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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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