Personal Finance Blog- India V 2.0: 2006

Lessons on mutual funds

Why you need to invest in mutual funds

Benefits of investing in mutual funds

Why you need to invest in mutual funds

If you want higher returns combined with lowest risks, mutual fund is the answer. The money invested in mutual funds is invested in debt market, capital market and money market instruments like shares and debentures depending on the type of mutual fund. Mutual funds are a safe place for investing your hard earned money and it also provides a good return of atleast 20%-25% over a period of time as compared to the conventional National Savings Certificates (NSC) and Fixed Deposits that offer less than 10% returns. Systematic Investment Plans or SIP as they are commonly known as, are an excellent substitute for the Recurring Deposits (RD) of banks and post office. The value of your investments fluctuates depending on the stocks or bonds in which the fund has invested the money. The investment portfolio of the fund is extremely diverse and even if some of the investments don’t move in the upper direction, the other investments help in generating a reasonable yield.

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Types of funds

You have several options to choose from. Some funds invest in only shares, while some invest only in bonds and debentures. The fund may even be investing only in shares that are listed in the stock exchange and form part of the index number of the stock exchange (SENSEX). You can choose growth oriented funds if you aim at capital appreciation through investment in shares with high growth potentials. Else, income-oriented funds will suit your needs of regular income in the form of high dividend payouts. Also, another classification is that of open-ended funds and close-ended funds. In case of open-ended funds, there is no fixed maturity period and you can easily purchase or sell the units at the Net Asset Value.

Meanwhile, close-ended funds have a fixed maturity period of 2 to 15 years and the fund cannot issue new units once it is closed.

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Benefits of investing in Mutual funds

You can easily transfer investments from one scheme to another with the help of updated market information.

In case of open-ended funds, you can sell your units to the mutual funds directly at any point of time, while in case of close-ended funds, you can sell the units in the market.

Different schemes to suit your needs

Transparency is assured as NAV of the schemes are declared at regular intervals

You stand to gain by the expert services of fund managers at very nominal cost.

Offers tax shelters

Diversification of investments decreases the risk of volatility in prices.

Well regulated by SEBI and all functions are within the strict regulations designed to safeguard the interest of the investors.

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Net Asset Value

Net Asset Value or NAV is Assets less liabilities of the fund as on a particular date. The NAV of a unit
is calculated as-

NAV of a unit = Net Asset Value of fund/ Number of units outstanding

The NAV fluctuates with the purchase or sale of investment securities, the value of the investments
held by the firm, the assets and liabilities of the fund and the number of units sold by the fund or redeemed.

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MIN mandatory from January 1

MIN Number is mandatory , if you plan to invest Rs 50,000 or more in MF from Jan,1 2007.
This will be applicable for pre-registered SIPs too.

MIN need to be obtained only once and can be used across all fund houses.

MIN form and other information are available on AMFI website.

If you are not investing more than Rs. 50,000 ,You need not worry as of now.

Tax Related Index

Compare Mysore Palace and a Two Bedroom flat

Mysore Palace was built between 1897 and 1912 at an outlay of around Rs. 42 Lakhs.

You will have to strive hard to get a two bedroom flat in Bangalore today for the same amount (Just four walls).

The Compounding effect of Inflation does such wonders!!!!@. So, whenever we do investment planning (Say a financial plan for the future like child’s education or retirement planning) it is very important to factor inflation into our plans. If we don’t do this, the whole plan can go for a toss.

We must also choose investment avenues that can grow ahead of inflation. Overall return of the portfolio must at least keep pace with inflation if not outpace it.

Always have ‘Inflation’ in mind when you invest or plan for the future.

Presentation on Inflation

Why you must have a PPF account?

1. Highest Return- 8% among the safest category of investment.

2. Only instrument that falls under EEE (Exempt - Investment amount, Exempt- Interest accrual ,Exempt- Interest pay out) category under Income Tax Act..You need not pay a single penny of tax.

3. Power of compounding can act effectively as the investment period is for 15 years.

4. Tax exemption under section 80 C.

5. The Lock-in period keeps reducing as years go by (15,14,13....and so on). Example if you opened a PPF account in 1992..the amount you invest in 2005 can be got back in 2006....

So Open PPF account even if you are wary of the 15 year lock in ….Keep investing the minimum amount every year (Rs 500) and you can use it during the final 3/4 years with a minimum lock in period!!

Happy Investing :-)

Equity MF Investment Approach

Traditional Approach to Investing in Equity MF is illustrated in the Pyramid given above. The approach is bottom up ( See Arrow mark direction).

