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September 30, 2012


Fiscal Deficit: Fiscal Deficit (FD) is the difference between total expenditure and total revenue of a government.

Primary Deficit: Primary Deficit  is nothing but Fiscal deficit devoid of the interest paid.

Primary Deficit= Fiscal deficit-Interest Paid

Current Account Deficit (CAD): CAD is the difference (in monetary value) between  imports and exports of a country.

Trade Deficit(TD):  TD is the CAD devoid of  Balance of Payment (BOP) of Investment and Foreign Aids  BOP.
Simply put, TD is the BOP of goods and services only. 

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September 29, 2012



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HDFC SL Classic Assure is a limited premium paying plan which comes with survival benefits.
Besides Maturity Benefit and Death Benefits this plan may give you non-guaranteed returns every year (better called as reversionary bonus or non guaranteed bonus) which once added to the policy is guaranteed either at maturity or on the death of the insured person, whichever is earlier.

Reversionary bonus is nothing but a bonus amount added to the Sum-Assured, given out of the surplus profit of the insurance company annually.

Sum Assured is the minimum amount payable to the insured person who survives till maturity or to his relatives in case of the death of the insured person.

This plan comes with various premium paying options like yearly, half-yearly, quarterly or monthly.
This policy shall fetch you tax benefits under sections 80 C and 10(10D).
Let us review this plan for a 36 year old male for a policy term of 15 year. Premium is payable for 7 years.

Policy Term
Annual Premium
Total premium paid in 7 years
15 Years
Rs. 51,545
Rs. 3,60,815

Return when assured person survives the policy term-

Sum Assured
Cumulated Non guaranteed bonus received @6% per annum accumulated in 15 years
Total Return
Rs. 3,93,894
Rs.64,994
Rs. 4,58,888

Let’s see what will be returns when instead of going for this plan, a combination of an online HDFC Life term plan (Click2protect) and investment in HDFC bank RD (Recurring Deposit) is chosen-

The Click2protect online term plan of 15 years for a Sum Assured (SA) of Rs. 10 lakh (please note this SA is 2.5 times the SA of Classic Assure insurance Plan) requires an annual premium of Rs. 2240 only.

This means now there are Rs. 49,305 to be invested in HDFC bank RD (Premium of Classic Assure plan {Rs. 51,545} minus Rs. 2,240).

HDFC bank, by this date, offers a coupon rate of 8.25 % on an RD of 7 year tenure. Just after 7 years return shall be Rs. 4,31,586. This corpus then can be kept in HDFC bank FD for next 8 years (We are trying to simulate the Classic Assure plan for a term of 15 years in a better way). This sum (of Rs. 4,31,586) even at a low coupon rate of 6% (for a FD of 8 years) shall give the final  corpus as Rs. 6,87,881.
Compare it with what you would have gotten after 15 years in Classic Assure Plan- Rs. 4,58,888 only.
If coupon of the FD were to be 8% then the corpus would be  almost around Rs. 8 lakh.

Tax Angle: the forte of tax plan lies in their tax-saving feature. Under Section 10(10D), income from the insurance is tax free.
So we have to reduce the final corpus from our simulation by ~ 30 %( or 10% or 20% as per the slab investor falls in). After subtracting income tax at 30 % corpus becomes around Rs. 4.82 lakh, which is still better than the return of classic Assure plan.

Inference:  

(1) It is always better to go for a combination of HDFC Click2protect online term plan and a 10-year HDFC bank RD than going for Classic Assure Insurance plan for the same policy term.
Though online insurance plans are not available in smaller cities and rural areas still a combination of offline term plan and RD too shall give better returns than the Classic Assure term plan besides higher death benefits.

(2) After tax consideration Classic Assure plan is more suitable for investors falling in top income tax category (30%).

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September 29, 2012
Kelkar committee on Friday clearly emphasized the precariousness of the Indian economy aggrieved by the subsidy burden. If financial reforms are not pursued seriously then fiscal deficit could even touch 6.1% mark against the FY 13 budget target of 5.1%. Indian government has so far been providing subsidies on Food, Fertilizers and Fuel. Higher fiscal deficit makes the government to borrow more from the market leading to higher interest rates which consequently translates into higher inflation.
Higher interest rates also affect the profitability of the Indian businesses and hamper the flow of foreign funds in the country which finally translates in weaker rupee. Weaker rupee further increases the fiscal deficit and might result in economy going into a spiralling downtrend.
Kelkar committee has recommended the complete abolishing of the Diesel subsidy but in view of coming state (Gujarat) and general elections (2014) this seems impossible.
In the financial year 2012 total petroleum products subsidy was Rs. 1,38,541 crore against the FY 11 figure of Rs. 75,962 crore.
In the absence of the financial reforms, India's credit rating may be downgraded that means foreign debt at higher interest rates. 


