How to use losses to reduce income tax?

Posted on March 23, 2009July 21, 2019 by Jagoinvestor

Are losses good? Do they have any benefit?

When you make a loss, do you feel it has nothing to provide or not at all beneficial. The answer is NO! Losses are bad, but our tax laws gives us a way to utilize them in such a way that we can reduce our income tax liabilities.

reduce tax

Let’s see how 🙂 , don’t worry, we will start from scratch and will explain in detail so that everyone can understand .

Let us talk about capital gains in detail today and let us understand how should we utilize it to minimize our tax liability. Things we will discuss would be stocks, mutual funds, Gold , Debt funds, Real Estate etc.

Understanding Terms and Rules

Capital Gains and Loss : Any profit or loss arises from the sale of capital assets is capital gain or loss. Capital Assets Include Shares, Mutual funds, Real Estate, GOLD etc.

Short Term Capital Loss and Profit : STCL for Equity (shares and mutual funds) is when you sell them at loss before 1 yr, for Real estate, GOLD its 3 yrs.

Long Term Capital Loss and Profit : LTCG for Equity is when you sell it after 1 year, for Real estate, GOLD its 3 years.

Following is the chart showing the tax treatment and time frame for short term for each asset class. Click on the chart to enlarge it.

General and Carry forward Rules :

Short-term capital loss can be set off against any capital gain (Long-term or Short-term)
Long-term capital loss can be set off only against long-term capital gain.
A long-term capital loss will have no value in a case where the long-term capital gain is exempt from tax. For example, In case of shares or mutual funds after 1 year, LTCG is exempt from tax, so If you hold a share for more than 1 year and then take a loss, That LTCL will have no benefit. This loss cannot be set off against any other income.
A capital loss can be carried forward for next 8 years.

How can you utilize the losses ?

As we know that capital losses can be offset with capital gains, we can utilize this advantage to reduce the tax liability.

The main idea is to create losses to offset any profits. There may be the cases where there is an investment on which you are losing, but still you have not booked the loss, but you can book it and use this loss to offset a profit on which you may have to pay the tax.

Let us see some examples

Example 1 :

Ajay had invested Rs.5 lac in GOLD in 2005 and currently in 2009 he sold it for Rs 10 Lacs, Now he made a profit of 5 lacs and it will be considered as a LTCG, as its after 3 yrs. and it will be taxed at 20% indexed (If you don’t know what is indexed, just forget it, don’t worry ). The tax would be around Rs 1 lacs.

Now Ajay also had invested Rs.10 Lacs in Unitech Shares in Apr 2008. His investment has come down to Rs.4 lacs now. But he thinks that it will go up and he wants to keep it and not sell.

Good !! I appreciate his belief that it will go up again. But what is stopping him from selling it today and then again buying it next day.

Watch this video to know 7 ways to save your tax:

What will happen if he does that ?

If he sells his shares and takes a loss of Rs.6 lacs, He now has made a STCL of Rs.6 lacs and law says that he is allowed to offset it with any STCG or STCL. So now he can offset his 5 lacs profit with this 6 lacs loss and hence, he can save his tax of that 1 lac which he had to pay, also he can carry forward a loss of remaining 1 lac which was not offset.

He can again buy his favorite Unitech share the next day. The only loss he will make is the brokerage charges and any fluctuations which may occur in prices, which will not be much, may be it has gone down and he can buy them later at better prices.

So the point is to generate the loss by selling a losing investment and again buying it back in some days. This will help you cook up the loses which then you can offset with existing profits and hence reduce your tax liabilities.

Example 2

Robert had invested 5 lacs in mutual funds in early 2008 or end of 2007 and currently has a good loss of 2.5 lacs (1 yr is still not complete). This is currently every one state, most of the people have burnt their fingers and made huge losses.

Now he is sad that he made losses, He also had bought some shares before some months and made a profit of 50k. Let us also assume that next year his mutual fund will rise to 4 lacs from current 2.5 lacs, which he sells next year.