NSC and PPF Comparison

1. Return - 8% on both.

2. Lockin Period -15 Years for PPF and 6 years for NSC

3. PPF - Principal + Interest (fully exempt from tax), Tax Payable on Interest at the end of sixth year in NSC

4. Interest earned every year on NSC can be shown as reinvestment under Section 80 c for the current year.

For Example
if you invested Rs 50,000 in NSC in Jan'06.You would have availed Rs 50,000 under Sec 80c last year.

You can also claim the interest earned on 50,000 during the current year under Section 80 c.

See Table below for details.

From a taxation point of view PPF is better (Why you must have a PPF account?), if you are comfortable with the lock in period of 15 years.

Time in the market is more important

Wondering what's happening to the sensex after the blood bath that has been happening for the past couple of days!!!

These Volatility should'nt really affect a long term investor. In an article in TOI , there was an excellent comparsion between two investors.

1. Both the investors were in the market from 1980 to Dec 2005, Investing 10,000 every year.

2. A always invested when market was at its low (year low), B on the contrary did invest in highs alone (Year high)

3. The difference in ROI was just 2% between them. (per annum return , 16%- B and 18%-A)

It was interesting to note this... Because " In God we trust , Others Need DATA"..So it was a proof with data for the fact that " Time in the market is more important than timing the market".

Q & A - Mutual Funds

What do you think about the below mutual funds for long term, which one is the best . I am planning to invest, please spend some of your time and help me :)

1) Prudential ICICI infra

2) Reliance Growth

3) Reliance vision

4) Sundaram select midcap

5) Magnum Global fund.

Im looking for Equity diversified mutual fund for aperiod of 3-5 years. - ideasmoney blog visitor

1) Prudential ICICI infra

Infrastructure is a great growth area and it has fetched a lot of returns recently. This is a sectoral fund and carries diversification within the sector only. so , the risk/ return proportion is high. Sectoral Funds are not generally suggested for a beginner (investor).If you are willing to take the sectoral risk (infrastructure) ..you can go for it. ( Also look at Tata Infrastructure, Sundaram Capex before you decide)

2) Reliance Growth

4) Sundaram select midcap

5) Magnum Global fund.

All the three of the aforesaid funds are midcap funds . Midcaps tend to outperform other funds in the long term ..as the mid caps companies ability to grow is generally perceived to be higher than the large caps. But the time you keep invested in these funds need to be a bit longer than other diversified equity funds to fetch the results. You can definitely go for these, as you are looking for a 5 year investment period.( Sundaram midcap has multiplied money almost 9 times in four years and Reliance growth almost 25 times in 11 years!!)

3) Reliance vision

Funds like Reliance Vision, HDFC Equity are stable funds. They are more Large Cap oriented with an ability to fetch stable returns . They should form a core of your portfolio. (These are must haves and you can allocate a good share of your portfolio to these funds for more stability ).

Most importantly take the SIP route..happy investing

NSC/ FD VS Equity MF Comparison table

A self explanatory table of comparison between investments

( Fixed Deposit/ National Savings Certificate Vs Diversified Mutual Fund)


		Amount in Rs
Investment	F.D./ NSC	Diversified Equity MF
Amount	10000	10000
Period	6 years	6 years
Maturity Value	15868.74	29859.84
Tax on Income/ Capital gains	1573.68	0
Inflation	4185.19	4185.19
Value of Investment after 5 Years	10109.87	25674.65
(post tax post inflation)	10109.87	25674.65

Difference	(15564.78)

Rates	Per annum
Inflation	6%
Rate of Interest on F.D./NSC	8%
Rate of Return on MF	20%***	(Last five years average 40%)
Income Tax rate	30%

***This post was published originally in Dec 2006 ( When the global equities were moving to a peak ). In those times,an average equity mutual fund had annualized returns over 40% for five years ( 2001-2006). In 2013, the average annualized return for equity funds stand at around 5 % (considering the last five year period 2008-13).

So, Please know your facts and risks associated well before investing. Blind extrapolation of the past would lead to great failures.

Also read, http://ideasmoney.blogspot.in/2013/09/fixed-deposits-or-debt-funds.html

Some facts about Warren Buffet

Some facts about Warren Buffet - Second Richest Man ...................

There was a one hour interview on CNBC with Warren Buffet, the
second richest man who has donated $31 billion to charity.
Here are some very interesting aspects of his life:

1)He bought his first share at age 11 and he now regrets that he
started too late!

2)He bought a small farm at age 14 with savings from delivering
newspapers.

3)He still lives in the same small 3 bedroom house in mid-town
Omaha, that he bought after he got married 50 years ago.
He says that he has everything he needs in that house. His house does
not have a compound wall or a fence.

