth for long term . Often you might have felt that you have to depend on others for calculations , because you don’t know it themselves .

I have made a video myself where I explain 3 important formula’s which everybody should know .

1. Compound Interest
2. Annuity
3. CAGR

Lot of you might have learned this school , but many have forgotten it . So in this video post I have explained it with examples . I hope that it will help beginners or new readers . I am also giving a Calculator below the video where you can do your own calculations , If it gives any error , please go to the link I provide and calculate it there . I will also put presentation here , so that people who have very low bandwidth can view the presentation at least.

Presentation

Important Calculations In Personal Finance

View more presentations from manish.pucsd.

Embedded Calculator (click here if this gives some error)

 

 

How different Products can yield different post tax Returns?

Posted on by Jagoinvestor

This post will teach you how to take advantage of different products tax rules keeping in mind your income tax bracket. Different products can yield different post-tax returns for people in different tax bracket. FD’s return can be 7.2% post tax for you, but may be its 5.6% for me 🙁

Lets take an example to understand this post.

How different Products can yield different post tax Returns?

Two of my friends Ajay and Robert asked me what should they invest in for 2 year. They have Rs.1,00,000 to invest.

I recommended following products to them :

Ajay : Fixed Deposits
Robert : FMP’s ( Read what is FMP’s )

You must be wondering why did I suggest different products to them? Both have same risk-apetite, Age etc.

The answer lies in there tax bracket. The post tax returns depends on your tax bracket too. Lets see how.

Ajay Case

Ajay does not earn much, His annual income is less and he falls in 10% bracket.

Tax treatment of FD’s interest : Returns are added to your income and then its taxed as per your tax slab rate.

Now it means that tax on FD’s for him would be just 10%. Considering 8% interest.

Interest Received = 16,000
Total Tax paid = 10% of 16,000 = 1,600
Total Return = Rs 14,600

Robert Case

Robert earns well and falls in 30% tax bracket, hence FD will not be best for him, He will have to pay 30% tax on the Interest for FD.

Tax treatment for FMP’s : For Long term capital gains (more than a year), the returns from FMP’s are either taxed at 20% after Indexation or 10% without Indexation

Assumption : Lets day FMP’s provide indicative returns of 9% and lets also assume that they actually provide that return. then

Investment = Rs.1,00,000
Interest = 18,000
Interest = 10% of 18,000 = 1,800
Returns = 16,200

Note : I have not considered tax after indexation, please do it yourself. read this, Anyways it will be more than what he is paying without indexation.

Read What is Indexation Benefit ?

Why FMP’s were not better for Ajay ?

you might think that Ajay could have gone for FMP’s too. The returns are almost same and tax is also same, But you have to realise that FMP’s returns are not guaranteed ,they are just indicative.

Also FMP’s carry Default risk , then why to take extra risk, The only advantage he would have got is .5 or 1% extra returns but at the cost of the risk, which is not worth.

Why FD’s were not better for Robert?

Now this you know , obviously the tax to be paid on it would have been 30% as Robert tax bracket is 30% and hence he might have paid 30% tax on the returns from FD’s

Conclusion

So now you understand that a product can yield different post-tax returns for two people in different tax bracket

So when you do your investment planning, you must take these small details about tax, If you choose your investments considering your post-tax returns, you can make much better decisions, how ever this should come after an investment passes the 4 most important aspects of investments and GFactor basis .

I have started active blogging on my Technical analysis and options blog, I have suggested to go long in Satyam, Please read it.

– Go long in Satyam
– Detailed Analysis on Satyam

I came across a very good article called “What the IPL taught me about Investing”

 

Everything you want to know about Super Annuation

Posted on by Jagoinvestor

The only schemes that comes in your mind when it comes to retirement benefits are EPF, NPS & PPF. But there is one more scheme i.e. Super Annuation about which lot of people don’t even know. And those who know about it they don’t know how much corpus they have as their super annuation.

In this article I’m going to tell you what is super annuation and how to check your superannuation balance if your employer maintains it with LIC.

Super Annuation

First of all I would like to share with you an important thing, which one of my friend Subbu has figured out himself . Credit goes to him.

