5 mutual funds that you must own
January 22, 2007 10:50 IST
It's the start of a new year and maybe its time for investors to take a re-look at their mutual fund portfolios to ensure that they are invested in the right schemes. We outline the most "invest-worthy" equity fund schemes that investors should consider owning.
Given Personalfn's mutual fund research processes, the best funds for 2007 are unlikely to be very different from those we recommended in 2006. Its because our view on a fund is crystallised after considerable deliberation that involves scrutinising the fund's performance over the long-term (minimum 3 years, although with some exceptions, many of our recommendations have established themselves over close to 10 years) and even then over several market cycles, particularly the downturns.
Performance of course is the concluding point for us. We begin with the sponsor, the credibility it commands, fund management philosophy of the fund house, its investment approach and processes, whether it promotes a steady, team-based approach as opposed to a volatile, fund manager-based approach. This forms the first line of evaluation for us; if a fund house redeems itself on these parameters then we migrate to performance.
At Personalfn, in a lot of instances we come across clients with a high risk appetite who believe that the best way to invest is to stack your portfolio with as many mutual funds (or stocks) as possible. The idea is that there is safety in numbers so by being 'well-diversified' you can cover all your bases.
To counter the diversification rational we have a quote from Warren Buffet, arguably the leading authority on investments � 'Diversification is a protection against ignorance. It makes very little sense for those who know what they are doing'. So rather than populate your portfolio with every second NFO (new fund offer), it makes imminent sense to invest some time researching mutual funds so as to pick the best funds. The Personalfn Research Team has selected the 5 diversified equity funds that investors with an appetite for risk must own.
Go for the tried and tested
Diversified Equity Funds NAV (Rs) 1-Yr (%) 3-Yr (%) 5-Yr (%) Since
Incep. (%) SD (%) SR (%) Launch Date
DSP ML Equity 45.29 51.6 47.2 46.7 28.9 8.35 0.41 Apr-97
DSP ML Opp. (G) 56.00 51.6 46.5 50.5 32.4 7.92 0.41 May-00
Franklin Flexi Cap (G) 20.95 48.0 - - 52.6 7.98 0.43 Mar-05
HDFC Top 200 (G) 109.47 43.8 45.3 49.9 35.8 7.28 0.43 Oct-96
Sundaram Select Midcap (G) 90.42 67.2 56.1 - 66.1 7.56 0.52 Jul-02
BSE Sensex 54.9 38.2 32.0
. DSP ML Opportunities Fund
DSP ML Opportunities Fund is an equity fund managed with a free flowing investment style, popularly known as an 'opportunities style' of investing. Launched in May 2000, it began poorly by making aggressive, ill-advised investments in technology stocks, but a change in the fund management team was just what the fund needed to effect a change in fortunes.
Although, an opportunities fund, DMLOF is probably one of the more conservatively managed, predominantly large cap diversified equity funds. It pursues a well-diversified investment strategy across stocks and sectors and is far from opportunistic given the consistency in its stock picks.
More than the fund, this is the mainstay of the well-defined investment processes and approach of the asset management company - DSP Merrill Lynch Fund Managers, a respectable name in the fund management business. The conservative fund management philosophy of the AMC is the reason we did not see any gimmicks being launched in the guise of NFOs when most other AMCs were gripped by the NFO frenzy.
In our view, investors with looking to invest in a well-managed, opportunities style, diversified equity fund with a large cap bias should invest in DMLOF.
2. DSP ML Equity Fund
Coming from the same pedigree as DSP ML Opportunities Fund explains DSP ML Equity Fund's (DMEF) steady track record as a well-managed value-style diversified equity fund.
The value style of investing, a popular investment approach in developed markets like the US, is lesser-known in the Indian context. This style involves investing in fundamentally strong companies that are trading at a discount to their fair values till such a time that their stock prices are fully valued. This is a departure from the growth style of investing, which involves investing in fairly valued companies in the hope that stock prices will rise even further.
DMEF scouts for value picks mainly among large cap companies. True to the investment approach of the fund house, it is well-diversified across stocks and sectors. Among its limited peer group, it has usually maintained an edge over competition by providing higher absolute and risk-adjusted returns.
In our view, DMEF is the first stop for investors looking for a well-managed value fund in the large cap segment.
3. Franklin India Flexicap Fund
An equity fund with as limited a tenure as Franklin India Flexicap Fund (launched in January 2005) would not usually have figured so high on our Research Team's list of recommendations. But FIFF is no ordinary fund; it is backed by a fund management team headed by K.N. Sivasubramanian and R. Sukumar, two very experienced fund managers who have given us Franklin India Bluechip and Franklin India Prima.
Both these funds, would normally have occupied the slot that FIFF now occupies, but as we mentioned right at the start, when we can do with one fund, we would not like to have two.
Franklin Flexicap was launched with a mandate to help it overcome the limitations of its illustrious predecessors (Franklin India Bluechip and Franklin India Prima). So unlike them, it can invest in companies regardless of the market capitalisation. So far, the fund has maintained a predominantly large cap portfolio recognising the risks of being over invested in mid caps.
In our view, investors looking for a fund that can invest freely across market capitalisation should invest in FIFF given the impressive track record of the fund management team that is managing it.
4. HDFC Top 200 Fund
Talk of well-managed diversified equity funds and HDFC Top 200 Fund emerges as an obvious option. The reasons are obvious - over the years HTF has established an impressive track record across time frames and parameters related to risk and return.
HTF has undergone a long journey from ITC Threadneedle to Zurich India Mutual Fund finally resting with HDFC Mutual Fund, one of the more respectable names in the AMC business. But a constant with the fund, for most of its existence, has been Mr. Prashant Jain, one of the more competent fund managers, who has directly or indirectly managed the fund. It was under him that HTF made the timely decision to exit technology stocks before the crash in March 2000.
HTF is one the earliest proponents of the index-plus investing style. It is mandated to invest at least 60% of its net assets in stocks drawn from the BSE 200. The fund is invested predominantly in large cap companies. It pursues a relatively well-diversified strategy as far as stocks are concerned but takes sectoral bets to score above-average returns.
In our view, investors looking for a fund that has consistently generated above-average returns at lower risk, must invest in HTF.
5. Sundaram BNP Paribas Select Midcap Fund
Having selected the regular large cap/flexi cap equity funds, it is time to move to a 'niche' fund that can give a boost to your portfolio. Look at Sundaram BNP Paribas Select Midcap for that edge.
Only 4 years in business and SSM has already assumed leadership position in this segment. Managed by Sundaram BNP Paribas Mutual Fund (a fund house known largely for its conservative investment style), SSM has adopted two measures to lower the risk in a relatively high risk segment.
For one, it diversifies its portfolio to include as many as 100 stocks. And two - it moves into cash (upto a maximum of 35 per cent of net assets) when it finds the market at uncomfortable levels. This particular feature held the fund in good stead during the crash in May 2006 when its fully invested peers witnessed significant erosion.
On the flipside, this has worked against SSM over the last few months when its peers have made the most of the rally from 9,000 points to 14,000 points, while it has been sitting on cash (31 per cent on October 31, 2006). However, over a market cycle, we believe SSM will still come out tops vis-a-vis its peers.
In our view, investors looking for a well-managed mid cap fund that has shown consistency in performance across parameters (related to risk and return) must invest in SSM.
Having selected the 5 funds is only one part of the investment process. The other and equally important step is to invest in the funds in the right allocation so as to make the most of what they have to offer investors. For instance, an investor with an appetite for risk who wants to avoid short-term volatility must consider investing a larger amount in HDFC Top 200 than Sundaram Select Midcap.
For the high risk investor, it could be the reverse. To add that element of customisation in your investment plan, you must get in touch with an experienced and competent financial planner
Sunday, January 21, 2007
Friday, January 12, 2007
How to benefit from HRA
Kairav Shah in New Delhi January 09, 2007 08:22 IST
Buying a house is probably one of the single biggest investments one makes in a lifetime. In today's complex financial market, buying a property requires a thorough knowledge of real estate. Also it is difficult to choose an appropriate loan given the intense competition in the home loan market.
Today, a 30-year-old professional can put down a deposit of 10 per cent of the cost of a house and easily raise a 15-year mortgage loan.
The home loan market in India is also growing at a rate of over 40 per cent over the last four years. The most important factor that has contributed to the growth is declining interest rates.
Here we can highlight two-way benefits on HRA (house rent allowance) along with home loans.
What is HRA?
It is an allowance given by an employer to an employee. The sole purpose of which is to meet the cost of renting a home.
Here, we hope to clear the concepts of HRA:
Please note, when we refer to salary in this article, it encompasses basic component and the dearness allowance.
You can claim HRA if you fulfil these three conditions:
HRA allowance as part of your salary package.
Staying in a rented accommodation and paying rent for it.
The rent exceeds 10 per cent of one's salary.
You can claim rent given to parents:
Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.
One cannot claim rent paid to spouse:
The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So the income tax authorities will not accept payment of rent to a spouse.
One will need to keep all rent receipts:
Since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement.
However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.
But it is wise to still keep them because, "at the time of assessment, the income-tax officer may demand the receipts/ agreement."
The actual HRA you will be entitled to get exemption for will be the least of the following:
The actual amount of HRA received.
40 per cent of salary. This increases to 50 per cent if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
Rent paid minus 10 per cent of salary (basic component + dearness allowance).
The HRA that does not get exempted is taxed:
Let's see how it works with an example (TABLE I).
Table I
ASSUMPTIONS
HRA per month
Rs 15,000
Basic monthly salary
Rs 30,000
Dearness Allowance
Nil
Monthly rent
Rs 12,000
TABLE II: Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.
RENTAL ACCOMMODATION IN MUMBAI
Actual amount of HRA
Rs 15,000
50% of salary
50% x (30,000 + 0) = Rs 15,000
Actual rent paid - 10% of salary
Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000 = Rs 9,000
If you took a home loan for a home in one city but reside in another you will be entitled to:
Tax benefit on Principal repayment under Section 80C
Tax benefit on Interest payment under Section 24
HRA benefit 10(13 A)
Or, even if the home is in the same city but is not ready forcing you to rent a place, you will still be entitled to all the above benefits.
Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops.
If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above.
However, in this case, the rent you receive would be considered as your taxable income.
Let's say you took a home loan and have bought a home but are not residing in it:
It could be that the home is at a considerable distance from your work place. Or, it could be that the home is rather small and your parents are living in it so you have to stay elsewhere.
Though your rental accommodation and home are in the same city, you can still get all the benefits.
Tax benefit on principal repayment under Section 80C as deduction of income
Tax benefit on interest payment under Section 24. Under the head of house property
HRA benefit under the head of salaries
However, it is necessary you have some of your belongings at your home (the one you own) and you stay there on and off on during weekends and holidays.
Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns.
Renting a house, on the other hand, is acceptable for the sake of convenience and financial constraints.
There are a few tax shelters available for rental payouts both for salaried employees by way of HRA deductions and for self-employed professionals under section 80GG.
However, the applicability is limited and there are some preconditions attached to it.
Thankfully, banks and housing finance companies are more than happy to finance our dreams -- no matter whether we are of any status or just another common man.
The writer is head, financial planning, Sykes & Ray Equities.
Buying a house is probably one of the single biggest investments one makes in a lifetime. In today's complex financial market, buying a property requires a thorough knowledge of real estate. Also it is difficult to choose an appropriate loan given the intense competition in the home loan market.
Today, a 30-year-old professional can put down a deposit of 10 per cent of the cost of a house and easily raise a 15-year mortgage loan.
The home loan market in India is also growing at a rate of over 40 per cent over the last four years. The most important factor that has contributed to the growth is declining interest rates.
Here we can highlight two-way benefits on HRA (house rent allowance) along with home loans.
What is HRA?
It is an allowance given by an employer to an employee. The sole purpose of which is to meet the cost of renting a home.
Here, we hope to clear the concepts of HRA:
Please note, when we refer to salary in this article, it encompasses basic component and the dearness allowance.