Reduction of subsidies shall definitely hurt poor and the lower middle class people, but that's the way our national economic  condition is. Next budget is supposed to be full of populist measures to garner votes in the general elections of 2014 and for the same government needs some room which is being achieved by the present fiscal consolidation.
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September 28, 2012
FY 13 Q2 Review:


Rakesh Jhunjhunwala portfolio shares in FY 13 Q2
                                  
Rakesh Jhunjhunwala, a billionaire investor often called as Indian Warren Buffett who recently hit the headlines by for quashing the political parties opposing the introduction of FDI in retail, has recently increased his stake in Mumbai based Godrej group engineering solution provider firm Geometric Ltd.
Rakesh Jhunjhunwala along with his wife Rekha now holds around 14.55 % stake. This stock soared 56% in Q2.
Another member of his portfolio Titan saw 13 % appreciation in price. Jewellery accounts for more than 70 % of the company's revenue and soaring gold prices put downward pressure on its revenue which capped its price rise.Opening of the retail sector for foreign equity caused even Pantaloon Retail to soar 13 % which was declining earlier.
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September 26, 2012


Holding companies owns outstanding shares of other companies. Outstanding shares are nothing but issued shares devoid of the treasury stocks.
Simply put, a holding company owns non-treasury shares of other companies.
The most famous example of a holding company is-warren Buffett led Berkshire Hathaway.
Some of listed Indian holding companies are as follows-
Tata Investment Corporation, Bajaj Holdings and Investments, Rane Holdings Ltd, UBHL (United Breweries Holding Ltd.), SIL Investments and a few more.
Holding companies are not involved in any production nor do they render services. Dividends and capital gains are the main sources of income for holding companies.
Holding companies may own shares of listed as well as non-listed companies.Besides shares, holding companies may also own bonds, mutual funds and other similar financial instruments.
Holding companies generally trade at 20-70% discount to their inherent values.

Double taxation: If a holding company owns less than 51 % stake of in subsidiary company, it becomes liable to pay DDT (Dividend Distribution Tax).
This means, when a holding company owns less than 51 % of its subsidiary company double taxation takes place- first the subsidiary company pays the DDT followed by the holding company paying the same.

When to buy a holding company share?

If a holding company with a good dividend paying track record is available at a steep discount to its inherent value or any of its unlisted subsidiaries is going to be listed resulting in value unlocking or any of its subsidiaries supposed to be benefiting with huge profit; one should do his due-diligence before taking a position.
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September 21, 2012


RGESS was proposed by the former finance minister Mr. Pranav Mukharji -now president of the nation in budget. This scheme shall provide income tax benefits to investors having annual income below Rs. 10 lakh . RGESS is restricted to first time investors only.

What is this scheme?

First time investor with annual income not exceeding Rs. 10 lakh can invest up to Rs. 50,000 in equities, mutual funds and ETFs (Exchange Traded Funds) to avail a deduction of 50 %  of the investment from the taxable income for that year.

If Mr. Verma who is a first time investor in equity with annual income of Rs. 6,00,000, invests a sum of Rs. 50,000 under this scheme  then he shall get a deduction of Rs. 25,000.
So, taxable income for Mr. Verma shall be Rs. 5,75,000. This scheme is besides the 80-C investment scheme.
Under RGESS, investment should be done in top-100 shares of BSE’s ‘BSE 100’ or NSE’s ‘CNX 100’ or public sector companies of Mahratna, Navratna or Miniratna stature .
Besides this, investment in IPOs and FPOs of public sector undertakings having a turnover over Rs. 4,000 crore shall also qualify as investment under RGESS scheme.
For this,Mutual funds and ETF’s should be RGESS compliant that means they should also invest in aforementioned shares only . Investment in RGESS-non-compliant mutual funds shall not qualify for the deduction under this scheme.

FAQ:

   (1)    I have an old demat account. Shall I qualify for this scheme?
Ans: Provided you have not invested in shares before. Only first time investors shall qualify for this scheme.
   