A lot of employees do not care to check there Superannuation amount, or they are not even aware that it exists. Knowing the amount of your superannuation can be helpful, because then you know that you have that much saving and hence when you plan your investments, you can factor in this information and take better decisions . This small amount make big chunks of your portfolio .

What is Superannuation?

Superannuation is a retirement Benefit by employer . It is a contribution made by employer each year on your behalf towards the group superannuation policy held by the employer. This is an important part of creating wealth for your retirement .

Features of Super annuation :

a) Superannuation Fund is a retirement benefit given to employees by the Company.

b) Normally the Company has a link with agencies like LIC Superannuation Fund, where their contributions are paid.

c) The Company pays 15% of basic wages as superannuation contribution. There is no contribution from the employee.>

d) This contribution is invested by the Fund in various securities as per investment pattern prescribed.

e) Interest on contributions is credited to the members account. Normally the rate of interest is equivalent to the PF interest rate. Read what is EPF and PPF ?
f) On attaining the retirement age, the member is eligible to take 25% of the balance available in his/her account as a tax free benefit.

g) The balance 75% is put in a annuity fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member. This payment received regularly is taxable.

h) In the case of resignation of the employee, the employee has the option to transfer his amount to the new employer. If the new employer does not have a Superannuation scheme, then the employee can withdraw the amount in the account, subject to deduction of tax and approval of IT department, or retain the amount in the Fund, till the superannuation age.

Source : https://www.citehr.com

What happens with your superannuation after your retirement?

Once you get retired you can use the amount of your super annuation in 2 ways, either withdraw the total amount which will be completely taxable if withdrawn at once, or withdraw 1/3rd of it which will be tax free and convert the 2/3rd amount in regular pension scheme.

Tax will be applicable on the remaining 2/3rd of the superannuation amount and returns on it.

What happens if you resign?

This is the concern of most of the people today. When you resign the job, you can transfer your Super Annuation from your current employer to new employer and can continue it till your retirement.

If your new employer does not have the superannuation scheam, then you have 2 options, either withdraw all the money on which tax will be applicable, Or let it be in your superannuation fund and use it after your retirement as per the above mentions tax rules.

How SuperAnnuation is calculated?

The interest rate on Super annuation is similar to the interest rate applicable on PPF. Whereas the returns may differ depending upon the underlying insurance company and the superannuation scheam that your company has taken.

The interest in calculated and deposited to your account yearly. This is the interest paid by the insurance company and also your employers contribution.

Super annuation chart:

[su_table]

Years of Employment  Amount of Super Annuation 
  Less than 1 year   NIL
  Between 1 and 2 years   50% of the contribution + interest earned
  Between 2 and 3 years   75% of the contribution + interest earned
  More than 3 years   100% of the contribution + interest earned

[/su_table]

Interest Earned :

This is interest paid by LIC every year on the contribution by employer.

Rules of Superannuation on Maturity

Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension. He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.

Steps for checking Superannuation balance online?

1. Go to licindia.com

2. Register for a user id and password.

3. Login.

4. Click on ‘Group Scheme Details’ tab.

5. Click on ‘member’ radio button.

6. Get the group policy number for super annuation from your company’s payroll department and enter ” in the policy number text box and click ok. (Talk to your finance department for getting the group policy number , this will be unique for all the employees of a company).

7. It will ask for LIC Id no and Date of Birth fields.

8. To get LIC Id no, call LIC branch with which your employer has a super annuation account and inform that you are calling from your company and provide your name to the LIC official. They will give your LIC ID No.

9. Since most companies had not furnished the date of birth details to LIC, enter ’01/07/1960′ / ’07/01/1960′ (forgot the order, try both n check) in the date of birth field.

10. You will get the policy enrolled and you can click on the policy number to view the details. The details will contain the accumulated balance till the last financial year. It also shows contribution made by your employer i the current financial year.

Are you able to see Superannuation Balance for yourself ? Were you aware of it ? Please share with us in comments section . Also please share if you find any discrepancies with the steps .

How to Calculate Net Present Value (NPV) and how to use it?