You can claim HRA if you fulfil these three conditions:
HRA allowance as part of your salary package.
Staying in a rented accommodation and paying rent for it.
The rent exceeds 10 per cent of one's salary.
You can claim rent given to parents:
Let's say you live with parents and pay them rent. This makes your parents the landlords. One of them will have to declare it in his/ her personal income tax return to prevent litigation in the future.
One cannot claim rent paid to spouse:
The relationship between a husband and wife is not commercial in nature; a husband and wife are supposed to stay together. So the income tax authorities will not accept payment of rent to a spouse.
One will need to keep all rent receipts:
Since it is the only proof that you are paying rent. HRA exemptions are only available on submission of rent receipts or the rent agreement.
However, if the HRA is up to Rs 3,000 per month, then receipts/ agreement is not mandatory. It is only when your HRA exceeds this amount that you will have to keep the receipts.
But it is wise to still keep them because, "at the time of assessment, the income-tax officer may demand the receipts/ agreement."
The actual HRA you will be entitled to get exemption for will be the least of the following:
The actual amount of HRA received.
40 per cent of salary. This increases to 50 per cent if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
Rent paid minus 10 per cent of salary (basic component + dearness allowance).
The HRA that does not get exempted is taxed:
Let's see how it works with an example (TABLE I).
Table I
ASSUMPTIONS
HRA per month
Rs 15,000
Basic monthly salary
Rs 30,000
Dearness Allowance
Nil
Monthly rent
Rs 12,000
TABLE II: Rs 9,000 being the least of the three amounts will be the exemption from HRA. The balance HRA of Rs 6,000 (15,000-Rs 9,000) is taxable.
RENTAL ACCOMMODATION IN MUMBAI
Actual amount of HRA
Rs 15,000
50% of salary
50% x (30,000 + 0) = Rs 15,000
Actual rent paid - 10% of salary
Rs 12,000 - [10% of (30,000 + 0)] = 12,000 - 3,000 = Rs 9,000
If you took a home loan for a home in one city but reside in another you will be entitled to:
Tax benefit on Principal repayment under Section 80C
Tax benefit on Interest payment under Section 24
HRA benefit 10(13 A)
Or, even if the home is in the same city but is not ready forcing you to rent a place, you will still be entitled to all the above benefits.
Of course, you can claim tax benefits on the home loan only if your home is ready to live in during that financial year. Once the construction on your home is complete, the HRA benefit stops.
If you took a home loan, got possession of the house, have rented it out and stay in a rented accommodation, you will be entitled to all the three benefits mentioned above.
However, in this case, the rent you receive would be considered as your taxable income.
Let's say you took a home loan and have bought a home but are not residing in it:
It could be that the home is at a considerable distance from your work place. Or, it could be that the home is rather small and your parents are living in it so you have to stay elsewhere.
Though your rental accommodation and home are in the same city, you can still get all the benefits.
Tax benefit on principal repayment under Section 80C as deduction of income
Tax benefit on interest payment under Section 24. Under the head of house property
HRA benefit under the head of salaries
However, it is necessary you have some of your belongings at your home (the one you own) and you stay there on and off on during weekends and holidays.
Despite this, if your employer does not agree and denies your tax benefits, you will have to claim it at the time of filing your tax returns.
Renting a house, on the other hand, is acceptable for the sake of convenience and financial constraints.
There are a few tax shelters available for rental payouts both for salaried employees by way of HRA deductions and for self-employed professionals under section 80GG.
However, the applicability is limited and there are some preconditions attached to it.
Thankfully, banks and housing finance companies are more than happy to finance our dreams -- no matter whether we are of any status or just another common man.
The writer is head, financial planning, Sykes & Ray Equities.
Saturday, January 6, 2007
12 small cap stocks with hidden value that you can invest in
Mohit Satyanand and Rajesh Kumar, Outlook Money January 05, 2007
In the last month of the year, the Kerala government inaugurated a state guesthouse in Mumbai. That a resolutely communist state should find it necessary to have a foot in the country's commercial capital is a sign of our times.
Over in West Bengal, Mamatadi is protesting that the communist-led state is bending too far backwards to broker a land deal for the House of Tatas. Clearly, even the followers of Karl Marx have begun to get it -- it's all about the Economy!
In the past few years as the political mood has changed, and restrictive economic policy has eased up, money has begun to flow into India, both as FDI (foreign direct investment), and from FII (foreign institutional investment).
The first kind comes from companies with expertise in specific areas, which want to bring both their capital and management talent to bear on India. The second kind is just like your money and mine, looking for returns from investing in shares of Indian companies.
Inflows from both FDI and FIIs have grown significantly during the year -- the former is up 128 per cent to Rs 28,378 crore ($6.3 billion) as of September 2006, and the latter 30 per cent to Rs 40,111 crore (Rs 401.11 billion) as of November.
The FDI numbers are still tiny compared to China, where foreign direct investment is about nine times as great, at $54.3 billion for the first eleven months of 2006. Portfolio investment into China, though, has not been as significant -- our stock markets are relatively more attractive to foreign institutional investors because our financial markets are considered more robust and sophisticated, and a greater proportion of our companies are listed on the stock markets.
Stock markets are 'hot'
In fact, FIIs have been active in the so-called 'emerging' economies across the globe, and if the Sensex has racked up 45 per cent gain this year, this is part of a world-wide trend, led by stocks in Peru, up 157 per cent for the year, Venezuela, at 123 per cent, and Russia up about 50 per cent.
FII money is considered 'hot', liable to turn tail at the slightest hint of trouble, as it did from our markets in May-June of 2006. While this could happen again, such developments will be temporary -- money seeks higher returns, which are most likely to come from economies with growing populations and an increased taste for the fruits of economic liberalisation.
In any case, Indian stock markets are not entirely dependent on foreign funds -- as markets have consistently appreciated since 2003, domestic investors have gradually increased their exposure to stock markets, encouraged by a wide range of mutual fund products.
Today, the total value of assets managed by Indian mutual funds (also called assets under management) stands at Rs 3,30,000 crore (Rs 3,300 billion), of which over Rs 9,000 crore (90 billion) is in equity funds. This represents less than four per cent of the capitalisation of shares listed on the National Stock Exchange, leaving lots of room for increased domestic participation in stock markets.
Success breeds success and, over time, even risk-averse Indian households will begin to compare consistent equity returns of 20 per cent plus with the seven to nine per cent in fixed-income investments.
Possible spoilers
The pressures of growth are beginning to create inflationary tendencies in the economy. On the one hand, the central bank is trying to fight these with higher interest rates, which could become a spoiler. On the other hand, the finance minister says inflation is to be expected in a high-growth scenario, thus aiming to create political space for him to manage the economy with somewhat looser fiscal control.
In this, he has been aided by an unexpected surge in tax collections, and by a reversal in global commodity prices. In May 2006, crude oil was at $78 a barrel and metals were at all-time highs. International sugar shortages drove shares of Indian sugar producers to new heights, and later in the year, wheat prices looked threatening. The other, less-discussed oils -- groundnut, coconut and palm -- too, saw price surges, putting pressure on margins of companies that use these for various purposes like food or soap.
Partly because of this, shares of these companies have been sticky, and are yet to fully regain their May highs. The good news, for the time being, seems to be that commodity prices are edging down. If the trend continues, it should augur well for FMCG companies, and for the economy as a whole.
Sector plays
If the economy continues to grow, and commodity prices remain under check, we will see a resurgence of interest in FMCG counters. One we particularly like is Britannia, which has recently seen lows for the year, around the Rs 1,050 to Rs 1,100 levels. But, with both sugar and wheat prices in retreat, it is clearly going to see better margins in the quarters to come.
Hindustan Lever, too, seems to be resurgent, with both growing margins and volumes, but the share price is subdued. This is part of a larger change in attitude -- in the past, FMCG counters were considered safe investments, with profits growing consistently year after year, though investors paid for this consistency with higher price-to-earning (PE) ratios. But, over the last three to four years, as other sectors have grown equally consistently, and with higher growth rates, their PE ratios have overtaken FMCG numbers.
IT companies, for example, deliver results ahead of expectations, quarter after quarter. In telecom too Bharti Airtel, has leapt into the top four of the market cap stakes.
Infrastructure and capital goods, too, have reaped the India growth dividend and seen unprecedented appreciation during the year -- Lakshmi Machine Works (LMW) is up 111 per cent, Thermax 100 per cent, and Crompton Greaves 90 per cent. Not to forget the real estate stocks, where an investment of Rs 10,000 in Unitech on 1 January 2006 would be worth Rs 2,83,845 at the time of writing.
This huge appetite for Indian equity is the greatest threat to stock market returns during the year -- when you end one year with the Nifty trading at over 22 times earnings, there is not much scope for higher PE multiples, and higher stock prices are going to depend largely on quarterly numbers. We see no reason to be pessimistic about these. Yet, in our quest for stock market returns, we believe there is another road to explore.
Lesser known stocks
As Indian stock markets surged consistently for the three years from May 2003 to May 2006, the retail investor felt left out. Scared by the astronomical prices of front-line stocks, he put his bets on the so-called penny stocks. As a result, small-cap indices grew almost 30 per cent in the first 20 weeks of 2006. When markets reversed, small caps went into stall mode, and fell 23 per cent in 20 days. They are yet to recover fully, and are still 14.65 per cent below their May highs.
If the economy continues to grow, as we believe it will, and unless there are huge reversals in stock markets, we believe there will be a gradual development of interest in small-cap stocks again, both by individual investors, as well as by fund managers looking for niche plays. Of course, there is a need for discrimination here, since the universe of small-cap stocks is enormous.
Looking for small cap value
In our search for hidden value in lesser-known stocks, we followed a rigorous, purely quantitative analysis:
Step 1. Since the relatively undiscovered stocks are most likely to be those of smaller companies, we looked at all the listed stocks with a market cap below Rs 500 crore (Rs 5 billion), but above Rs 50 crore (Rs 500 million) so as to filter out the least liquid stocks. This process yielded a total of 836 companies.
Step 2. Out of these, we selected those which looked to be the cheapest, namely those with a PE ratio of less than 15. We were now left with 405 companies.
Step 3. We now looked for consistent growth -- those that have seen profit after tax (PAT) grow by at least 15 per cent year-on-year for the last three years. This left us with the 12 companies profiled below.
This exercise is meant only as a starting point for deciding whether to invest in these companies. Small-cap stocks are typically more volatile than large caps, and present both higher risks and higher rewards.
If any of these stocks takes your fancy, we suggest you put only a small amount into it, and stay invested until wider buying interest develops.
1. Aegis Logistics: Incorporated in 1956, the company is in the specialised business of storage and handling of bulk items, especially oils, chemicals and petroleum. It has
consistently given its shareholders dividends, and is currently quoting at about Rs 140, well below its 2005 peak of over Rs 300.
2. Crew B.O.S. Products: A leading leather exporter, the company is also listed on Luxembourg stock exchange and has consistently paid dividends. It recently announced plans to issue preference shares to promoters, which will have the effect of diluting earnings per share (EPS).
3. Dewan Housing Finance Corp: In business since 1984, the share currently quotes at about 30 per cent below its highs in June 2006. It has recently expanded operations into the Gulf area to facilitate NRI investment in Indian housing.
4. Eastern Silk Industries: This Kolkata-based company was started in 1946. Its broad production range includes silk yarn, fabrics, embroidery and accessories.
5. GIC Housing Finance: Promoted in 1993 by General Insurance Corporation, the company is largely held by public sector insurance companies. Business has benefited from the current real estate boom, and as a bonus, the regular dividend of 15 per cent offers a high yield.
6. Jetking Infotrain: Incorporated in 1984, Jetking offers computer education through 60 centres -- company-owned and franchised. It specialises in hardware and networking education and readies students for direct entry into the job market.
7. RTS Power Corp: In operation since 1947, this manufacturer of electrical transformers and related products seems to have benefited from the recent infrastructure boom. It has also made a tentative foray into wind energy, with a 1.25-MW wind power plant at Dhule, Maharashtra.