4) He drives his own car everywhere and does not have a driver or
security people around him.

5)He never travels by private jet, although he owns the world's
largest private jet company.

6)His company, Berkshire Hathaway, owns 63 companies.
He writes only one letter each year to the CEOs of these
companies, giving them goals for the year.
He never holds meetings or calls them on a regular basis.

7) He has given his CEO's only two rules.
Rule number 1: do not lose any of your share holder's money. Rule
number 2: Do not forget rule number 1.

8)He does not socialize with the high society crowd. His past time
after he gets home is to make himself some pop corn and watch television.

9) Bill Gates, the world's richest man met him for the first time
only 5 years ago. Bill Gates did not think he had anything in common
with Warren Buffet. So he had scheduled his meeting only for half hour.
But when Gates met him, the meeting lasted for ten hours and Bill Gates
became a devotee of Warren Buffet.

10)Warren Buffet does not carry a cell phone, nor has a computer on
his desk.

11)His advice to young people: Stay away from credit cards and
invest in yourself.

Amazing individual indeed!

3 "I"'s that can make you Wealthy

Look at any of the wealthy people in the world , they would have got rich by any of the 3 I's that follow.

1. Innovation

Being innovative ...being different from the crowd.
Innovation need not be restricted to a product innovation or a technology breakthrough...but also innovative way of doing a business......successfully turning ideas into reality.
Doing things that the crowd doesnot do ....thinking differently can also all be classified as innovation for this purpose.
if you take the first generation billionaires throughout the word they have become rich mostly by being innovative or by championing an innovative idea.

Needless to say , every organisation emphasises its employees to be innovative.

2. Investment

Investing in a disciplined and planned manner can make you wealthy. Investment is spotting opportunities and multiplyig your wealth through those opportunities.
Its essentially identifying Question marks and Stars ..keeping your bets on them till they become Cash cows.
This is the best way for the not so innovative kind.

Wondering about the third 'I' ...That's nothing but

3. Inheritance....You can be wealthy because you inherit wealth....there's nothing much you can do about it. :-)

Few slides from a Presentation on Investment ...which I happened to see.

'Real Estate' Vs 'Equity' Conflict

I was going through an article in Business Standard, Yesterday (Nov 23, 2006). It was on how real estate stocks had fared during the last couple of years. The stock that topped the list had fetched 74900% returns (yes, not a typo…it’s 74900) in the last five-year period Nov 2001- Nov 2006.

The long lasting ‘ Real Estate vs Equity ‘ as an investment avenue coflict in my mind came close to a conclusion. I sort of realised that equity is a super set of real estate at times as you can invest in real estate through stocks & not vice versa.
(Nb: - interested in knowing the name of the stock.. That’s unitech…. the other stocks in the list had also fetched phenomenal returns. These Companies and their promoters should have gone crazily rich!! Thanks to the growth in need for commercial and housing spaces…)

Tax Saving-ELSS Advantage!

Which is the best tax saving instrument? (under Section 80c - 1 Lakh limit)

There are wide spectrums of choices available

1.NSC
2.PPF
3.Insurance / Pension Plan
4.FDs ( 5 Year Tenure)
5.Infrastructure Bonds
6.ELSS * and a few more

*(ELSS refers to Equity Linked Saving Scheme of mutual funds)

ELSS is one of the best choices

1)It has the potential for highest returns (Last five year average returns well above 30 % p.a. **).
2)It has the minimum lock in period (3 years) compared to other tax saving instruments.
3)Dividend from equity schemes are tax free (for Dividend Payout option)
4)No Long term capital gain tax on redemption as the period of investment is greater than a year.
5)An SIP investment can help you hedge against market fluctuations while investing.

With so many advantages, ELSS is the most attractive investment option available to us.

(SIP#- Systematic Investment Plan. Where a fixed portion is invested in a fund every month like a Recurring Deposit)(** Returns Subject to market risk)

Also read http://ideasmoney.blogspot.com/2006/11/tax-saving-dividend-reinvestment-option.html

Tax saving-Dividend Reinvestment option in ELSS – Think about it

ELSS Schemes provide for 3 options while investing like any other equity scheme.

The options being

1) Dividend Payout
2) Dividend Reinvestment
3) Growth.

Dividend Reinvestment is an option which you can avoid when investing in tax saving ELSS.

Whenever Dividend is declared and reinvested in tax saving ELSS, it is subject to a lock-in period of three years.