Posted on by Jagoinvestor

In this post we will talk about How to think and calculate Net Present Value of a transaction involving Financial Payment, and why its important to understand the concept.

net present value

Consider the following Example :

You have to lend Rs 1,00,000 to one of your friends and He is offering you following choices.

Choice 1 : He will pay you Rs 18,000 per year for next 10 yrs.

Choice 2 : He will pay you 13,000 per year for next 15 yrs.

Choice 3 : He will pay you Rs 8,000 per year for whole life.

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Which one should you choose?

Here you have to take a decision of choosing from one of the choices. The logical decision here will be to go for choice whose Net Present Value is Highest. You have to understand the time value of money. Rs.10,000 received today is much more valuable than Rs.10,000 received 10 yrs later, even Rs 15,000 received after 10 yrs.

So you have to see that which choice has the highest worth if you calculate its Value today.

So how do you calculate the Net Present Value in this case, where you have Rs X receivable every year for n years. Here you also have to consider present rate of returns which you can assume at 8%.

So We have 3 variables

X : Amount received per year

n : Number of years

r : Present rate of return

NPV = X * [(1+r)^n – 1]/[r * (1+r)^n]

Calculating through this formula, we get the Net Present Value of the choices as

1. 120781

2. 111273

3. 100000

Net Present Value of the last choice is simple , how much money do you put in bank today that will fetch you 8,000 per year forever? If X is the amount than at 8% interest you get 8,000, so

8% of X = 8,000

.08 * X = 8,000

X = 8,000 * (1/.08)

X = 1,00,000

If you see the total amount received in all the cases you will realise that the choices with lesser NPV will give you have higher Total amount.

For Case 1 : NPV = 120781 , Total amount received = 1,80,000

For Case 2 : NPV = 111273 , Total amount received = 1,95,000

For Case 3 : NPV = 100000 , Total amount received = Infinite (The amount is paid forever)

Calculate NPV for your self, see this calculator

But you have to understand that “Total amount received” is not important. What can you do with the money is more important? So the real Indicator is Net present Value of Money. You have to understand the Difference between Price Vs Value. Price is what you pay, Value is what you get. Value is important not Price.

Real Estate Case

If you go for a home which cost Rs 50 Lacs @9% Interest for 20 yrs. Your EMI will be around 45,000 per month.

I found this amazing Apna Loan , EMI calculator, Its nice

You will actually pay total of 45,000 * 12 * 20 = Rs.1.08 Crores.

Now you may feel that the cost of house is Rs.50 Lacs ,but the amount outgo is actually 1.08 Crores and may feel bad for this, But this is ridiculous. Because you are not paying 1.08 worth of money in your entire tenure, 1.08 is just a number.

Its worth is still 50 lacs only spread over 20 years and the numbers sum up to 1.08 crores.

If you calculate NPV of the Home loan money which you are paying , its exactly 50 Lacs . Calculate it with (.75% interest and 240 as tenure, as its a monthly and not yearly) .

Note : There can be other situations also where we need to calculate Net present value with a different formula, but for this post we are only discussing the examples and scenarios where you need to pay or receive a fixed amount after every fixed period for some tenure.

Conclusion :

You can also use this concept for taking decisions in scenarios where you have different choices of payments, choose the one which has lowest Net Present Value, like in the example we took , For the friends its more beneficial to go for the 3rd option.

So the moral of the story is that dont pass this post link to your friends with whom you have financial relations 🙂

Questions?

Should Banks state net present Value of the money customers pay as loan , so that people come to know that they are getting fair value for there money?

Read interesting note on Home Loan EMI, Read how Home Loan EMI is Calculated?

Readers, are you getting a horizontal scroll bar when you view this blog? If its irritating for many people I will fix it? It depends on your computer resolution how does it look to you, for me, it works fine.

How to Calculate Capital Gains and What is Indexation ?

Posted on by Jagoinvestor

In this post we will learn How to calculate Capital Gains or Losses. A lot of people make mistake in this . If you buy a house in 1995 at Rs.10 lacs and sell it at Rs.20 lacs in 2009. On how much profit will you pay the tax?

If your answer is Rs.10 lacs , you have no idea how to calculate capital gains. Read ahead to understand .

capital gain

What is Capital Asset ?