8. Raj Rayon: In business since 1993, Raj Rayon recently set up a polyester yarn plant at Silvassa. It has paid 10 per cent dividend for the last two years, and currently trades at Rs 43, more than double its June-low of less than Rs 20, but a long way from the earlier high of Rs 81.
9. Shri Dinesh Mills: In operation for 70 years, the composite textile set up has recently entered into a joint venture with US-based company McGean Rohco Inc to produce speciality chemicals.
10. Surya Pharmaceutical: With four units in the tax-exempt areas of Himachal Pradesh, Surya focuses on penicillin and its derivatives. Other products include cephalosporins and anti-histamines. It exports over 50 per cent of its production.
11. Tricom India: Started in 1992, Tricom is an early entrant into the BPO business, specialising in electronic management of business documents for overseas clients. It recently announced a 1:1 bonus.
12. Vivimed Labs: Set up in 1988, Vivimed has a large product offering of healthcare products, including over the counter products. It also partners customers in synthesizing and developing new products.
In the last month of the year, the Kerala government inaugurated a state guesthouse in Mumbai. That a resolutely communist state should find it necessary to have a foot in the country's commercial capital is a sign of our times.
Over in West Bengal, Mamatadi is protesting that the communist-led state is bending too far backwards to broker a land deal for the House of Tatas. Clearly, even the followers of Karl Marx have begun to get it -- it's all about the Economy!
In the past few years as the political mood has changed, and restrictive economic policy has eased up, money has begun to flow into India, both as FDI (foreign direct investment), and from FII (foreign institutional investment).
The first kind comes from companies with expertise in specific areas, which want to bring both their capital and management talent to bear on India. The second kind is just like your money and mine, looking for returns from investing in shares of Indian companies.
Inflows from both FDI and FIIs have grown significantly during the year -- the former is up 128 per cent to Rs 28,378 crore ($6.3 billion) as of September 2006, and the latter 30 per cent to Rs 40,111 crore (Rs 401.11 billion) as of November.
The FDI numbers are still tiny compared to China, where foreign direct investment is about nine times as great, at $54.3 billion for the first eleven months of 2006. Portfolio investment into China, though, has not been as significant -- our stock markets are relatively more attractive to foreign institutional investors because our financial markets are considered more robust and sophisticated, and a greater proportion of our companies are listed on the stock markets.
Stock markets are 'hot'
In fact, FIIs have been active in the so-called 'emerging' economies across the globe, and if the Sensex has racked up 45 per cent gain this year, this is part of a world-wide trend, led by stocks in Peru, up 157 per cent for the year, Venezuela, at 123 per cent, and Russia up about 50 per cent.
FII money is considered 'hot', liable to turn tail at the slightest hint of trouble, as it did from our markets in May-June of 2006. While this could happen again, such developments will be temporary -- money seeks higher returns, which are most likely to come from economies with growing populations and an increased taste for the fruits of economic liberalisation.
In any case, Indian stock markets are not entirely dependent on foreign funds -- as markets have consistently appreciated since 2003, domestic investors have gradually increased their exposure to stock markets, encouraged by a wide range of mutual fund products.
Today, the total value of assets managed by Indian mutual funds (also called assets under management) stands at Rs 3,30,000 crore (Rs 3,300 billion), of which over Rs 9,000 crore (90 billion) is in equity funds. This represents less than four per cent of the capitalisation of shares listed on the National Stock Exchange, leaving lots of room for increased domestic participation in stock markets.
Success breeds success and, over time, even risk-averse Indian households will begin to compare consistent equity returns of 20 per cent plus with the seven to nine per cent in fixed-income investments.
Possible spoilers
The pressures of growth are beginning to create inflationary tendencies in the economy. On the one hand, the central bank is trying to fight these with higher interest rates, which could become a spoiler. On the other hand, the finance minister says inflation is to be expected in a high-growth scenario, thus aiming to create political space for him to manage the economy with somewhat looser fiscal control.
In this, he has been aided by an unexpected surge in tax collections, and by a reversal in global commodity prices. In May 2006, crude oil was at $78 a barrel and metals were at all-time highs. International sugar shortages drove shares of Indian sugar producers to new heights, and later in the year, wheat prices looked threatening. The other, less-discussed oils -- groundnut, coconut and palm -- too, saw price surges, putting pressure on margins of companies that use these for various purposes like food or soap.
Partly because of this, shares of these companies have been sticky, and are yet to fully regain their May highs. The good news, for the time being, seems to be that commodity prices are edging down. If the trend continues, it should augur well for FMCG companies, and for the economy as a whole.
Sector plays
If the economy continues to grow, and commodity prices remain under check, we will see a resurgence of interest in FMCG counters. One we particularly like is Britannia, which has recently seen lows for the year, around the Rs 1,050 to Rs 1,100 levels. But, with both sugar and wheat prices in retreat, it is clearly going to see better margins in the quarters to come.
Hindustan Lever, too, seems to be resurgent, with both growing margins and volumes, but the share price is subdued. This is part of a larger change in attitude -- in the past, FMCG counters were considered safe investments, with profits growing consistently year after year, though investors paid for this consistency with higher price-to-earning (PE) ratios. But, over the last three to four years, as other sectors have grown equally consistently, and with higher growth rates, their PE ratios have overtaken FMCG numbers.
IT companies, for example, deliver results ahead of expectations, quarter after quarter. In telecom too Bharti Airtel, has leapt into the top four of the market cap stakes.
Infrastructure and capital goods, too, have reaped the India growth dividend and seen unprecedented appreciation during the year -- Lakshmi Machine Works (LMW) is up 111 per cent, Thermax 100 per cent, and Crompton Greaves 90 per cent. Not to forget the real estate stocks, where an investment of Rs 10,000 in Unitech on 1 January 2006 would be worth Rs 2,83,845 at the time of writing.
This huge appetite for Indian equity is the greatest threat to stock market returns during the year -- when you end one year with the Nifty trading at over 22 times earnings, there is not much scope for higher PE multiples, and higher stock prices are going to depend largely on quarterly numbers. We see no reason to be pessimistic about these. Yet, in our quest for stock market returns, we believe there is another road to explore.
Lesser known stocks
As Indian stock markets surged consistently for the three years from May 2003 to May 2006, the retail investor felt left out. Scared by the astronomical prices of front-line stocks, he put his bets on the so-called penny stocks. As a result, small-cap indices grew almost 30 per cent in the first 20 weeks of 2006. When markets reversed, small caps went into stall mode, and fell 23 per cent in 20 days. They are yet to recover fully, and are still 14.65 per cent below their May highs.
If the economy continues to grow, as we believe it will, and unless there are huge reversals in stock markets, we believe there will be a gradual development of interest in small-cap stocks again, both by individual investors, as well as by fund managers looking for niche plays. Of course, there is a need for discrimination here, since the universe of small-cap stocks is enormous.
Looking for small cap value
In our search for hidden value in lesser-known stocks, we followed a rigorous, purely quantitative analysis:
Step 1. Since the relatively undiscovered stocks are most likely to be those of smaller companies, we looked at all the listed stocks with a market cap below Rs 500 crore (Rs 5 billion), but above Rs 50 crore (Rs 500 million) so as to filter out the least liquid stocks. This process yielded a total of 836 companies.
Step 2. Out of these, we selected those which looked to be the cheapest, namely those with a PE ratio of less than 15. We were now left with 405 companies.
Step 3. We now looked for consistent growth -- those that have seen profit after tax (PAT) grow by at least 15 per cent year-on-year for the last three years. This left us with the 12 companies profiled below.
This exercise is meant only as a starting point for deciding whether to invest in these companies. Small-cap stocks are typically more volatile than large caps, and present both higher risks and higher rewards.
If any of these stocks takes your fancy, we suggest you put only a small amount into it, and stay invested until wider buying interest develops.
1. Aegis Logistics: Incorporated in 1956, the company is in the specialised business of storage and handling of bulk items, especially oils, chemicals and petroleum. It has
consistently given its shareholders dividends, and is currently quoting at about Rs 140, well below its 2005 peak of over Rs 300.
2. Crew B.O.S. Products: A leading leather exporter, the company is also listed on Luxembourg stock exchange and has consistently paid dividends. It recently announced plans to issue preference shares to promoters, which will have the effect of diluting earnings per share (EPS).
3. Dewan Housing Finance Corp: In business since 1984, the share currently quotes at about 30 per cent below its highs in June 2006. It has recently expanded operations into the Gulf area to facilitate NRI investment in Indian housing.
4. Eastern Silk Industries: This Kolkata-based company was started in 1946. Its broad production range includes silk yarn, fabrics, embroidery and accessories.
5. GIC Housing Finance: Promoted in 1993 by General Insurance Corporation, the company is largely held by public sector insurance companies. Business has benefited from the current real estate boom, and as a bonus, the regular dividend of 15 per cent offers a high yield.
6. Jetking Infotrain: Incorporated in 1984, Jetking offers computer education through 60 centres -- company-owned and franchised. It specialises in hardware and networking education and readies students for direct entry into the job market.
7. RTS Power Corp: In operation since 1947, this manufacturer of electrical transformers and related products seems to have benefited from the recent infrastructure boom. It has also made a tentative foray into wind energy, with a 1.25-MW wind power plant at Dhule, Maharashtra.
8. Raj Rayon: In business since 1993, Raj Rayon recently set up a polyester yarn plant at Silvassa. It has paid 10 per cent dividend for the last two years, and currently trades at Rs 43, more than double its June-low of less than Rs 20, but a long way from the earlier high of Rs 81.
9. Shri Dinesh Mills: In operation for 70 years, the composite textile set up has recently entered into a joint venture with US-based company McGean Rohco Inc to produce speciality chemicals.
10. Surya Pharmaceutical: With four units in the tax-exempt areas of Himachal Pradesh, Surya focuses on penicillin and its derivatives. Other products include cephalosporins and anti-histamines. It exports over 50 per cent of its production.
11. Tricom India: Started in 1992, Tricom is an early entrant into the BPO business, specialising in electronic management of business documents for overseas clients. It recently announced a 1:1 bonus.
12. Vivimed Labs: Set up in 1988, Vivimed has a large product offering of healthcare products, including over the counter products. It also partners customers in synthesizing and developing new products.
Mutual funds: What 2007 has in store
Kayezad E. Adajania, Outlook Money January 05, 2007
In 2006, equity markets gave good returns, despite a cautionary warning. While the Sensex returned 45.9 per cent, diversified equity funds returned 32.2 per cent on an average.
This might sound like a poor show for mutual funds, but most of them have had a sizeable portion invested in mid-cap scrips that were volatile this year. The Sensex, on the other hand, is composed of only large, blue-chip companies.
If 2004 and 2005 were years of mid-cap-oriented funds, 2006 saw large-cap funds staging a comeback. Diversified equity funds that tilted their portfolios towards mid caps the past two years, sold off their mid-cap holdings and bought many large-cap scrips. So, while these schemes returned 32.2 per cent, mid-cap funds on an average returned 29.6 per cent.
Systematic investment plans doubled in 2006 from 75,000 accounts in December 2005 to around 150,000 accounts in November 2006. Debt funds continued their slump on account of volatile interest rates and returned 4.7 per cent on an average.
Up and Down
The Indian mutual fund industry grew 58 per cent, from Rs 2, 07,979 crore (Rs 2079.79 billion) in January to Rs 3,29,162 crore (Rs 3291.62 billion) in November 2006.
Benchmark Mutual Fund was the largest growing fund house. Its assets under management of Rs 1,267 crore (Rs 12.67 billion) in January, grew 606 per cent to Rs 8,951 crore (Rs 89.51 billion) in November.
Its growth was largely led by Bank BeES - a CNX Bank Index-linked ETF that grew 773 per cent from Rs 852.9 crore (Rs 8.53 billion) in January to Rs 7,446.5 crore (Rs 74.47 billion) in November.
Though much of its inflows came from foreign institutional investors, ETFs, in general, are gaining popularity among the retail investors too. An ETF scores over an index fund on account of lower costs and, hence, a low tracking error.