So, there is a high probability that a fraction of your dividend goes on a continuous circle of 3-year lock-in. In that sense, you will never be able to withdraw the full amount of dividend paid out of the scheme. (Unless the scheme does not declare a dividend for three continuous years).

Confused!@#$% J . Let me give an example
Assume~
You invest 10,000 in a ELSS scheme with dividend reinvestment in 2006. (You can redeem these units only after a three-year lock in 2009)
Assume -Dividend of 1000 declared in 2007. The dividend units get added to your kitty by way of reinvestment (these units can only be redeemed in 2010)
Assume -Dividend of 1200 declared in 2008. The dividend units get added to your kitty again (these units can only be redeemed in 2011)…and it goes on like that…so a fraction of your investment can go unredeemable.

Still confused …Let go...
So, please stay away from dividend reinvestment option while investing in tax saving ELSS.

Also read http://ideasmoney.blogspot.com/2006/11/tax-saving-elss-advantage.html

Mail from a Friend!!

When I logged into put up a post on this blog, I got a mail from my friend .........after a little thought .....decided to put it in this blog as a post.

Hi,No PVR Cinemas, No coffee day, No Barista, No S.L.V hotel, No Adigashotel, No theaters ...
(You know where to go and where not to go afterreading this mail...)
between 16-Nov-2006 and 15-Dec-2006.

Its not just a forward.

How many of you are ready to follow this?

(Below email "Save the IT People from Debts" was wonderful and we shouldgo through it and also forward to all our friends)

Real Estate price hike is known open robbery from IT guys by brokers /whoever it is and it's not only Flats / Real Estate, IT guys undergoopen robbery from all rich shop owners / a person who wanted to becomerich as fast as possible...

The salary whatever we get, it's our hard-earned money, most of thetimes sitting in the night, away from family functions, friends,etc...but all our money or most of the money are going to someone whojust takes advantage of our stressful life (both mentally andphysically) and our new western life style.

I do not find anything wrong in having a US / UK life style, but manyopen thieves (starting from Ministers to our local Restaurant owner)just swindling all our "legal money" and as we do not have any otherchoice becoming poor / debtor day by day.

Well most of the price hikes are just unbelievable and there isabsolutely no justification (few examples given below).
Chicken Biriyani - Rs. 65
Today (since last 2 weeks) same Chicken Biriyani (believe me, there isabsolutely no change) - Rs. 78,
there is no justification for such a bigincrease.

Pop Corn (PVR Complex) previously (month and half back) - Rs. 20
Today(almost the same quantity) - Rs. 30 (again, i do not find anyjustification)

Corn in Garuda Mall previously (month back) - Rs20 Small,
Rs30 Medium
and Rs40 High

Now, No "actual" small and real small has become 35 now and 45 forhigh...

[Are they the farmers who have given their blood to grow this.]
(In PVR complex, many price hikes are really too much for no reason...)

Chips packet (Gangotree) previously (three months back) - Rs. 15

Sincelast two Months the same packet costs - Rs. 20
(again, I do not find anyjustification)

Room Clean (just once) - Rs. 200, that's bcos they cleaned IT guys room.
(The moment you say that you are from Software company, the priceautomatically increases...)

We guys already pays big taxes from our salaries and goes on payingother taxes too (starting from Hotel Adiga's "Vada" to Scotch in abar), it's time to think and pledge ourselves that we stop spending justfor one month...

Reason(s) why we should stop spending alteast for a month:
1. 70% of the IT guys occupy the restaurants.
2. 80-90% of the IT guys goes to coffee shop, hang around places,bakeries, etc.
3. Most of the IT guys goes to PVR,Garuda complex for, Movies

If we stop going / spending just for a month, their businessautomatically goes down and they would have no other choice except tobring down the price, that's what happened when IT industry was downthree years back.

Somehow directly or indirectly we are responsible for this unjust pricehike and now, only we could prevent this open robberies, please add yourcomments or experiences and keep forwarding this email to all your knownpeople, I am sure even if 25% of us realizes and acts accordingly, itcould and would make lot of difference to us.

(let's try and prevent unjust price hike)

Save the IT People from Debts*

Property market in Year 2001 -2004 was quiet Ok , People were able tobuy Flats in reasonable rates .
*Year 2005 -2006 , Some of the well known builders started the ratesboom, flat which was at the cost of Rs.900 Sq Ft now became 2200 to2800

Q: Are there any additional facilities?

--> No Same Scheme/Area, Flat sold at 10 Lacks Now selling at 25 lacks.

Q: Why Property increased so High?

--> IT people competition to buy sweet home.

Q: Who is going to Benefit from this Property Boom?