Capital Assets are the properties which can be held by a person . Some examples are Real Estate , Shares , Mutual Funds , Gold and Debt Funds. FD’s and other fixed returns Instruments are not part of it.

Taxation

For taxation of Capital Assets , read this : How to use your looses to Reduce Tax

How to Calculate Capital Gains ?

Most of the people think that

Capital Gain = Sell Price – Purchase Price

But , Actually the real formula is

Capital Gain = Sell Price – Indexed Purchase Price

What is Indexation ?

Indexation is a technique to adjust income payments by means of a price Index , in order to maintain the purchasing power of the public after inflation.

We must understand that prices in general also rises, so the actual prices should not be used while computing the profits , rather It should be Indexed as per Inflation in the country, so that people can get the real value from sale of there assets.

Indexation is used in Tax treatment for Debt , Gold and other asset classes

What is Cost Inflation Index (CII) ?

Year CPI
1981-82 100
1982-83 109
1983-84 116
1984-85 125
1985-86 133
1986-87 140
1987-88 150
1988-89 161
1989-90 172
1990-91 182
1991-92 199
1992-93 223
1993-94 244
1994-95 259
1995-96 281
1996-97 305
1997-98 331
1998-99 351
1999-00 389
2000-01 406
2001-02 426
2002-03 447
2003-04 463
2004-05 480
2005-06 497
2006-07 519
2007-08 551
2008-09 582
2009-10 632
2010-11 711
2011-12 785
2012-13 852

How to Calculate Indexed Purchase Price ?

Indexed Purchase Price = Purchase Price * (CPI for current year / CPI for year of purchase)

Once you have Indexed Purchase Price , you can subtract it from Sale Price and get your capital gains .

In some products Long term Capital gains is around 20% with Indexation and 10% without Indexation. In Equities Long term Capital Gains is exempt from Tax .

Let take an Example

Purchase Price 1000000
Year of Purchase 1995
Sale Price 2500000
Year of Sale 2008
No of Years 13
Purchase CII 281
Sale CII 582
Indexed Purchase Price 2071174
Capital Gain 428826
Tax with Indexation 85765
Tax without Indexation 150000

I hope the above example is clear . Below is the calculator I have created for you to calculate Capital Gain tax for your self. Just play with different numbers . Just enter the year of Purchase and Sale and It will figure out the CII (incase it does not, please put CII yourself)

Capital Gains Calculator
I have made a Calculator for you : https://public.sheet.zoho.com/publish/manish.pucsd/temp

Capital Gains Tax with Indexation and Without Indexation

There are some asset classes where you have the choice of using Indexation or not . This is true for debt funds and FMP’s. So the current rate is either 20% with Indexation or 10% without Indexation for Long term Capital Gains .

For Tax without Indexation, you simply find out normal profit (sale price – cost price) and then calculate the tax.

So you can calculate tax using both ways and then choose the one which is lower 🙂 .

How to save your Capital Gains Tax?

For people who are miser and do not like to pay lot of taxes , govt has provided some relief to them. Govt says that If you don’t want to pay tax on your capital gains, you can do following things to save your taxes.

Invest your Capital Gains in Real Estate: If you invest your Capital Gains in Real estate within 2 yrs, you will get the the exemption.

Invest in Capital Gain Bonds : There are some specific bonds issued under sec 54EC, some of them are NHAI or REC bonds. You have to invest in these bonds within 6 months. Generally the lock in period is around 3+ yrs. interest on NHAI or REC bonds is around 5-5.5% .

Tax on Capital Gains can be different for different People

Please note that Capital Gains tax can vary from one person to other person depending on which tax bracket he/she belongs to. It will also depends whether Tax with Indexation or without Indexation works out to be cheaper for him or not.

Note : For calculation purpose the Financial years are business year from April – Mar, Not Jan – Dec. If you buy in June 2009 and sell in Jan 2010, you are in the same year not 2 different years.

Conclusion

So, In this post we learned how you can calculate capital gains and also take advantage of tax benefits for saving your taxes on capital gains, Your aim should be to understand the process and learn about it, so that you can take informed decisions in your financial life .