Sahara and Canbank Mutual Funds were the biggest losers in terms of AUM. While Sahara lost 56 per cent {from Rs 464 crore (Rs 4.64 billion) in January to Rs 203 crore (Rs 2.03 billion) in November}, Canbank dropped 19 per cent {from Rs 2,843 crore (Rs 28.43 billion) in January to Rs 2,305 crore (Rs 23.05 billion) in November}. Poor performance and inability to attract fund management talent were the common evils. 2007 may be tough on such fund houses as competition hots up with new fund houses expected to hit the market.
New schemes and fund houses. Thirty-eight new equity schemes were launched in 2006 and garnered around Rs 27,400 crore (Rs 274 billion). New categories of funds, like capital protection-oriented funds and equity derivative funds, were launched.
And just when we thought we had seen the last of sectoral funds, JM MF launched two sectoral equity schemes targeting the financial services and telecom sectors. The response, though, was weak. The rush for equity initial public offers saw Standard Chartered Mutual Fund launching an equity scheme that aimed to invest in such IPOs to make listing gains.
Three fund houses, OptiMix, Quantum and Lotus Mutual Funds, made a debut in the Indian market. While OptiMix is India's first specialised fund of funds house, Quantum is the country's first fund house to avoid the distributor route to sell its own schemes.
With fund distributors demanding fees as high as five per cent of the initial collection -that eventually goes out of your scheme's net asset value, it was a nice change to see a fund house daring to go it alone.
Quantum Equity Fund, its first offering, garnered mere Rs 11 crore (Rs 110 million), the third lowest collection by any equity fund this year. Only time will tell how far Quantum will succeed in its approach.
Some fanfare and many hiccups later, Lotus Mutual Fund finally launched two schemes - a tax-saving equity fund and a liquid fund. 2007 will be an acid-test year for this fund.
New laws. The Securities and Exchange Board of India's mutual fund guidelines completed 10 years in 2006. After much delay, Sebi also gave a nod to gold ETFs in October. The regulator is also close to issuing guidelines on real estate mutual funds, according to sources.
In April, Sebi banned open-ended mutual funds from charging the six per cent new fund offer expenses and its amortisation. Only closed-end funds were allowed to charge the NFO expenses.
This was a good step as many 'new' schemes that were actually just clones of the existing ones, were launched in order to charge the high NFO expenses, pass more commission to distributors and show higher inflows.
Sebi also empowered mutual fund trustees to certify that an NFO launched by the mutual fund is different from any of its existing ones. The intention was good, but there was a loophole - a closed-end fund is said to have a different characteristic from its open-ended peer even if their scheme objectives are the same.
Mutual funds exploited this and launched 12 closed-end equity funds that garnered Rs 8,400 crore (Rs 84 billion), up from nil in 2004.
Looking ahead
Realistic returns. Exercise caution going forward. Expect returns to be more realistic. Says Amitabh Chakraborty, business head, Brics Securities, "The Sensex will return around 10 to 12 per cent in 2007." Ignore short-term blips if you are in for the long haul. Expect diversified equity funds to outperform index funds in the long run. But if you want to avoid the fund manager's risk, go towards ETFs.
New funds and schemes. A total of 13 new fund houses are either waiting for Sebi's approval or have plans to enter the Indian mutual fund market. Expect more NFOs to hit the market. More capital protection schemes will be launched, as will India's first gold ETF. And, if Sebi issues REMF guidelines, we might just be able to see India's first REMF as well.
Opt for NFOs with care as fund houses and distributors have been known to play the 'Rs 10 NFO' myth. It is safer to invest in schemes that come with a proven track record.
Go SIP. Predicting which route the equity market will take is anybody's guess. Will 2007 see a correction or will the market remain bullish? In face of such volatile conditions, opt for SIPs if you want to invest in equity funds, especially for the long term. In this way your fixed monthly or quarterly investment in an equity fund will buy fewer units if the NAV is high, and more units if the NAV is low.
Try a systematic transfer plan if you have a lump sum to invest; you invest the entire amount in a liquid fund and instruct your fund house to transfer a fixed sum of money at periodic intervals to an equity fund of your choice. This way, your money earns on average of four to five per cent while it lies in the liquid fund (a good one to one and a half per cent more than what your savings bank account would give) and then earns equity-level returns on the sum transferred.
In 2006, equity markets gave good returns, despite a cautionary warning. While the Sensex returned 45.9 per cent, diversified equity funds returned 32.2 per cent on an average.
This might sound like a poor show for mutual funds, but most of them have had a sizeable portion invested in mid-cap scrips that were volatile this year. The Sensex, on the other hand, is composed of only large, blue-chip companies.
If 2004 and 2005 were years of mid-cap-oriented funds, 2006 saw large-cap funds staging a comeback. Diversified equity funds that tilted their portfolios towards mid caps the past two years, sold off their mid-cap holdings and bought many large-cap scrips. So, while these schemes returned 32.2 per cent, mid-cap funds on an average returned 29.6 per cent.
Systematic investment plans doubled in 2006 from 75,000 accounts in December 2005 to around 150,000 accounts in November 2006. Debt funds continued their slump on account of volatile interest rates and returned 4.7 per cent on an average.
Up and Down
The Indian mutual fund industry grew 58 per cent, from Rs 2, 07,979 crore (Rs 2079.79 billion) in January to Rs 3,29,162 crore (Rs 3291.62 billion) in November 2006.
Benchmark Mutual Fund was the largest growing fund house. Its assets under management of Rs 1,267 crore (Rs 12.67 billion) in January, grew 606 per cent to Rs 8,951 crore (Rs 89.51 billion) in November.
Its growth was largely led by Bank BeES - a CNX Bank Index-linked ETF that grew 773 per cent from Rs 852.9 crore (Rs 8.53 billion) in January to Rs 7,446.5 crore (Rs 74.47 billion) in November.
Though much of its inflows came from foreign institutional investors, ETFs, in general, are gaining popularity among the retail investors too. An ETF scores over an index fund on account of lower costs and, hence, a low tracking error.
Sahara and Canbank Mutual Funds were the biggest losers in terms of AUM. While Sahara lost 56 per cent {from Rs 464 crore (Rs 4.64 billion) in January to Rs 203 crore (Rs 2.03 billion) in November}, Canbank dropped 19 per cent {from Rs 2,843 crore (Rs 28.43 billion) in January to Rs 2,305 crore (Rs 23.05 billion) in November}. Poor performance and inability to attract fund management talent were the common evils. 2007 may be tough on such fund houses as competition hots up with new fund houses expected to hit the market.
New schemes and fund houses. Thirty-eight new equity schemes were launched in 2006 and garnered around Rs 27,400 crore (Rs 274 billion). New categories of funds, like capital protection-oriented funds and equity derivative funds, were launched.
And just when we thought we had seen the last of sectoral funds, JM MF launched two sectoral equity schemes targeting the financial services and telecom sectors. The response, though, was weak. The rush for equity initial public offers saw Standard Chartered Mutual Fund launching an equity scheme that aimed to invest in such IPOs to make listing gains.
Three fund houses, OptiMix, Quantum and Lotus Mutual Funds, made a debut in the Indian market. While OptiMix is India's first specialised fund of funds house, Quantum is the country's first fund house to avoid the distributor route to sell its own schemes.
With fund distributors demanding fees as high as five per cent of the initial collection -that eventually goes out of your scheme's net asset value, it was a nice change to see a fund house daring to go it alone.
Quantum Equity Fund, its first offering, garnered mere Rs 11 crore (Rs 110 million), the third lowest collection by any equity fund this year. Only time will tell how far Quantum will succeed in its approach.
Some fanfare and many hiccups later, Lotus Mutual Fund finally launched two schemes - a tax-saving equity fund and a liquid fund. 2007 will be an acid-test year for this fund.
New laws. The Securities and Exchange Board of India's mutual fund guidelines completed 10 years in 2006. After much delay, Sebi also gave a nod to gold ETFs in October. The regulator is also close to issuing guidelines on real estate mutual funds, according to sources.
In April, Sebi banned open-ended mutual funds from charging the six per cent new fund offer expenses and its amortisation. Only closed-end funds were allowed to charge the NFO expenses.
This was a good step as many 'new' schemes that were actually just clones of the existing ones, were launched in order to charge the high NFO expenses, pass more commission to distributors and show higher inflows.
Sebi also empowered mutual fund trustees to certify that an NFO launched by the mutual fund is different from any of its existing ones. The intention was good, but there was a loophole - a closed-end fund is said to have a different characteristic from its open-ended peer even if their scheme objectives are the same.
Mutual funds exploited this and launched 12 closed-end equity funds that garnered Rs 8,400 crore (Rs 84 billion), up from nil in 2004.
Looking ahead
Realistic returns. Exercise caution going forward. Expect returns to be more realistic. Says Amitabh Chakraborty, business head, Brics Securities, "The Sensex will return around 10 to 12 per cent in 2007." Ignore short-term blips if you are in for the long haul. Expect diversified equity funds to outperform index funds in the long run. But if you want to avoid the fund manager's risk, go towards ETFs.
New funds and schemes. A total of 13 new fund houses are either waiting for Sebi's approval or have plans to enter the Indian mutual fund market. Expect more NFOs to hit the market. More capital protection schemes will be launched, as will India's first gold ETF. And, if Sebi issues REMF guidelines, we might just be able to see India's first REMF as well.
Opt for NFOs with care as fund houses and distributors have been known to play the 'Rs 10 NFO' myth. It is safer to invest in schemes that come with a proven track record.
Go SIP. Predicting which route the equity market will take is anybody's guess. Will 2007 see a correction or will the market remain bullish? In face of such volatile conditions, opt for SIPs if you want to invest in equity funds, especially for the long term. In this way your fixed monthly or quarterly investment in an equity fund will buy fewer units if the NAV is high, and more units if the NAV is low.
Try a systematic transfer plan if you have a lump sum to invest; you invest the entire amount in a liquid fund and instruct your fund house to transfer a fixed sum of money at periodic intervals to an equity fund of your choice. This way, your money earns on average of four to five per cent while it lies in the liquid fund (a good one to one and a half per cent more than what your savings bank account would give) and then earns equity-level returns on the sum transferred.
Commodity trading guide
Rajesh Kumar, Outlook Money January 05, 2007
You may have your debt and equity funds in place, but investing in commodities could just be the one element to improve your portfolio. Commodity trading provides an ideal asset allocation, also helps you hedge against inflation and buy a piece of global demand growth.
In 2003, the ban on commodity trading was lifted after 40 years in India. Now, more and more people are interested in investing in this new asset class. While price fluctuations in the sector could get rather volatile depending on the category, returns are relatively higher.
However, as this is not a primary area of investment for most, there is a lot of apprehension about when and how to invest. Outlook Money seeks to answer some of these questions and help you assess a whole new turf for making money.
Why invest in commodities?
Commodities allow a portfolio to improve overall return at the same level of risk. Ibbotson Associates, a leading US-based authority on asset allocation estimates that commodities increased returns between 133 and 188 basis points, at no extra risk.
Who should invest?
Any investor who wants to take advantage of price movements and wishes to diversify his portfolio can invest in commodities. However, retail and small investors should be careful while investing in commodities as the swings are volatile and lack of knowledge may result in loss of wealth.
Investors must understand the demand cycles that commodities go through and should have a view on what factors may affect this. Ideally, you should invest in select commodities that you can analyse rather than speculate across products you have no idea about.
Investing in commodities should be undertaken as a kicker in your portfolio and not as the first destination for your money.
What is commodity trading?
It's an age-old phenomenon. Modern markets came up in the late 18th century, when farming began to be modernised. Though the trade's mechanisms have changed, the basics are still the same.
In common parlance, commodities means all types of products. However, the Foreign Currency Regulation Act (FCRA) defines them as 'every kind of movable property other than actionable claims, money and securities.'
Commodity trading is nothing but trading in commodity spot and derivatives (futures). If you are keen on taking a buy or sell position based on the future performance of agricultural commodities or commodities like gold, silver, metals, or crude, then you could do so by trading in commodity derivatives.