--> Only Builders and some of the Politicians

Q: How is the Bank's support on Home Loans?

--> Last Year, Bank gave the loan's at flexible minimum rate,
Now Banks --> has sufficient number of customers, (Trap) Slowly Banker's increasing interst at % 0.5 every month.

IT People Who bought house for 22 Lacks for 20 Yrs, Now became 23 Yrswith raise of 0.5 %

Q. How some IT people can face the problems in Future?

--> Companies are Project Based; If Projects are not there then Peoplewill not be there.

Q. IT salaries are high in Market, How much actually IT-people gettingin Hand?

--> People, Who bought house of 22 Lacks to 40 Lacks They need to payEMI 15,000 to 35,000 for 20 Yrs. If Bank keeps same interest rates. Suppose Salary is 35- 40 K Per Month, 20K will be the EMI

Q. Is there any "Terms & Condition or Processes to increase rates"?

--> No , Depends on Buiders Greediness . Every builder follows thedifferent strategies Builder sold one flat 1500 Per Sqft in Morning and 1800 Per Sqftin the Evening , There are no records maintained.

Q. Who made builders smart & greedy?

--> Greedy IT people.No body is asking, Flat was sold at 12 Lacks, Why now 24 Lacks?

Q. Is Corporation water & MESB available to all schemes?

--> Some of the area don't have the Corporation water at all, Peoplesurviving on Water Tankers. ** MESB. Under Table, can be managed easily.

Q. What will be the condition If We are not able to Clear the Loan?-

-> Depends on individual capabilities

Q. What wiil be the actual 'area of living' or carpet area if thebuilder proposes 1000 sft?

...> The actual carpet area will be 800-850 sft only. The common area is also included in the proposal. If two flats are in the same floor, then the builder cheats boththe residents by collecting

How do Builders cheat buyers?

... Let us see with a simple example

Builder XXXX proposes a flat in a decent residential area. Rate ( Unit Price ) - Rs. 3500 sft. Registration - Rs. 40 per sft.
EB and drainage - Rs. 50,000
Covered Car park - Rs. 1,25,000
Corpus fund - Rs. 50000.

For a 1000 sft flat ( 850 sft carpet area ), the approximate cost willbe Rs.37,65,000. In the same plot area ( measuring 2 grounds) thebuilder would have constructed 8 or 10 flats.

Let us see how a builder earns his profit

Total sales for the builder - 37, 65,000 *10 = 3, 76, 50000 ( 3.76crores)
Cost of the land - Rs. 40 laks per ground
1) Total cost of the land - 80 lakhs for two ground
-------ATotal builtup area for 10 flats - 10*1000 sft = 10,000 sftConstruction cost per sft ( for normal specification) = Rs. 900 per sft

2) Total construction cost - 10,000 * 900 = Rs.90, 00,000-------------- B

3) Other expenses for the builder - Rs. 20 per sft = Rs.2, 00,000................ CTotal expenses for the builder = A+ B+C = Rs. 80, 00,000 + Rs.90,00,000 + Rs. 2, 00,00 = Rs. 1, 72, 00,000(1.72crores approx)
Total Sales = Rs. 3.76 crores - Rs. 1.72crores
Total profit of the builder = Rs. 2.04 crores.

Let us see the share of each resident
1. Cost of land = Divided share among the other 10 residents
= Rs. 80, 00,000 / 10 = Rs. 8, 00,000
2. Construction cost = Rs.900 * 1000 = Rs.9, 00,000
3. Other expenses = Rs.2, 00,000(approx)

Total = Rs.19, 00,000(Nineteen lakhs)

The total share for each resident is Rs.19, 00,000(Nineteen lakhs only)but he pays Rs.37.5laks for the flat.

Q. How we can stop Builders -Property Boom?
1) IT People should'nt think about buying flats for at least next1-2 Yrs .
2) Once rates are reasonable, with some legal process get theBooking.
3) Check Facilities, Convince, Road Approach, schools & Mainlyco-operation water
4) Ask Questions If I buy 1/2 BHK at 12 to 30Lacks, Do I getresale value in future?
5) Today you are capable for paying 1000 -3000 maintains per month?Will be the same case after 20-30yrs after retirement.
6) In All, Don't stretch more to get the more & more loans otherwise it will create unnecessary pressure and tension.
7) Read the above mentioned calculation carefully, when you areabout to buy a flat please keep this in mind.*

Send it to all you know*

Act quickly*

We can stop the inflation.

a rupee saved is a rupee earned :-)

Money - Journey

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You will soon see articles on earning, saving,and anything related to money on this site.

Thanks ,

Ideasmoney