No one should take advantage of your ignorance and also to take quick decisions and make rough calculations when there is a need. If you know these rules, you can take better decisions

Questions for you

Suppose you are age 30.
– In June, 2000, You buy 20 lacs Home
– In Aug, 2007, You buy stocks worth 10 Lacs
– In April, 2008, your sell your house at Rs 30 lacs
– In June 2008, your stocks have gone down in value are worth Rs.3 lacs now.

What should you do to avoid paying any tax on capital gains made from House?

In previous post I have discussed “What is NPS , New Pension Scheme” by Govt of India . Read it

NPS , New Pension Scheme , A detailed Explanation

Posted on by Jagoinvestor

Today we will be talking about the “New Pension Scheme” Launched by Govt. of India.

What is NPS?

Its a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime . It will work almost the same way as Private Pension Schemes.

new pension scheme

Until now the pension schemes was available to Govt employees and employees of Big companies who has Provident fund facility. Any other person had to go with Private Pension schemes provided by Insurance Companies. IT as not a govt scheme for common person, With NPS now its a common person gateway to Pension Schemes.

Read previous post which was a guest post by Nooresh Merani on “How does a day trader looks like”Features

– No upper limit of Investment
– Minimum limit of 6,000 per year (Rs.500 per month).
– Annual Fees of .00009% (90 paisa for Rs.10,000) for Managing the fund.
– Tax benefit under sec 80C.
– Any Indian citizen between 18 and 55 years can invest in NPS.

Read other details below.

NPS Bodies

– Regulator : The one who will regulate the NPS System .
– Fund Managers : Who will invest the money
– Point of Presence : Responsible for Sales and Marketing .
– Central Record Keeping Agency : Responsible for all the document Keeping work (Record Keeper)

Lets see each of them In detail now .

Who will Regulate NPS?

PFRDA(Pension Fund Regulatory and Development Authority) will monitor and regulate all the activities under NPS. It checks how your money in invested and makes sure that the fund managers are following the rules and guidelines.

Its just like “SEBI for Stock Market” .

Who are the Fund Managers?

There will be 6 Fund houses appointed by Government to manage the funds under NPS. You can choose any one of them to be your Fund Managers. They are :

1. SBI Pension Funds Private Limited.
2. UTI Retirement Solutions Limited.
3. ICICI Prudential Pension Funds Management Company Limited.
4. Religare Pension Fund Limited.
5. IDFC Pension Funds Management Company Limited.
6. Kotak Mahindra Pension Fund Limited.

They will take all the decisions of where the money received under NPS should be invested in the best possible way considering all the rules and regulations set by PFRDA.

Watch this video to know about national pension scheme:

Who are Point of Presence?

The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS.

1. Allahabad Bank
2. Axis Bank Ltd
3. Bajaj Allianz General Insurance Co Ltd
4. Central Bank of India
5. Citibank N.A
6. Computer Age Management Services Private Limited
7. ICICI Bank Ltd
8. IDBI Bank Ltd
9. IL&FS Securities Services Ltd
10. Kotak Mahindra Bank Limited
11. LIC of India
12. Oriental Bank of Commerce
13. Reliance Capital Ltd
14. State Bank of Bikaner & Jaipur
15. State Bank of Hyderabad
16. State Bank of India
17. State Bank of Indore
18. State Bank of Mysore
19. State Bank of Patiala
20. State Bank of Travancore
21. The South Indian Bank Ltd
22. Union Bank of India
23. UTI Asset Management Company Ltd

Who will be the CRA?

As per the website of PFRDA there is a Contact of negotiation is underway and NSDL is expected to be appointed as the CRA. there were other bodies too who wanted to be CRA, but the most suitable of all is CSDL. You can see them as the back office for maintaining records, administration and customer service functions.

What are the Steps of Investment?

  1. Visit a point of presence (PoP), fill up the prescribed form with the required documents.
  2. Once registered, CRA will send you a Permanent Retirement Account Number (PRAN). This will be unique to every person.
  3. Select your Amount and Investment Option.

Investment Options and Structure

Structure wise they are very similar to ULIP’s or ULPP’s from Investment Point of View . You have different kind of funds options with different exposure to –

– Equity Instruments
– Corporate Debt
– Fixed Income Instruments
– Govt Securities.