   (2)    How government will find out my old transactions?
Ans: Your PAN shall speak for that.
   
   (3)    Which IT section will incorporate this scheme?
Ans: new section- 80CCG
    
   (4)    Is there any lock in period?
Ans: Yes. A lock-in period of 3 years. However, an investor can sell his holding after completion of the first year.Conditions under this clause are ambiguous and it’s better to wait for further clarification from the government over it.
     
     (5)    I never transacted in shares but I have invested in mutual funds before.
Again, FM shall have to clarify this ambiguity. I hope that FM shall consider  investors with prior investment in mutual funds as eligible for this scheme.

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September 13, 2012
MAS-MCX-SX-40
The country's new stock exchange MCX-SX would start functioning from Diwali and along with the new exchange, the investors and traders are in for a new index as well. The MCX-SX, which is expected to be a full-fledged stock exchange, is set to begin trading with about 1,000 - 1,200 stocks. MCX-SX will commence trading in cash market and derivative segments (futures and options).

Not only the exchange, MCX-SX  is all set to take on the country's two most popularly traded equity indices, the Sensex-30 and the Nifty-50, with its own benchmark index  SX-40. It will select top stocks from the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) to create the SX-40. The new index, SX-40 is expected to consisting of BSE-30 stocks and the rest 10 would be of picked from stocks reflecting the growth story of India.

Currently, the Sensex and Nifty are recognised globally, of which NSE comprising of  exchange-traded funds (ETFs), exchange-traded futures and options and other index funds, generates a little over half of the trading volumes in India's equity derivative market. The new exchange MCX-SX and the new index SX-40 is definitely bound to catch everyone's attention globally as well as locally.


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September 13, 2012
masterandstudent-mcx-sx
MCX Stock Exchange Limited (MCX-SX), branded as India’s new stock exchange, is set to launch equity segment  from Diwali, according to exchange sources.Earlier in 2008, MCX commenced operations in the Currency Derivatives (CD) and has been witnessing a steady and significant growth in average daily turnover and open interest ever since its inception. It has a separate clearing corporation, MCX-SX Clearing Corporation Ltd. (MCX-SX CCL), through which the clearing and settlement is conducted.


The currency derivatives segment at MCX-SX is supported by a strong membership base and witnesses a nation-wide participation. At the end of July 2012, MCX-SX had 751 members and saw participation from 714 towns and cities across India. MCX-SX has received permissions to deal in Interest Rate Derivatives, Equity, Futures & Options on Equity and Wholesale Debt Segment.


Following its success in Currency futures, MCX is all set to launch its equity operations from Diwali. What does this mean for an investor and trader?

MCX-SX is planning to offer competitive membership fees, which could trigger a price war causing the BSE and the NSE to revise their membership fee structure. This would help in reduced transaction charges for the investor and trader. Just like Bombay Stock Exchange BSE and National Stock Exchange NSE, investors and trader could buy and sell stocks, futures and options in MCX-SX. It's just that your broker has to be a member of MCX-SX and surely, leading brokers would provide trading facilities of MCX-SX, since the costs involved are going to be lesser than now.

Investor and traders, over the past 15 years are very much connected with BSE and NSE, but they are in for a change and it would be a new beginning for them.

Change is here, be part of it !

Just visit the new exchange here at MCX-SX.


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September 08, 2012


To bail out counties such as Spain and Italy and to save the Euro Zone, ECB (European Central Bank) went ahead with its much-awaited bond buying programme better known as money printing or 'liquidity insertion ' leading into rising global markets.
Under this move ECB shall buy  short term bonds of one to three year maturity from crisis-hit countries to pump liquidity. A new economic term got originated – OMT (Outright Monetary Transactions), under which ECB shall continue its unlimited bond buying programme.
The ECB President Mario Draghi has justified OMT by calling it a necessary programme to save the Euro zone.
The beneficiaries of OMT shall necessarily have to implement austerity-measures to avail the same.
Simply put, austerity measures are nothing but the lowering of the government spending.
This is nothing but like an old wine in a new bottle.OMT was done fearing the threat of some members of the Euro zone deserting the common currency Euro.
The biggest problem with the debt-ridden countries is their inability to devalue the common currency Euro while they earlier would devalue their domestic currency to hive off their national debt to some extent.
As a result of the OMT, bond prices shall soar and consequently bond yields shall come down.
Euro-zone countries like Greece, Spain, Italy, Cyprus, Malta and Portugal are already under the clutch of the recession.
Money printing is often followed by the raging inflation as money supply in the system increases and to tame the same steps like sterilization are necessary.
The money required for buying bonds is electronic money with no backing like gold. As a sterilization move ECB shall increase the bank rate (the interest it pays to banks for parking money with it) so that excess liquidity is sucked out of the system so that inflation remains controlled.