Commodity derivatives are traded on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). Gold, silver, agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that these exchanges deal in.
Trading in commodities futures is quite similar to equity futures trading. You could take a long position (where you buy a contract) or a short position (where you sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you take a long position and when prices are headed south you opt for a short position.
How big is the Indian commodity trading market as compared to other Asian markets?
The commodity market in India clocks a daily average turnover of Rs 12,000-15,000 crore (Rs 120-150 billion). The accumulative commodities derivatives trade value is estimated to have reached the equivalent of 66 per cent of the gross domestic product and the future will only see the percentage rising, says ICICI direct.com vice-president Kedar Deshpande.
What do you need to start trading?
Like equity markets, you have to fulfil the 'know your customer' norms with a commodity broker. A photo identification, PAN and proof of address are essential for registration. You will also have to sign the necessary agreements with the broker.
Is there a regulator for the commodity trading market?
The Forward Markets Commission is the regulatory body for the commodity market in India. It is the equivalent of the Securities and Exchange Board of India (Sebi), which protects the interests of investors in securities.
What kind of products can be listed on the commodity market?
All commodities produced in the agriculture, mineral and fossil sectors have been sanctioned for futures trading. These include cereals, pulses, ginned cotton, un-ginned
cotton, oilseeds, oils, jute, jute products, sugar, gur, potatoes, onions, coffee, tea, petrochemicals, and bullion, among others.
What are the risk factors?
Commodity trading is done in the form of futures and that throws up a huge potential for profit and loss as it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are similar to futures trading in equity markets.
A major difference is that the information availability on supply and demand cycles in commodity markets is not as robust and controlled as the equity market.
What are the factors that influence the commodity prices in the market?
The commodity market is driven by demand and supply factors and inventory, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices.
Variables like weather, social changes, government policies and global factors influence the balance.
What is the difference between directional trading and day trading?
The key difference between commodity markets and stock markets is the nature of products traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the prices of these commodities is low as supply goes up. There are traders who use these patterns to trade in the commodity market, and this is termed directional trading.
Day trading in commodity markets is no different from day trading in the equity market, where positions are bought in the morning and squared off by the end of the day.
Does commodity speculation affect agricultural income in India?
The vision for the commodity market in India is to reduce information asymmetry and make a robust market available to the end producer or farmer. It is also expected to balance out price information and give the producer a better price and a platform to hedge.
The futures market will allow the farmer to see the upside of the price over two to three months and help him decide where to sell.
How to keep updated?
Most commodity trading firms have a research team in place that prepares commodity charts and conducts detailed study on the trends of the commodity in question.
Investing strategies based on this research are usually provided to clients.
They usually provide daily market reports before the market opens and intra-day calls during trading hours, along with monthly and weekly research reports.
You may have your debt and equity funds in place, but investing in commodities could just be the one element to improve your portfolio. Commodity trading provides an ideal asset allocation, also helps you hedge against inflation and buy a piece of global demand growth.
In 2003, the ban on commodity trading was lifted after 40 years in India. Now, more and more people are interested in investing in this new asset class. While price fluctuations in the sector could get rather volatile depending on the category, returns are relatively higher.
However, as this is not a primary area of investment for most, there is a lot of apprehension about when and how to invest. Outlook Money seeks to answer some of these questions and help you assess a whole new turf for making money.
Why invest in commodities?
Commodities allow a portfolio to improve overall return at the same level of risk. Ibbotson Associates, a leading US-based authority on asset allocation estimates that commodities increased returns between 133 and 188 basis points, at no extra risk.
Who should invest?
Any investor who wants to take advantage of price movements and wishes to diversify his portfolio can invest in commodities. However, retail and small investors should be careful while investing in commodities as the swings are volatile and lack of knowledge may result in loss of wealth.
Investors must understand the demand cycles that commodities go through and should have a view on what factors may affect this. Ideally, you should invest in select commodities that you can analyse rather than speculate across products you have no idea about.
Investing in commodities should be undertaken as a kicker in your portfolio and not as the first destination for your money.
What is commodity trading?
It's an age-old phenomenon. Modern markets came up in the late 18th century, when farming began to be modernised. Though the trade's mechanisms have changed, the basics are still the same.
In common parlance, commodities means all types of products. However, the Foreign Currency Regulation Act (FCRA) defines them as 'every kind of movable property other than actionable claims, money and securities.'
Commodity trading is nothing but trading in commodity spot and derivatives (futures). If you are keen on taking a buy or sell position based on the future performance of agricultural commodities or commodities like gold, silver, metals, or crude, then you could do so by trading in commodity derivatives.
Commodity derivatives are traded on the National Commodity and Derivative Exchange (NCDEX) and the Multi-Commodity Exchange (MCX). Gold, silver, agri-commodities including grains, pulses, spices, oils and oilseeds, mentha oil, metals and crude are some of the commodities that these exchanges deal in.
Trading in commodities futures is quite similar to equity futures trading. You could take a long position (where you buy a contract) or a short position (where you sell it). Simply speaking, like in equity and other markets, if you think prices are on their way up, you take a long position and when prices are headed south you opt for a short position.
How big is the Indian commodity trading market as compared to other Asian markets?
The commodity market in India clocks a daily average turnover of Rs 12,000-15,000 crore (Rs 120-150 billion). The accumulative commodities derivatives trade value is estimated to have reached the equivalent of 66 per cent of the gross domestic product and the future will only see the percentage rising, says ICICI direct.com vice-president Kedar Deshpande.
What do you need to start trading?
Like equity markets, you have to fulfil the 'know your customer' norms with a commodity broker. A photo identification, PAN and proof of address are essential for registration. You will also have to sign the necessary agreements with the broker.
Is there a regulator for the commodity trading market?
The Forward Markets Commission is the regulatory body for the commodity market in India. It is the equivalent of the Securities and Exchange Board of India (Sebi), which protects the interests of investors in securities.
What kind of products can be listed on the commodity market?
All commodities produced in the agriculture, mineral and fossil sectors have been sanctioned for futures trading. These include cereals, pulses, ginned cotton, un-ginned
cotton, oilseeds, oils, jute, jute products, sugar, gur, potatoes, onions, coffee, tea, petrochemicals, and bullion, among others.
What are the risk factors?
Commodity trading is done in the form of futures and that throws up a huge potential for profit and loss as it involves predictions of the future and hence uncertainty and risk. Risk factors in commodity trading are similar to futures trading in equity markets.
A major difference is that the information availability on supply and demand cycles in commodity markets is not as robust and controlled as the equity market.
What are the factors that influence the commodity prices in the market?
The commodity market is driven by demand and supply factors and inventory, when it comes to perishable commodities such as agricultural products and high demand products such as crude oil. Like any market, the demand-supply equation influences the prices.
Variables like weather, social changes, government policies and global factors influence the balance.
What is the difference between directional trading and day trading?
The key difference between commodity markets and stock markets is the nature of products traded. Agricultural produce is unpredictable and seasonal. During harvesting season, the prices of these commodities is low as supply goes up. There are traders who use these patterns to trade in the commodity market, and this is termed directional trading.
Day trading in commodity markets is no different from day trading in the equity market, where positions are bought in the morning and squared off by the end of the day.
Does commodity speculation affect agricultural income in India?
The vision for the commodity market in India is to reduce information asymmetry and make a robust market available to the end producer or farmer. It is also expected to balance out price information and give the producer a better price and a platform to hedge.
The futures market will allow the farmer to see the upside of the price over two to three months and help him decide where to sell.
How to keep updated?
Most commodity trading firms have a research team in place that prepares commodity charts and conducts detailed study on the trends of the commodity in question.
Investing strategies based on this research are usually provided to clients.
They usually provide daily market reports before the market opens and intra-day calls during trading hours, along with monthly and weekly research reports.
How and Why of Investing in GOLD
The street to wealth in 2007 is certainly paved with gold. While equity, debt and real estate may form the core of your portfolio, investing in the yellow metal is an ideal money move this year, say experts.
Investing in gold comes without the drama of the stock markets, you do not have to track minute by minute price movements or be wary of what news flows will send a stock up or down. It also does not have the staidness of parking your money in long-term debt products.
Gold prices have been volatile, but well within ranges and though the metal has had a strong run in 2006 and prices were fairly high, analysts expect there will be a further appreciation. Outlook Money takes you through the hows and whys of investing in gold.
Why is 2007 a good year to buy gold? Every year is a good year for buying gold. It is a "defensive" investment in your portfolio and every penny you put into it is, well, worth its weight in gold, to borrow a clich�. The year 2007, however, promises much excitement in the gold (usually referred to as 'bullion') commodity market.
The key driver for gold prices is the gross mismatch between demand and supply. Indians are the biggest buyers of gold in the world. However, buyers in other large economies like Russia and China have also fallen for its lustre. In the last few months, demand has been at least 15 per cent more than supply, say experts. This is one force that will keep prices on an upward trajectory, they say.
Gold prices are linked to the strength of the dollar. With the dollar weakening and expected to continue doing so, the demand and price of gold would only rise. Central banks of several countries have started adding to their gold reserves. While China is certainly going to increase its bullion reserves and match that of other Organisation for Economic Cooperation and Development (OECD) countries, Russia is seeking to double its reserves and has started buying.
Latin American countries have also been steadily buying gold in the last few months. India also might be mulling a similar move. Former deputy governor of Reserve Bank of India, S S Tarapore, has stated the need for RBI to increase its bullion reserves as the share of gold in our forex reserves is down to 3.16 per cent.
The price of gold is expected to rise also because the cost of production is rising, says a Multi-Commodity Exchange (MCX) official. Moreover, activities in many African mines have reduced due to strife, adding to the low supply situation.
Price movements: The price of gold has been rather volatile, especially in the last six months. It is currently trading at $644 per ounce. Prices are expected to remain between $725-735 in the first quarter of 2007. There might be corrections and dip in prices, but analysts do not expect a sustained trend of falling prices in the bullion market.
However, the price of gold and the movements of the bullion markets are heavily correlated to global macro-economics. Any attempt to rationalise major currencies could affect the price of gold. Devaluation of the dollar, for now, is not imminent but a strong possibility.
The good news here is that, even if all these factors do come into play, analysts say that the price of gold would move sideways rather than drastically downwards. That's more than what you can say of equities!
What kind of gold should you buy? Gold can be bought in various forms and the decision should be based on the reason you need gold. If you see this purely as an investment, you can either buy it in the form of physical gold -- bars, biscuits and or coins or even in a dematerialised form.
For most Indians, gold purchases usually mean buying jewellery. This makes it the rare asset class that you can wear. However, the disadvantage of buying gold in the form of jewellery is that its resale is not always a profitable proposition.
For one, the jeweller discounts what you paid as 'making charges' or 'design charges' from the value of your jewellery. This shaves off a significant part (up to 40 per cent) of your investment. Its second disadvantage is that most jewellers do not give you cash in lieu of your gold. Instead they allow you to exchange it for gold -- jewellery or in a bar or coin form.
However, if your reason for buying gold is enjoying it and wearing it, never mind the value loss; go ahead and buy that necklace that has been calling out to you. However, gold bars and biscuits are ideal ways of investing in physical gold. These are priced at market value and can easily be exchanged for cash.
Though experts say that retail investments in gold should be in the physical form, the modern way to invest is buying dematerialised gold from a commodity exchange as this has its own advantages. The National Commodity & Derivatives Exchange (NCDEX) introduced 100 gram gold futures in November. With this, investors can take positions in gold and will have to give or take physical delivery on the contract's expiry.
The exchange also provides an easy avenue to enter and exit the market as he can always square off his position before the contract closes. Dematerialisation of gold eliminates risks related to physical storage and theft, reducing paper work and facilitating easy transfer of holdings through the electronic mode.
Where should you buy it from? There have been serious debates about the ideal places to buy gold from. This is especially relevant now as banks have also started retailing gold bars and coins to customers.