Now he has 2 choices to make, let us see 2 cases.

Case 1 : He does not book the loss and holds it .

In this case, he will have to pay profit of 15% STCG on his profit of 50k, and next year he will have his current investment at 4 lacs. When he sells it, it will be a loss of lac which will be LTGL (because he had held it for more than 1 yr).

Case 2 : He books the loss of 2.5 lacs and then again buys it back the same day or next day .

In this case, he has made a STCL of 2.5 lacs (bought at 5 and sold at 2.5), Now he can offset his 50k profit with this loss. Then he would not have to pay the tax and he can then carry his loss of 2 lacs carry forward.

Next year, he sells his mutual funds for 4 lacs and makes a STCG of 1.5 lacs (because he has re-bought this mutual fund and 1 yr is still not complete) .. But he can offset this profit of 1.5 lacs with the carried forward loss of 2 lacs, and still carry another 50k worth of loss forward.

So what’s the advantage of case 2 ?

The advantage is that you can save tax on the existing profit and also generate STCL which you can take forward and save tax on future profits.

There are many people who make losses and don’t bother to show it in their returns, if they don’t show it in returns then they will not be able to use it for offsetting purpose in future. Note, The way I have shown the examples have their own benefit and problems, Its you who have to decide what you want and how to utilize the tax rules to your advantage.

Its smart use of knowledge, not cheating 🙂

I wish you have got some knowledge out of this article, please put your comments/corrections/suggestions so that we can do more discussion.

Also, don’t forget to put your vote on the poll at the top of this page.

Akruti City , Have you gone Mad !!

Posted on March 18, 2009August 6, 2019 by Jagoinvestor

Double in a week ?

If you are watching Markets , you must have seen the movements of Akruti City . This company is a Mumbai based Company . The shares of this company is on the roll from last 10 days . In just 1 week it has zoomed from 994 on march 9th to 2145 on Mar 18th , that’s roughly a week .

Note : Please vote on the question asked on the upper – left hand side of this blog .
Also see the update on Jaiprakash Associates after todays markets action on my analysys blog , click here

So, Now the company market capitalization (13421 Cr) is second highest in Real estate sector , just next to DLF (29229 Cr) . Its suddenly 3 times more valuable than Unitech !!

see list of real estate companies with market capitalization

My God !! , whats going on !!

90% of the equity is with promotors , and a very small fraction is with retail public , you can understand that everything going on is just the “kartut” (hindi word) of minority public .

Agreed that anyone who has entered the stocks some days back or 2 days back or 1 day back has made exceptional profits , But is it a right decision to invest in this as of now for short term gain or to ride the trend . A big NO!!

For sure some insider trading is going on with company , that’s the reason why stocks has gone mad . Retail Investors must not get very excited with these kind of things , These kind of sharp moves are not sustainable , to move in a healthy way , the stock must form a base (spend some time in a range ) and then start its up move slowly and with some corrections in between .

These kind of mad up moves without any pauses and slowdown are nothing but a bomb ready to explode .

If like someone who just entered the trade 1 week back and made 100% gains , other person can also loose 60-75% in just 1 week from now onwards . If you put money in this , Its not investing now , its Gambling !!

Suggestion : please stay away , Dont forget the mantra of “Not loosing money” rather than “Trying to get fast money” in stock markets . If you are bothered about lost opportunity , I can bet there more opportunities in market every day than all the combined opportunity in the world in all other aspects of life . Wait for just 1 day and you will get thousands of opportunities again .

see detailed news on :

Note : Please vote on the question asked on the upper – left hand side of this blog .

Margin Of Safety Principle

Posted on March 17, 2009July 21, 2019 by Jagoinvestor

Came across a good article. Just reproducing the work here. This post talks about the Value and Price difference of some investment .

Margin Of Safety Principle

In his book, The Intelligent Investor, Benjamin Graham describes the concept of margin of safety as being an essential part of any true investment. He goes on to say that margin of safety is an element of investing that can be demonstrated quantitatively with sound rationale and from a historical perspective.