Different Options

– Risky option : The higher allocation in this option will be in Equity. To decrease the risk, Equity Investment is allowed only to invest in Index funds which tracks Sensex or Nifty. Also the equity exposure is caped at 50%.

– Moderate : IN this options Main exposure would be Corporate debt and Fixed income securities with some exposure in Equity and Govt securities. It will be moderately risky and rewarding.

– Safe : In this option mainly the investment will be done in Govt securities, and very little will be invested in Equity.

There will be a Default option , under which the allocation will be decided as per your age, where Equity Allocation will be high in the start and then it will come down as your age increases . You can also decide your own asset allocation as per your Risk appetite

Cost

There are different kind of Costs in NPS.

– Fund management charges of .0009% per Annam, which is excellent if compared to ULPP’s or Mutual funds charges .

– Annual Maintenance charges of Rs.350 and Rs.10 per transaction to CRA (soon, it will be Rs.280 per year, Rs.6 for per transaction).

– Rs.40 for registration with PoP and Rs.20 per transaction with them.

– There are other small costs too, lets leave it for now.

Taxation Issue

Sadly, As per the current law, the amount received at the end from NPS would be taxable, PFRDA is trying hard with govt to exempt the tax. You will get the 80C benefits on the amount invested in NPS.

UPDATE May 3, 2009

“Under following circumstances your account may be closed before attaining retirement age?

– death
– account value reduces to zero
– change in citizenship status.

Thanks to Viral for bringing up this point
Read NPS FAQ here

Conclusion

As per my views, Its a good initiative from Govt to introduce a Pension Scheme which will give common people a chance to invest in Pension schemes which is from Govt.

One important thing to understand and note is that Even though its a pension scheme, the returns are not guaranteed. It can vary drastically depending on your asset allocation and how you choose the fund options.

Other Negative point at this point is that the amount received at the end would be taxable which can have adverse affect on the return potential. But I am sure soon govt will make the final amount received non-taxable.

Currently I don’t rate it at par with PPF or EPF. At this point it would be wise to invest money in this if you have any money left over after your PPF and EPF contribution. Waiting for some more time before taking a call on this would be worthwile . Overall NPS passes 🙂

Question for you

– Are you personally impressed by NPS and will you invest in NPS?
– What else govt can make changes in NPS to make it attractive to you?

Previous Post : Nooresh Merani Guest post on How does a Day trader looks like?

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A day in the life of a stock trader – Part II of the series of “Profile of a Day Trader”

Posted on by Jagoinvestor

This is a guest Article from a fellow blogger friend and a very good Technical Analyst, Nooresh Merani. This is an interesting article where he presents how a profile of a Day trader looks like.

day trading

A part of this article was published in May 14th Issue of Money Today Magazine. I hope it would be a good read for everyone , Even If you are not related to Trading , you will come to know what is Day trading and how it can be a full time profession and very rewarding one . Read the article Below .

THE JOB = Day Trading

Job description: 6 hours a day / 5 days a week which requires hardly any physical activity apart from grunting or swearing in anger or thumping hands, tables and chairs in happiness.

Desired Profile: The desired candidate should be good at accounts and quick at using the computer keyboard or mobile keypads. No formal education or age bar.

Company Profile: It’s one of the oldest organizations (BSE is formed in 1875!) which is open to all candidates provided they have capital to trade with.

Remuneration: The salary has no upper limit but the candidate has to forego a small amount as brokerage/ taxes on the transactions.

The above job description seems a dream job!!

The profile of a day trader is not as rosy as it seems as they don’t have a fixed salary, instead they have to risk a security deposit (trading capital) paid up with the company (exchanges/brokers) which may be blown off in few hours, days or weeks or years.90% of Traders pay salaries for the rest 10%.

Trading is one serious business and a highly disciplined profession but, a large section of traders who don’t have this attitude get thrown out of the system very quickly. A trader learns from the mistakes, accomplishments through his trading career and by honing his technical and intuitive skills.