Bullion experts recommend that it is best to buy gold from a reputed jeweller. Banks that sell gold bars charge a premium as high as 15 per cent for providing you with a 'certificate of purity', but you are assured that the gold is pure. Leading jewellers in all cities also sell pure gold bars, but most do not give a certificate with it.
However, when it's time to sell your gold, the bank does not buy it back and the jeweller that you sell it to has no use for your certificate. You end up paying a premium for no real value addition.
If you buy gold bars or coins from reputed jewellers, not only do they buy it back from you, they also give you the prevailing market rate for it. Jewellers like Tribhovandas Bhimji Zaveri have their own certificates of purity, just in case that piece of paper makes you feel more secure.
In the dematerialised form, gold can only be bought in the commodity exchanges. But make sure your payments are made by cheques and don't forget to take a receipt.
Gold as fund: Gold can be used for wedding expenses or as wedding gifts for your children. It is best to gift gold rather than trying to sell it to meet other expenses. But, do not forget that sale of gold jewellery or bullion is taxable. The short-term (less than three years) rate is your marginal income tax and long-term (over three years) is 20 per cent with indexation.
It is evident that gold is an asset class that you can rarely go wrong with. However you look at it, gold dust is the colour of the New Year.
Investing in gold comes without the drama of the stock markets, you do not have to track minute by minute price movements or be wary of what news flows will send a stock up or down. It also does not have the staidness of parking your money in long-term debt products.
Gold prices have been volatile, but well within ranges and though the metal has had a strong run in 2006 and prices were fairly high, analysts expect there will be a further appreciation. Outlook Money takes you through the hows and whys of investing in gold.
Why is 2007 a good year to buy gold? Every year is a good year for buying gold. It is a "defensive" investment in your portfolio and every penny you put into it is, well, worth its weight in gold, to borrow a clich�. The year 2007, however, promises much excitement in the gold (usually referred to as 'bullion') commodity market.
The key driver for gold prices is the gross mismatch between demand and supply. Indians are the biggest buyers of gold in the world. However, buyers in other large economies like Russia and China have also fallen for its lustre. In the last few months, demand has been at least 15 per cent more than supply, say experts. This is one force that will keep prices on an upward trajectory, they say.
Gold prices are linked to the strength of the dollar. With the dollar weakening and expected to continue doing so, the demand and price of gold would only rise. Central banks of several countries have started adding to their gold reserves. While China is certainly going to increase its bullion reserves and match that of other Organisation for Economic Cooperation and Development (OECD) countries, Russia is seeking to double its reserves and has started buying.
Latin American countries have also been steadily buying gold in the last few months. India also might be mulling a similar move. Former deputy governor of Reserve Bank of India, S S Tarapore, has stated the need for RBI to increase its bullion reserves as the share of gold in our forex reserves is down to 3.16 per cent.
The price of gold is expected to rise also because the cost of production is rising, says a Multi-Commodity Exchange (MCX) official. Moreover, activities in many African mines have reduced due to strife, adding to the low supply situation.
Price movements: The price of gold has been rather volatile, especially in the last six months. It is currently trading at $644 per ounce. Prices are expected to remain between $725-735 in the first quarter of 2007. There might be corrections and dip in prices, but analysts do not expect a sustained trend of falling prices in the bullion market.
However, the price of gold and the movements of the bullion markets are heavily correlated to global macro-economics. Any attempt to rationalise major currencies could affect the price of gold. Devaluation of the dollar, for now, is not imminent but a strong possibility.
The good news here is that, even if all these factors do come into play, analysts say that the price of gold would move sideways rather than drastically downwards. That's more than what you can say of equities!
What kind of gold should you buy? Gold can be bought in various forms and the decision should be based on the reason you need gold. If you see this purely as an investment, you can either buy it in the form of physical gold -- bars, biscuits and or coins or even in a dematerialised form.
For most Indians, gold purchases usually mean buying jewellery. This makes it the rare asset class that you can wear. However, the disadvantage of buying gold in the form of jewellery is that its resale is not always a profitable proposition.
For one, the jeweller discounts what you paid as 'making charges' or 'design charges' from the value of your jewellery. This shaves off a significant part (up to 40 per cent) of your investment. Its second disadvantage is that most jewellers do not give you cash in lieu of your gold. Instead they allow you to exchange it for gold -- jewellery or in a bar or coin form.
However, if your reason for buying gold is enjoying it and wearing it, never mind the value loss; go ahead and buy that necklace that has been calling out to you. However, gold bars and biscuits are ideal ways of investing in physical gold. These are priced at market value and can easily be exchanged for cash.
Though experts say that retail investments in gold should be in the physical form, the modern way to invest is buying dematerialised gold from a commodity exchange as this has its own advantages. The National Commodity & Derivatives Exchange (NCDEX) introduced 100 gram gold futures in November. With this, investors can take positions in gold and will have to give or take physical delivery on the contract's expiry.
The exchange also provides an easy avenue to enter and exit the market as he can always square off his position before the contract closes. Dematerialisation of gold eliminates risks related to physical storage and theft, reducing paper work and facilitating easy transfer of holdings through the electronic mode.
Where should you buy it from? There have been serious debates about the ideal places to buy gold from. This is especially relevant now as banks have also started retailing gold bars and coins to customers.
Bullion experts recommend that it is best to buy gold from a reputed jeweller. Banks that sell gold bars charge a premium as high as 15 per cent for providing you with a 'certificate of purity', but you are assured that the gold is pure. Leading jewellers in all cities also sell pure gold bars, but most do not give a certificate with it.
However, when it's time to sell your gold, the bank does not buy it back and the jeweller that you sell it to has no use for your certificate. You end up paying a premium for no real value addition.
If you buy gold bars or coins from reputed jewellers, not only do they buy it back from you, they also give you the prevailing market rate for it. Jewellers like Tribhovandas Bhimji Zaveri have their own certificates of purity, just in case that piece of paper makes you feel more secure.
In the dematerialised form, gold can only be bought in the commodity exchanges. But make sure your payments are made by cheques and don't forget to take a receipt.
Gold as fund: Gold can be used for wedding expenses or as wedding gifts for your children. It is best to gift gold rather than trying to sell it to meet other expenses. But, do not forget that sale of gold jewellery or bullion is taxable. The short-term (less than three years) rate is your marginal income tax and long-term (over three years) is 20 per cent with indexation.
It is evident that gold is an asset class that you can rarely go wrong with. However you look at it, gold dust is the colour of the New Year.
Real Estate Prospects in six metros in the near future
Over the last two years or so, real estate prices in most metros have seen a sharp rise, with annual return of 30 per cent being quite common. Though there seems to be some steam left still, some experts predict that prices will either stabilise or fall in 2007.
If you plan to invest in 2007, remember that it is a high-risk game, requiring you to stomach up to a six-year price downturn. Next year, go for long-term bets, basically areas that will surely appreciate in the next 4-5 years courtesy infrastructural developments such as metros, roads, bridges and airports. We map the areas with great prospects for price appreciation in the six metros of Delhi & NCR, Kolkata, Hyderabad, Chennai, Bangalore and Mumbai.
1. DELHI & NCR
Infrastructure development in Delhi is giving access to places where even now people grow two righteous good crops a year. And those are just the places to grow your money.
Delhi Metro: In Dwarka in west Delhi, the connection has pushed up prices by about 75 per cent and a further increase of 15-20 per cent is expected in 2007, especially in sectors 2, 6, 7, 9, 10, 11, 12, 13 and 14. The eastern extreme, adjoining Noida, which will get connected by 2009, is seeing property prices along the Metro shooting up. In sectors that will house stations -- 15, 16, 18, 32 (city centre), the botanical garden and the golf course -- expect a rise of 20-25 per cent.
Says vice-president of Delhi-based Majestic Properties Abdul Bari: "The prices are Rs 4,000-5,000 per sq ft as of now." Sectors 19, 26, 39, 40, 41, 47, 50, 51, 61 and 62 are also expected to gain. "Once the Metro reaches Noida, the connecting corridors will see a rise of about 25-30 per cent," says S.K. Sayal, CEO, Alpha G Corp.
Taj Expressway: The road, connecting Noida to Agra, will divert traffic coming from the south and going north and north-west from going through the city. After work started on it, prices have risen from Rs 1,500-2,000 per sq ft to Rs 2,000-3,500 per sq ft in Greater Noida.
Once it becomes operational, prices could go up by 20-25 per cent. Meanwhile, Greater Noida is likely to see a population rise from 1,00,000 to 3,50,000 by next year. Also, developers like Unitech, Eldeco and the Ansals are coming up with residential projects there.
NH8 Expressway: This awaited project linking Dhaula Kuan in Delhi with Gurgaon has seen a time overrun. Even so, property prices around it have shot up to Rs 5,000-6,000 per sq ft.
2. KOLKATA
It is spreading out in the east and beyond Howrah in the west.
Rajarhat: Development of this new 5,000 hectare township in the north-east started about five years ago. From about Rs 1,400-1,500 per sq ft last year, rates have risen to Rs 2,400-2,850 per sq ft. "In six months down the line, the prices in East Kolkata will increase by another 15-20 per cent," says Rahul Todi of Bengal Sharachi. The average price in New Town next year is expected to be between Rs 2,800-3,300 per sq ft.
Beyond Howrah: Two township projects are pushing up land prices. The first is a West Bengal government plan to create a 5,000-acre township project in Dankuni, near Kolkata. "Land prices appreciated last year," says Abhijit Das, regional director, Trammell Crow Meghraj, Kolkata. "One cottah (720 sq ft) on the stretch from the second Hooghly bridge to Dankuni is at Rs 1.5 lakh-3 lakh (Rs 150,000-300,000) compared to Rs 15,000-40,000 a year back." The other is an integrated township, West International City. At present, prices here are ruling at Rs 19 lakh-85 lakh (Rs 1.9-8.5 million) for residences of 900-4,500 sq ft and are expected to rise 20 per cent in 2007.
Eastern Metropolitan Bypass (EMB): The 21-km road along the eastern rim of the city connects its northern and southern parts. Two seven-star projects by Delhi's DLF Group and Dubai's Emmar Group are on the anvil. Current rates are Rs 3,000-3,400 per sq ft and are expected to rise 15 per cent in 2007.
Baruipur-Sonarpur: Located in south of Kolkata, this is the venue of the Salim Group of Indonesia's 6,000-acre, multi-use township project and SEZ. Property prices have already been pushed up 15-20 per cent. "Garia, the Garia-EMB connector, south EMB, Sonarpur and Baruipur will get impacted," says Das. Current property rates: Rs 900-3,000 per sq ft.
3. BANGALORE
The city's infrastructure is creaking now. But it has big plans to bring it back to its former shape.
Outer Ring Road: Currently, the prices are pegged between Rs 3,500-4,000 per sq ft on the Outer Ring Road, connecting KR Puram to Hosur Road. The prices are expected to rise 15-20%.
Airport: The airport being built in Devanahalli, in the north, is to be completed by March 2008. "The prices there are at Rs 2,000 per sq ft now. A rise to Rs 3,000-4,000 per sq ft is expected in the next two to three years," says Bangalore-based Shivaram Malaka, executive director, Habitat Ventures.
"In strategically-located Hebbal, near Devanahalli, the residential prices are around Rs 3,400-3,500 per sq ft and could go up by 60-70 per cent by 2008, if the developments take place as planned," says Praveen Kumar, vice-president, Trammell Crow Meghraj, Bangalore.
Satellite townships: The government has proposed five satellite townships at Sathanur, Bidadi, Ramanagaram, Solur and Nandagudi. The announcement has pushed up land prices from Rs 4-8 lakh (Rs 400,000-800,000) per acre to Rs 15-20 lakh (Rs 1.5-2 million). Prices in the outer ring, which are Rs 3,500-4,000 per sq ft now will see a hike of 15-20 per cent.
Elevated expressway: It will connect Tumkur Road in the north to Hosur Road in the south. Price of land along the corridor has moved up. The Bengarhatta road, Kanakpura Road and Tumkur Road have already seen an increase in land prices up to 300 per cent in the last two to three years. The prices along Tumkur Road are Rs 2,000 per sq ft on an average.