Graham’s definition of margin of safety is essentially the gap between price and value. All else being equal, the wider the gap between the two, the greater the safety level. Graham also explains that the margin of safety is important because it can absorb mistakes in assessing the business or the fair value of the enterprise.

As Graham says – “The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.

For in most such cases he has no real enthusiasm about the company’s prospects…If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. The margin of safety will then have served its proper purpose.”

From its origin, the calculation of margin of safety was never related to the volatility of the stock price of a company. The focus of most value investors has always been based on the intrinsic worth of the company in question–a bottom-up process that should be done without regard to current market valuation (which very few analysts are willing to do).

Even with a margin of safety, an investment can still go bad. This is not a failure of the concept of margin of safety principle, as the concept only provides assurance that the odds are in the investors’ favor that they will not lose money. However, it is not a guarantee that the investors will not lose money.

There are and have been many adjustments to Benjamin Graham’s margin of safety concept in the modern era. The way that Benjamin Graham calculated margin of safety years back was very asset-based, and probably quite different from how analysts today would make the calculation.

It is the inclusion of the concept that is important in one’s assessment of an opportunity, rather than the actual mechanics and particulars of the safety calculation.

Some value investors use a variety of measures in determining a firm’s safety levels. They are as keen on asset values as on earnings and cash flow, and may even consider intangible asset values like brands, reputations and intellectual property.

They also use a variety of measures just in case one of them does not hold up–the objective is never to be caught off guard. Based on these criterion, these value investors look for several different measures, such as break-up value, favorable dividend yield, price to cash flow, and discount to future earnings as supporting casts to Graham’s margin of safety principle.

Buying companies with a margin of safety prevents owning companies with a high burden of proof to justify their stock valuations. When a stock trades at a high valuation level, the expectations are so great and often so specific that a slight disappointment or an adverse change in expectations could be catastrophic. Buying shares with ample safety means buying stocks with the lowest possible burden.

Value investors also believe that margin of safety should incorporate an investor’s appetite for risk. The disparity of safety levels among investors is based on the amount of volatility they are willing to tolerate, the mistakes they are willing to accept, and perhaps the financial pain they are willing to endure.

The margin of safety principle essentially asks the question: What is supporting the stock price at its current level? or, Why shouldn’t the stock fall significantly from today’s current price? The Graham margin of safety is heavily conscious of what can go wrong, and not what the discount is to its fair value–the safety is thus purely based on the liquidation value of the current assets.

WallStraits uses the concept of margin of safety, with a debt of gratitude to Professor Graham–but we shift the primary focus from asset valuations to discounted future earnings. Our method is less tangible today, but more valuable as a predictor of tomorrow.

Because our DCF method entails making several important predictions 10-years into the future, we require a large margin of safety–perhaps 50% or more. Luckily, in a bear market environment, such as Singapore is currently experiencing, there are several fine businesses discounted by over 50%.

Upon satisfying the 50% discount to future earnings, WallStraits moves on to evaluate dividend yields (after tax), payout ratios, cash and debt levels, brand values, sustainable competitive advantages, management capability and other fundamental aspects of each business being considered for our portfolio.

We place rather equal emphasis on quantitative and qualitative issues. This differs from Graham’s search for pure quantitative net-nets (a price equal to the firm’s current assets less all liabilities–placing current value squarely on the value of property, plant and equipment).

Graham’s most notable student, Warren Buffett, demonstrated how vital it was to consider both the quantitative asset valuations and the qualitative business assessments to find true value stocks.

Buffett favored the discounted cash flow valuation because it included both the ability of a business to generate cash flow from tangible assets, as well as the ability to create value from intangible assets–like brand strength, intelligent management, and consumer monopolies. Buffett made famous the expression–I’d rather pay a fair price for a good business than a bargain price for a fair business.

WallStraits agrees that the ultimate investment is one undervalued versus its ongoing ability to produce profits and reward shareholders.