Initial grind:

Every traders goes through the initial grind (sometimes recurring) of losses, depression, self -realization and more.
A must Quote for every traders’ desk, “People who learn from their own mistakes are Wise, People who learn from others mistake are Wise and Lucky and, those who do not learn at all are Traders (Suckers)”

qualities of a good day trader

So, to be successful in trading, the most dynamic profession, where even a richest man can’t afford an hour’s lunch break (the Gujarati Thali would cost somewhere in Lakhs!!), one needs to learn, evolve, adapt and be disciplined. Always learn from the past, apply it to the present so that you can gain in future!!!
A Traders Day!

Pre-Morning work:

First thing a trader checks is how Dow Jones, European indices performed overnight and the current situation of Asian markets. SGX Nifty in Singapore opens up much before India so a trader gets hint of Nifty opening.

The trader makes modifications to the stock lists and observations made for the day. Technical, Pivot and data traders are ready with a list whereas system traders rev up their mechanical engines which generally don’t deliver much.

Trading Hours:

Although every trader has to see the ticker on his computer monitor for prices, but, there is a section of traders who only rely on ticker reading, which is a study of price & volume fluctuations. For best results, a combination of intuition, ticker reading and knowledge of technical analysis is a must.

Indian markets are one of the most volatile ones and it’s a common saying out here – Nazar hati durghatna ghati (Moment you get your eyes off you will meet with an accident). So a trader has to be attentive and nimble footed to make split-second decisions and follow the personal trading style/rules.

Post Trading Hours:

This is the best time for the trader to catch up on a snack or freshen after finishing of the calculations and noting down the open trades or the profits made in the day.

Analysis and Self-Evaluations:

The amateur traders don’t realize that this part of a trader’s life is equally important. Technical traders go through their charts; mechanical traders test their system to come out with a list of possible stock trading ideas for the next trading session and evaluate the current positions.

Trading as a profession has the most ups and downs with terribly bad trading sessions and equally high performance sessions. Every trader needs to keep evaluating, modifying and optimizing their trading styles to stay in the loop or the market knows a way to kick you out.

Latest Experience with the Screen!

Although I and many of us traders do follow the above plan but human nature is frail and one does make mistakes. One thing I have realized with experience is if you make a cheap mistake (small loss) early you would make a killing next time around by not repeating it.

The last mistake I made off late was to pre-empt and anticipate a big down move in 2nd week of March which didn’t come but luckily got saved because of stop losses and the screen. The next time around I did the simpler thing of re-acting to the ticker sense.

My one such encounter with markets was on 15 April 2009 when Indian indices outperformed global indices.

Many traders were yet again caught on the wrong side of the trade by watching the performance of Dow Jones overnight.

The index opened lower and drifted lower. But, ticker did not show signs of weakness and out of index counters continued to gain strength. What lot many traders missed out was, that Hang Seng (Hong Kong) was up 600 points on 14th March, the day Indian markets were closed due to a holiday.

Any technical analyst would confirm Hang Seng bears the closest co-relation statistically with India. So, this simple observation kept my bias bullish though the index was negative to start with.

The ticker was purely biased towards the mid cap segment in the last few sessions so my focus was on them.

We kept on holding to the previous open positions (namely Crompton, ks oils, guj nre, gtl infra, ghcl).

Also, seeing the momentum, added on to my technical picks Dishman Pharma, Everonn & Crompton for the day at higher levels then opening which gave awesome moves of 10% + in the day!!

Sensing that the up move was backed by nervous morning sellers squaring up, we booked out of previous positions to reduce the risk exposure and raising stop-losses to cost to conserve gains. A combination of aggressive buying along with disciplined money management did the trick as index closed 200 points lower the next day.

The learning from above experience was “Respect the Screen & Markets are Supreme”. A Trader looks for intuitive hints from the screen and doesn’t ask why it’s performing so, but, just follows it on the path to making money.

Above all would like to end this with few words of wisdom in Gujarati – Market Ni kamai market ma samai – (Money made in the market, stays in the market). A wise trader makes money and takes it home regularly!

Happy Trading!

Nooresh Merani , Analyse India

Blog: https://nooreshtech.blogpost.com

Website: www.nooreshtech.co.in
Email: [email protected]