IT Park: Whitefield became the IT hub after industries moved to other parts of Bangalore. The corridor stretches to Indiranagar, Koramangala and Hosur Road. While the location is witnessing lot of action in terms of development and property prices, the spill of prices is being seen at Hosur Road.
Currently the residential prices at Hosur Road are Rs 2,000-2,500 per sq ft and they will escalate 10-15 per cent next year if the development is steady. "In Whitefield, the prices are between Rs 2,400-2,700 per sq ft and are likely to see a rise of 20-30 per cent next year," says Kumar.
4. MUMBAI
From crowded trains to clogged drains, it has huge problems. But still prices are going up due to infrastructure improvements.
Trans Harbour Link: The most ambitious project, it will connect Uran to Shivri across the harbour and become operational in 2015. It should cut travel time from south Mumbai to the eastern suburbs as well as the planned SEZs around the area.
Mumbai Metro: The elevated MRTS link connecting Versova to Ghatkopar will push the prices 40-50 per cent in some areas over three to four years and is likely to start running in this time. This should give a price thrust in Saki Naka, Powaii, Kurla, Ghatkopar and West Andheri. "I expect to see 40-50 per cent rise in these areas in the next three-four years," says Kapoor.
5. HYDERABAD
The challenger to Bangalore's crown as IT capital of India is experiencing some smart realty price rallies.
IT corridor: Madhapur to the west of Hyderabad, and Gachibowli to the north-west are the IT hubs spurring a lot of residential real estate projects in that area. "The prices have shot up between Rs 2,500-3,500 per sq ft in Madhapur, 20-25 per cent high since last year," says Thirumal Govindraj of CB Richard Ellis, Chennai. In Gachiboli, the prices start from Rs 3,000 per sq ft.
International Airport: This is slated to come up early in 2008 at Shamshabad, south of the city. Some major locations getting impacted at Shamshabad are areas along NH-7and Srisailam Highway. The prices along the connecting corridors range between Rs 8,000-12,000 per sq yard. By next year, the land prices will see a hike of 50 per cent. Neighbourhood areas along the airport like Kottur and Tukkuguda are within the range of Rs 3,500-5,000 per sq yard. Mansanpally is commanding prices between Rs 8,000-9,000 per sq yard.
Outer Ring Road: After work starts on Outer Ring Road, prices could go up 20-25 per cent. "West, south and south-west side of Hyderabad will see the maximum impact," says N. Ananthanarayanan, regional director, Trammell Crow Meghraj, Chennai.
6. CHENNAI
This is one of the cities expecting a moderate growth of about 10 per cent.
IT and BPO buzz: The 20-km stretch of Old Mahabalipuram Road has been designated an IT corridor. The stretch, starting at Taramani and Perungudi and ending at Padur and Kelamakkam, has seen property prices spiralling up from Rs 900 per sq ft in 2003 to Rs 3,400 per sq ft in 2006. "The prices are expected to increase by 20-25 per cent next year," says Ananthanarayanan.
"Porur in west Chennai and GST Road in south-west Chennai are emerging peripheral locations and are abuzz with IT developments," says Ramesh Nair, director (Chennai), Jones Lang, LaSalle, India. The prevailing residential prices in Porur are Rs 1,800-2,000 per sq ft and they have appreciated by 20-25 per cent because of the IT developments along the Mount Poonamallee highway.
Along GST Road, the rate is Rs 1,400-2,200 per sq ft for residential property, which has increased by 20 per cent over the previous year because of Mahindra City, Arun Excello Foundation, and Shriram Gateway IT Parks.
If you plan to invest in 2007, remember that it is a high-risk game, requiring you to stomach up to a six-year price downturn. Next year, go for long-term bets, basically areas that will surely appreciate in the next 4-5 years courtesy infrastructural developments such as metros, roads, bridges and airports. We map the areas with great prospects for price appreciation in the six metros of Delhi & NCR, Kolkata, Hyderabad, Chennai, Bangalore and Mumbai.
1. DELHI & NCR
Infrastructure development in Delhi is giving access to places where even now people grow two righteous good crops a year. And those are just the places to grow your money.
Delhi Metro: In Dwarka in west Delhi, the connection has pushed up prices by about 75 per cent and a further increase of 15-20 per cent is expected in 2007, especially in sectors 2, 6, 7, 9, 10, 11, 12, 13 and 14. The eastern extreme, adjoining Noida, which will get connected by 2009, is seeing property prices along the Metro shooting up. In sectors that will house stations -- 15, 16, 18, 32 (city centre), the botanical garden and the golf course -- expect a rise of 20-25 per cent.
Says vice-president of Delhi-based Majestic Properties Abdul Bari: "The prices are Rs 4,000-5,000 per sq ft as of now." Sectors 19, 26, 39, 40, 41, 47, 50, 51, 61 and 62 are also expected to gain. "Once the Metro reaches Noida, the connecting corridors will see a rise of about 25-30 per cent," says S.K. Sayal, CEO, Alpha G Corp.
Taj Expressway: The road, connecting Noida to Agra, will divert traffic coming from the south and going north and north-west from going through the city. After work started on it, prices have risen from Rs 1,500-2,000 per sq ft to Rs 2,000-3,500 per sq ft in Greater Noida.
Once it becomes operational, prices could go up by 20-25 per cent. Meanwhile, Greater Noida is likely to see a population rise from 1,00,000 to 3,50,000 by next year. Also, developers like Unitech, Eldeco and the Ansals are coming up with residential projects there.
NH8 Expressway: This awaited project linking Dhaula Kuan in Delhi with Gurgaon has seen a time overrun. Even so, property prices around it have shot up to Rs 5,000-6,000 per sq ft.
2. KOLKATA
It is spreading out in the east and beyond Howrah in the west.
Rajarhat: Development of this new 5,000 hectare township in the north-east started about five years ago. From about Rs 1,400-1,500 per sq ft last year, rates have risen to Rs 2,400-2,850 per sq ft. "In six months down the line, the prices in East Kolkata will increase by another 15-20 per cent," says Rahul Todi of Bengal Sharachi. The average price in New Town next year is expected to be between Rs 2,800-3,300 per sq ft.
Beyond Howrah: Two township projects are pushing up land prices. The first is a West Bengal government plan to create a 5,000-acre township project in Dankuni, near Kolkata. "Land prices appreciated last year," says Abhijit Das, regional director, Trammell Crow Meghraj, Kolkata. "One cottah (720 sq ft) on the stretch from the second Hooghly bridge to Dankuni is at Rs 1.5 lakh-3 lakh (Rs 150,000-300,000) compared to Rs 15,000-40,000 a year back." The other is an integrated township, West International City. At present, prices here are ruling at Rs 19 lakh-85 lakh (Rs 1.9-8.5 million) for residences of 900-4,500 sq ft and are expected to rise 20 per cent in 2007.
Eastern Metropolitan Bypass (EMB): The 21-km road along the eastern rim of the city connects its northern and southern parts. Two seven-star projects by Delhi's DLF Group and Dubai's Emmar Group are on the anvil. Current rates are Rs 3,000-3,400 per sq ft and are expected to rise 15 per cent in 2007.
Baruipur-Sonarpur: Located in south of Kolkata, this is the venue of the Salim Group of Indonesia's 6,000-acre, multi-use township project and SEZ. Property prices have already been pushed up 15-20 per cent. "Garia, the Garia-EMB connector, south EMB, Sonarpur and Baruipur will get impacted," says Das. Current property rates: Rs 900-3,000 per sq ft.
3. BANGALORE
The city's infrastructure is creaking now. But it has big plans to bring it back to its former shape.
Outer Ring Road: Currently, the prices are pegged between Rs 3,500-4,000 per sq ft on the Outer Ring Road, connecting KR Puram to Hosur Road. The prices are expected to rise 15-20%.
Airport: The airport being built in Devanahalli, in the north, is to be completed by March 2008. "The prices there are at Rs 2,000 per sq ft now. A rise to Rs 3,000-4,000 per sq ft is expected in the next two to three years," says Bangalore-based Shivaram Malaka, executive director, Habitat Ventures.
"In strategically-located Hebbal, near Devanahalli, the residential prices are around Rs 3,400-3,500 per sq ft and could go up by 60-70 per cent by 2008, if the developments take place as planned," says Praveen Kumar, vice-president, Trammell Crow Meghraj, Bangalore.
Satellite townships: The government has proposed five satellite townships at Sathanur, Bidadi, Ramanagaram, Solur and Nandagudi. The announcement has pushed up land prices from Rs 4-8 lakh (Rs 400,000-800,000) per acre to Rs 15-20 lakh (Rs 1.5-2 million). Prices in the outer ring, which are Rs 3,500-4,000 per sq ft now will see a hike of 15-20 per cent.
Elevated expressway: It will connect Tumkur Road in the north to Hosur Road in the south. Price of land along the corridor has moved up. The Bengarhatta road, Kanakpura Road and Tumkur Road have already seen an increase in land prices up to 300 per cent in the last two to three years. The prices along Tumkur Road are Rs 2,000 per sq ft on an average.
IT Park: Whitefield became the IT hub after industries moved to other parts of Bangalore. The corridor stretches to Indiranagar, Koramangala and Hosur Road. While the location is witnessing lot of action in terms of development and property prices, the spill of prices is being seen at Hosur Road.
Currently the residential prices at Hosur Road are Rs 2,000-2,500 per sq ft and they will escalate 10-15 per cent next year if the development is steady. "In Whitefield, the prices are between Rs 2,400-2,700 per sq ft and are likely to see a rise of 20-30 per cent next year," says Kumar.
4. MUMBAI
From crowded trains to clogged drains, it has huge problems. But still prices are going up due to infrastructure improvements.
Trans Harbour Link: The most ambitious project, it will connect Uran to Shivri across the harbour and become operational in 2015. It should cut travel time from south Mumbai to the eastern suburbs as well as the planned SEZs around the area.
Mumbai Metro: The elevated MRTS link connecting Versova to Ghatkopar will push the prices 40-50 per cent in some areas over three to four years and is likely to start running in this time. This should give a price thrust in Saki Naka, Powaii, Kurla, Ghatkopar and West Andheri. "I expect to see 40-50 per cent rise in these areas in the next three-four years," says Kapoor.
5. HYDERABAD
The challenger to Bangalore's crown as IT capital of India is experiencing some smart realty price rallies.
IT corridor: Madhapur to the west of Hyderabad, and Gachibowli to the north-west are the IT hubs spurring a lot of residential real estate projects in that area. "The prices have shot up between Rs 2,500-3,500 per sq ft in Madhapur, 20-25 per cent high since last year," says Thirumal Govindraj of CB Richard Ellis, Chennai. In Gachiboli, the prices start from Rs 3,000 per sq ft.
International Airport: This is slated to come up early in 2008 at Shamshabad, south of the city. Some major locations getting impacted at Shamshabad are areas along NH-7and Srisailam Highway. The prices along the connecting corridors range between Rs 8,000-12,000 per sq yard. By next year, the land prices will see a hike of 50 per cent. Neighbourhood areas along the airport like Kottur and Tukkuguda are within the range of Rs 3,500-5,000 per sq yard. Mansanpally is commanding prices between Rs 8,000-9,000 per sq yard.
Outer Ring Road: After work starts on Outer Ring Road, prices could go up 20-25 per cent. "West, south and south-west side of Hyderabad will see the maximum impact," says N. Ananthanarayanan, regional director, Trammell Crow Meghraj, Chennai.
6. CHENNAI
This is one of the cities expecting a moderate growth of about 10 per cent.
IT and BPO buzz: The 20-km stretch of Old Mahabalipuram Road has been designated an IT corridor. The stretch, starting at Taramani and Perungudi and ending at Padur and Kelamakkam, has seen property prices spiralling up from Rs 900 per sq ft in 2003 to Rs 3,400 per sq ft in 2006. "The prices are expected to increase by 20-25 per cent next year," says Ananthanarayanan.