You can use your own logic and creativity to make personal assessments of the qualitative and quantitative forms for any business you consider for your portfolio–but regardless of your methodology–don’t forget to always think from the perspective of seeking large margins of safety.

Credit goes to original post here

One Common question that every beginner investor has – Is Direct Equity for you ?

Posted on March 16, 2009July 21, 2019 by Jagoinvestor

This is one of the questions which everybody wants answer to . You can do it , but it will require some effort, learning and dedication. Also you will have to develop some kind of discipline and change your attitude a bit.

We shall first see who all are into Direct Equity Investing. They are Mutual funds , FII’s , Big experienced Investors with high experience and qualification . These people are 24/7 doing this job of researching the companies for long term investing . And even these people do mistakes and even they can predict markets directions always .

Direct Equity

So now you can be one of the two kind of people.

1. Someone who has no interest in the markets and have no desire to learn things on his/her own.

They want to earn better returns than debt, but at the same time without bothering much. Then you better invest in mutual funds (SIP would be a good idea).

That way you can get returns over long term and don’t have to put much effort (apart from choosing good mutual funds in the start and monitoring them once in a while in a year, which is not a big deal).

2. Someone who is ready to take more risk and can also devote some time to do his own study of stocks (not a big one, but basic atleast).

He has better than average interest in these things and also enjoys the stuff. If you are one of those than you can put some money directly in shares of companies after your own research and understanding, it can be any way you are comfortable with. You should learn some basics of Fundamental Analysis and then apply it.

For example: I can say, that After RPL – Reliance Merger, Reliance will be among the biggest refineries of the world (it was anyways, but now in better position), It has lots of exploration projects going on and company’s is in safe and great management (as per the current information).

On the top of it Company has great valuations, and is available at many years low price and now overall markets are near its bottom. Just by looking at these facts, you can understand that it would make sense to BUY Reliance for long term, better accumulate it over the next 6 months, to catch the volatility too.

Can we go wrong and it may not give us good returns?

Definitely yes, Markets are the place where you should expect the unexpected. But at this moment that’s the best we can do and should do.

Can you do better than Fund managers of mutual funds?

Some people may answer yes , and may be they are true, But personally I would say at this moment I can’t do better than them. Reasons are as follows:

They are doing it from last 10 yrs, I might be doing it from last 6 months or 1 yrs (personally i dont do any ).
They are highly expert and qualified people. I learned accounts till my 12th only and it really sucks for me.
They have access to internal information and resources to do better research. I don’t have it.

So, I may be able to pick a company once in a while which gives 100% in 6 months against there 20%. but over long term, chances of there sustaining in the business is very high. So think long term. Don’t over estimate yourself.

You should understand that i am not trying to tell you cant do it. I am just trying to make sure that you understand your position in this game and your abilities to do things.

I personally like to do things on which i am good at and transfer the responsibility of other things to experts in that field. If I want the joy of it anyways, I will take a small portion of my portfolio and will play with direct equity. That is allowed 🙂

Watch the video given below to learn everything about Direct Equity:

Why Mutual funds Makes sense for Retail public?

Mutual funds are the products which are formed on the philosophy that many inexperienced and uninterested people who have money but no knowledge will pool all the money together and hire a person who has experience, understand the markets well, and can take better decision.

This person also has all the time dedicated to investing, so that thousands of investors don’t have to monitor the investments and the returns which will be generated will be distributed to investors after paying this fund manager for services.

So it makes sense you any one like you , who may be a Software engineer, Doctor, businessman or another person, who has no time for all this investing thing. Its you who have to decide who you are?

Don’t fell in the trap of high returns, With high returns comes the disaster too.

“Good return with some risk is much better than Exceptional returns with catastrophic losses”.

I hope this article will prove helpful to your. Leave your views about this article in the comment section. You can also ask me if you have any query.

Investing and Wealth Growth Presentation

Posted on March 13, 2009July 21, 2019 by Jagoinvestor

Investments And Growing Wealth

View more presentations from manish.pucsd.