Why ECB came out with OMT?

Borrowing costs in countries like Spain & Italy was rising for want of  liquidity. Under OMT, ECB will be injecting liquidity so that borrowing costs come down.
Higher borrowing costs hinder the GDP growth.

Why OMT is threatening in the long run?

First the unlimited bond buying of the government debt is spooking. OMT shall end when goals are achieved thus making it a spooking proposition. Sterilization only, is not enough but there should be a counter electronic entry (when economy stabilizes) to outdo the original electronic entry by which money was generated for the bond buying programme. But as per the history it rarely happens.
In USA too, after having done two rounds of the quantitative easing the third one is in the offing leaving no chance for the deletion of old electronic entries.
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September 06, 2012
In the era when coins of denominations 50 paise and below have been discontinued in India, there are a few shares on NSE which shall cost you 50 paise or less.
Here follows a list of of penny stocks on the National Stock Exchange.

But, thing to keep in mind is penny stocks may not be cheaper in valuations which is better measured by ratios like Price to Earnings ratio (P/E ratio), Price to Book value ratio (P/B ratio) and PEG (P/E to growth ) ratio.
Too much equity dilution often results in diminishing stock value.
Penny stocks are often prone to sudden and wild price swings and this is one of the reasons that makes them a cynosure of traders.
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September 05, 2012




Market is rife with the news about rising gold prices every day. In one of my previous posts I had discussed reasons responsible for rising gold. There is no foolproof methodology for determining whether this yellow metal is overbought or not as it is determined by demand & supply scenario.
But gold holds an empirical relationship with crude.
 Gold prices are expressed in dollars per troy ounce. (1 troy ounce = 31.1 grams) while crude prices are denoted in dollars per barrel.
The ratio of gold price to crude price has been found to settle around 15.
By this time spot gold is trading at 1691 $ per ounce while Nynex crude is hovering around 95 $ per barrel.
This gives gold to crude ratio as 17.8.

Gold prices are also juxtaposed against silver prices. Gold to silver price ratio have been found to hover in the 50-60 range.
Presently silver is trading at 32 $ per ounce and this give the aforesaid ratio as 52.84.
Gold is rising in the hope of stimulus package from the US Federal Reserve under which US fed pumps money in the economy (by buying bonds) to stimulate the fledgling US economy mired under the huge debt better termed as Quantitative Easing (QE).
This excess money flows into commodities especially gold as it used as a hedge against the inflation resulting in higher gold prices.
But following a severe reprimand from Republicans it will not be easy for the US fed to go with its stimulus programme.
If US Fed fails to implement the QE3 gold may see a decline.

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September 05, 2012


US national debt ultimately touched the dreading $ 16 trillion level turning its every citizen into a debtor to the tune of $50,000. Every taxpayer of the United States is burdened with a debt of $ 1,40,000. Interestingly US GDP is around $ 15.3 trillion-this means US owes more than its GDP (total value of goods and services produced by the economy in entire year). 
US dollar being the reserve currency of the world, US did not find any difficulty in amassing this huge liability. Years of deficit spending has resulted into such a gargantuan debt.
China in order to keep its domestic currency competitive parked money into US treasury products and presently China is the largest foreign owner of the US debt.  China presently holds around 7.25 % of the US debt. However, China had reduced its exposure in US treasury products over the past year. By June 2012, China owned US debt worth $ 1.16 Trillion against the previous figure of $1.31 trillion a year ago. Japan follows the china with the ownership of the US debt worth $1.12 Trillion.
Other major countries whom USA owe are UK, Ireland, Brazil, Russia, Switzerland, Canada and Germany.
To get rid of this huge debt US government  needs to cut spending or increase taxes. But both options being unviable especially politically, US government goes for an innocuously looking but more dangerous option- money printing or quantitative easing. This results in higher overall inflation as more money now chases available goods and services.
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