DSP Black Rock Top 100 – A good old Equity Diversified mutual fund

Posted on March 10, 2009July 21, 2019 by Jagoinvestor

Let’s see a good Equity Diversified mutual fund today, DSP Black Rock Top 100, is an old fund, Its name was DSP ML Top 100 earlier, but now its renamed. It comes from one of the best Mutual funds houses DSP Black Rock.

The fund has very good record and consistently outperformed its Benchmark. To get more information see here

DSP Black Rock Top 100

Returns

If you see last 1 years returns its only -35%, which is much better than others who have given close to -50% return.

1 yrs : -35%
3 years : 1.2%
5 years returns : 15%
Since Inception : 29%

It has consistently outperformed its category average by good difference. Which is one the evaluating criteria.

Portfolio

Its portfolio is well diversified with high concentration on Large cap companies (50%), which is good.

Derivatives usage : There is one point to note in the portfolio is that the fund also uses tries to take advantage of Futures (derivatives). This is a smart action, considering Fund manager understand the risks. Else it can be disaster.

Rating

Its rated as 5 star fund and is places in Low risk High Return Grade by value research online. Though we should not put lot of focus on ratings, its one of the things to look at.

Conclusion : Overall the fund looks good. We have not done any detailed analysis but see it in a way which should be done at the minimum level by an average investor. The main thing is not the product, its the usage and utilization . You can take a normal fund and make most out of it using SIP and portfolio re balancing.

Please do your own findings and see if the fund fits your risk-appetite and criteria. People who want to invest money for atleast 3-5 yrs and without putting lot of efforts on monitoring the market , can invest there money using SIP in this Fund.

Keep the money invested for at least 3-4 yrs, and keep monitoring the fund performance minimum once every 6 months.

If you want to check one of my favorite scenes from movie “Socha na Tha”, see this

What is long term in Share market? – Understand short term, mid-term and long term investment

Posted on March 9, 2009July 21, 2019 by Jagoinvestor

Long term investments are the investments that are suppose to be held for an extended time period which will be considered to be more than 1 year.

There is no exact definition for long term investments. Let’s see how it is different from short term and medium term investments.

How long is long term ?

There are mainly 3 time frame in markets

Short term (6 months – 2 yrs)
Medium term (2 yrs – 8 yrs)
Long Term (8+ yrs)

We are taking about long term investing from point of view of Investor , which invests in a company on the basis of fundamentals and valuations .

Time Frame is a relative term , Short term for some one can be medium term for some one and long term for other . similarly if some time duration is long term for you , it can be short term for someone else .

I have also written a small post on IDBI FORTIS WealthAssurance ULIP , Read it

But here we are talking about an average investor . So lets look at predefined tenures .

from my understanding, any time frame less than 6 months shall be considered as trading Time frame . Traders are people who like to take advantage of short term price movements based on news , Charts patterns etc .

One thing you must understand before hand is that Risk and returns are proportional , If you take high risk , there are chances of high Returns.

Now , lets see different time frames .

Short Term (6 months – 1 yrs) :

Any investment made from 1-3 yrs should be considered as short term .

Risk/Return Potential :

VERY HIGH .

Investing for short term :

Invest for short term only if you can afford take the risk. Its always good, not to invest for short term for any goals which are very important. Like for example, if you are going to have an operation or a marriage after 1 years, don’t put your money in stock markets for less than a year to gain extraordinary gains .

Its for professionals , not for an average investor. do it if you can afford to risk loosing it.

Low risk Short term investment option :

Corrections in a BULL RUN : If there is a BULL Run, wait for a correction, It happens many times that there is some correction in stock markets , At that time you can do some investments for short term like 6 months – 1 yrs. Invest only when markets start rising again .

Have a level in mind where you will take loss if it goes against you. There is no guarantee of profits ever. If you are in profit after 6 months, take your profits and get out, don’t convert your short term investment in long term one, One who can not be loyal to his plan in markets will eventually loose it all some day.

Same thing can be applied to short selling in corrections in Bear markets.

Example : In April 2005 , Oct 2005 , June 2006 , there was very good correction, after which it gave 30-40% returns within 6 months – 1 yrs.

If you want to understand the short term and long term in share market, watch the video given below:

Medium Term (1 yrs – 3 yrs) :

Any investment made from 2-8 yrs should be considered as Medium term .

Risk/Return Potential : HIGH/Medium :

Higher the tenure , lesser the risk .

Also it depends on the situation , there is again no guarantee , There can be some time , when there can be high risk in 3 yrs and some time it can less , but over all it should be less than the short term investment .

Investing for Medium Term :

You should invest for medium term for goals like Car , Vacations , etc and some part of portfolio for House , etc (close to 5+ yrs , not 2 yrs) . Choosing well diversified portfolio and investing in strong fundamentals is extremely important . Good timing is always important in any time frame .

But its difficult to time the market .

Low risk Medium Term Investment Time :

After a Bear Market is there for some time around, and markets have fallen considerably, you can start accumulating good stocks with good valuations every month in installment. Don’t jump and put all your money at once ,just because you feel, “now markets have fallen much”, Markets are supreme and you are no one to “feel” or “tell” markets movements.

Just expect it to come back soon and now start accumulating good shares , or start a SIP. There is no guarantee of any profits, we are just discussing the low risk opportunities here.

Read why SIP helps in falling and Volatile markets , Part 1 and Part 2

Example : Current time . This is an excellent time to start accumulating fundamentally good stocks in installments over next couple of months , especially a big chuck should be invested when there October lows are breached within some days ,which is expected with high chances .

Long Term (8+ yrs) :

Any investment made from 2-8 yrs should be considered as Long term .

Risk/Return Potential :

LOW , By Low do not think that we are saying you will get lower return , we are talking about CAGR, obviously the CAGR you can expect over long term is lower than the CAGR which you can expect in short term or medium term, but more important is the risk, the loss potential, and that is extremely low here, almost Nil i would say, This I am saying on the basis of past historical data.

Loss is possible but chances are very bleak .

Investing for Medium Term :

You should invest for Long Term for goals like Retirement , Child Education , Children Marriage or any financial goal which is to be taken care of after 8+ years , Do it using SIP .

Low risk Long Term Investment Time :

Ideally speaking, you can start doing this any time without seeing the current situation of market, because over long term it would matter less that when you entered markets. This does not mean that timing is not important in growth of money, obviously, If you enter neat the end of bear market or at some other important time, it would help .

But the point here is that , it would not harm if you start investing for long term at any time frame assuming that you are diversifying it well across sectors and stocks and also apply some extremely beneficial techniques like Portfolio rebalancing over this long tenure .

Don’t get scared by these words ,they are extremely easy to understand things and can be applied by anyone , and it does not take much time also , The only thing required from investor is the his share of determination to do all this .

Read what is Portfolio Diversification and Portfolio Rebalancing.

Final Note :

What ever i have talked about here are my personal views and my own idea of short term, medium term and long term. It can differ from people to people with different risk – appetite. Also understand that deciding your time frame is important to deal with the situation in markets after investments.

For example: if you decide that you are investing your money for your retirement which is going to come after 25 yrs, then it would be really easy for you to digest the volatility of markets and to see it going down while you invest. So know your time frame and invest it smartly at correct time.

Don’t try to get smart and get greedy. Markets are the place where Albert Einstein and Issac Newton also failed and returned to try what there were good at. That does not mean we will also fail. try to made fast money, in fact try to make smart money.

For new comers in this area, its advisable not to enter through Direct equity, better go though mutual funds, and please listen to people when they tell you all this, don’t get smart, else you will be ruined like millions others.

I have also written a small post on IDBI FORTIS WealthAssurance ULIP, Read it

My trip to Savandurga on Saturaday was Great, check the pics at flickr here