"Porur in west Chennai and GST Road in south-west Chennai are emerging peripheral locations and are abuzz with IT developments," says Ramesh Nair, director (Chennai), Jones Lang, LaSalle, India. The prevailing residential prices in Porur are Rs 1,800-2,000 per sq ft and they have appreciated by 20-25 per cent because of the IT developments along the Mount Poonamallee highway.
Along GST Road, the rate is Rs 1,400-2,200 per sq ft for residential property, which has increased by 20 per cent over the previous year because of Mahindra City, Arun Excello Foundation, and Shriram Gateway IT Parks.
Tuesday, January 2, 2007
One Way to Save Tax
Have you noticed ELSS (equity-linked savings scheme) funds are being launched left, right and centre? That insurance companies, not to be left behind, are busy with their single premium, multiple premium and premium back ULIP offerings? That financial dailies are awash with fixed deposit ads offering tax breaks?
Just like mangoes appear in summer, these products tend to emphasise their presence in and around December. For December is tax-planning season: a season when investors wake up to the rather unpleasant, but necessary, task of making investments to save tax.
But if you ask me, this is too much ado for a paltry Rs 30,000. And look at the number of products competing in the same space -- bank deposits, mutual funds, ULIPs (unit-linked insurance products), life insurance products, PPF, NSC and pension plans -- all vying for the aggregate limit of Rs 1 lakh (Rs 100,000) offered by Sec. 80C of the Income Tax Act. And this is not even considering mandatory cash flows like employees provident fund, home loan installments and children's tuition fees.
Which means that the maximum tax most people can save is Rs 30,000. Period.
If you happen to be in the highest tax bracket of 33 per cent, the amount is marginally higher at Rs 33,600. The lock-in period that the tax saving brings in its wake is another irritant. PPF (Public Provident Fund) or NSC (National Savings Certificate) means locking your money for six years. ELSS and ULIPs offer a marginally lower lock-in of 3 years, but you take equity risk with your hard earned money.
'No exit route' in an equity investment is not everyone's cup of tea. And most of all, the 30-odd thousand is hardly going to make a dent in the tax outgo for most investors.
So what's the solution? Does one be a mute spectator and accept the inevitable?
Well, perhaps not. In this article, we are going to discuss two tools that if used optimally can save you heavy taxes. Both when used simultaneously create such synergy in tax savings that it is really mind-boggling. Read on to know more.
The first tool is your basic tax threshold. Readers would know that the first Rs 1 lakh of income is exempt from tax. For non-senior ladies, the limit is Rs 135,000. And for senior citizens (65-plus) the limit is Rs 185,000.
So far, so good.
The second tool that works hand in hand with the first is known as Sec. 56 of the Income Tax Act.
Sec. 56 basically exempts cash gifts between relatives. Although there is a long list specified in the section of what constitutes 'relatives,' for our purposes, suffice it to know that as per the Income Tax Act, you, your parents, your brothers and sisters as well as your children are all relatives of each other.
Now in order to understand how these two tools can be used for some smart tax planning, let us take the example of one Mr Mehta who is 49 years of age.
He happens to be in a senior management job which puts him in the highest tax bracket. He has retired parents who live with him. His wife is a home maker. And he and his wife are also proud parents of an 18-year-old daughter and a 20-year-old son who are both studying in college.
Read Mr Mehta's profile once more if you must because it is important in our scheme of things. Also remember that some of the numbers that are going to be thrown up are astonishingly large. Don't get thrown off because of that.
This is just the power of these tools at work. You can use them at any income level to suit your particular situation. What is important is understanding the concept. . . individual numbers can always be plugged in.
Now Mr Mehta, like most of us, finds that all the tax saving investments in the world can help him save only Rs 33,600. That's not enough. His tax outgo is much more. Moreover, every rupee of post tax paid income that he invests in, say, RBI Bonds, Bank fixed deposits, Post Office MIS, et cetera, is subject to the highest rate of tax.
If he doesn't want to pay tax, he is forced to adopt market risk by investing in equity shares or mutual funds as long-term capital gains are tax-free. But this was hardly a solution.
He has found the stock market to be too whimsical for his liking -- while it gives a reasonably good return for a period of time, it also suddenly falls by around a 1,000 points in a couple of days. Already suffering from hypertension, no beta blocker in the world could prevent his pressure from outswinging the market.
It was at this delicate juncture that Mr Mehta was introduced to our tax planning tools by an old chartered accountant friend of his. This is what Mr Mehta did after his brief, but illuminating, chat with his friend.
He gifted Rs 21.25 lakh (Rs 2.125 million) to his father and a similar amount to his mother. Out of the gifted money, his father invested Rs 15 lakh (Rs 1.5 million) in the Senior Citizen Savings Scheme (SCSS). The balance Rs 6.25 lakh (Rs 625,000) was invested in RBI Savings Bonds.
His mother did the same.
Now what happened was the following. The SCSS yielded an interest of Rs 135,000 (9% of Rs 15 lakh). The RBI bonds yielded a return of Rs 50,000 (8% of Rs 6.25 lakh). The total interest earned by Mr Mehta's father was Rs 185,000. His mother too earned a similar amount.
However, not a penny of this was taxable as it is not beyond the initial tax slab available to senior citizens.
In one stroke, Mr Mehta, effectively made income from over Rs 42 lakh of capital tax-free in the family's hands. Realise that had Mr Mehta invested the funds himself, he would have paid full tax on it. However, since the gift was tax-free and the tax slab was available, this strategy could be put to work.
Now, Mr Mehta finds that his children have some time to go before they start earning. His daughter can earn up to Rs 135,000 without having to pay tax, while his son can earn Rs 100,000 without having to pay tax. But they aren't earning as of now, are they? They are studying and will continue to do so for the next five to seven years.
So what does he do? He gifts them around Rs 17 lakh (Rs 1.7 million) and Rs 12.50 lakh (Rs 1.25 million), respectively. This money in turn they invest in the 8% RBI Bonds. Rs 17 lakh earns Mr Mehta's daughter around Rs 135,000. Of course, as explained earlier, no tax would be payable. Now you can work out the math for yourself in case of Mr Mehta's son.
In effect, by using two simple tools that the Income Tax Act offers, Mr Mehta had managed to make almost Rs 6 lakh (Rs 600,000) of income tax-free for the family. Putting it differently, over Rs 71 lakh (Rs 7.1 million) of capital was deployed, however, the income therefrom was totally tax-free.
Now admittedly, Mr Mehta is an extremely rich man. He had Rs 70 lakh (Rs 7 million) to spare in the first place before trying to make it tax-free. Not everyone will have this kind of money.
However, the example given is an optimal one. You can use a similar strategy with the funds at your disposal and the benefit you derive will be proportional. In other words, it is not an all or none strategy. . . use it to the best of your ability.
Also note that Mr Mehta's profile was an ideal one. A man working in the highest tax bracket with retired parents having no income of their own and two major children who are still studying. Again, not every taxpayer will have a similar profile. You father may have income of his own, but your mom may not be working. Or your children may be earning already. However, the point is to use that particular element in the equation which applies in your case directly. The rest can't be helped.
Note that we have left Mr Mehta's home maker wife out of the picture. There are reasons for this -- the Act specifies that any income earned out of money gifted to spouse is added back to the donor's income for tax purposes. There are ways out of this too, but that is the topic for another column.
Last point
Beyond a point (barring ideas such as discussed above), tax saving is not possible. The worst mistake any investor could make is to invest with the primary objective of saving tax. The question to ask is would you have made the investment if it didn't offer tax saving? If the answer is no, don't touch the investment. It is better to try and optimise post-tax income instead of making a sub-optimal investment just to save on tax.
Or like Donald Trump says, some of your best investments are the ones that you don't make.
The writer is Director A N Shanbhag NR Group, a tax and investment advisory firm. He may be contacted at sandeep.shanbhag@gmail.com
Just like mangoes appear in summer, these products tend to emphasise their presence in and around December. For December is tax-planning season: a season when investors wake up to the rather unpleasant, but necessary, task of making investments to save tax.
But if you ask me, this is too much ado for a paltry Rs 30,000. And look at the number of products competing in the same space -- bank deposits, mutual funds, ULIPs (unit-linked insurance products), life insurance products, PPF, NSC and pension plans -- all vying for the aggregate limit of Rs 1 lakh (Rs 100,000) offered by Sec. 80C of the Income Tax Act. And this is not even considering mandatory cash flows like employees provident fund, home loan installments and children's tuition fees.
Which means that the maximum tax most people can save is Rs 30,000. Period.
If you happen to be in the highest tax bracket of 33 per cent, the amount is marginally higher at Rs 33,600. The lock-in period that the tax saving brings in its wake is another irritant. PPF (Public Provident Fund) or NSC (National Savings Certificate) means locking your money for six years. ELSS and ULIPs offer a marginally lower lock-in of 3 years, but you take equity risk with your hard earned money.
'No exit route' in an equity investment is not everyone's cup of tea. And most of all, the 30-odd thousand is hardly going to make a dent in the tax outgo for most investors.
So what's the solution? Does one be a mute spectator and accept the inevitable?
Well, perhaps not. In this article, we are going to discuss two tools that if used optimally can save you heavy taxes. Both when used simultaneously create such synergy in tax savings that it is really mind-boggling. Read on to know more.
The first tool is your basic tax threshold. Readers would know that the first Rs 1 lakh of income is exempt from tax. For non-senior ladies, the limit is Rs 135,000. And for senior citizens (65-plus) the limit is Rs 185,000.
So far, so good.
The second tool that works hand in hand with the first is known as Sec. 56 of the Income Tax Act.
Sec. 56 basically exempts cash gifts between relatives. Although there is a long list specified in the section of what constitutes 'relatives,' for our purposes, suffice it to know that as per the Income Tax Act, you, your parents, your brothers and sisters as well as your children are all relatives of each other.
Now in order to understand how these two tools can be used for some smart tax planning, let us take the example of one Mr Mehta who is 49 years of age.
He happens to be in a senior management job which puts him in the highest tax bracket. He has retired parents who live with him. His wife is a home maker. And he and his wife are also proud parents of an 18-year-old daughter and a 20-year-old son who are both studying in college.
Read Mr Mehta's profile once more if you must because it is important in our scheme of things. Also remember that some of the numbers that are going to be thrown up are astonishingly large. Don't get thrown off because of that.
This is just the power of these tools at work. You can use them at any income level to suit your particular situation. What is important is understanding the concept. . . individual numbers can always be plugged in.
Now Mr Mehta, like most of us, finds that all the tax saving investments in the world can help him save only Rs 33,600. That's not enough. His tax outgo is much more. Moreover, every rupee of post tax paid income that he invests in, say, RBI Bonds, Bank fixed deposits, Post Office MIS, et cetera, is subject to the highest rate of tax.
If he doesn't want to pay tax, he is forced to adopt market risk by investing in equity shares or mutual funds as long-term capital gains are tax-free. But this was hardly a solution.
He has found the stock market to be too whimsical for his liking -- while it gives a reasonably good return for a period of time, it also suddenly falls by around a 1,000 points in a couple of days. Already suffering from hypertension, no beta blocker in the world could prevent his pressure from outswinging the market.
It was at this delicate juncture that Mr Mehta was introduced to our tax planning tools by an old chartered accountant friend of his. This is what Mr Mehta did after his brief, but illuminating, chat with his friend.
He gifted Rs 21.25 lakh (Rs 2.125 million) to his father and a similar amount to his mother. Out of the gifted money, his father invested Rs 15 lakh (Rs 1.5 million) in the Senior Citizen Savings Scheme (SCSS). The balance Rs 6.25 lakh (Rs 625,000) was invested in RBI Savings Bonds.
His mother did the same.
Now what happened was the following. The SCSS yielded an interest of Rs 135,000 (9% of Rs 15 lakh). The RBI bonds yielded a return of Rs 50,000 (8% of Rs 6.25 lakh). The total interest earned by Mr Mehta's father was Rs 185,000. His mother too earned a similar amount.
However, not a penny of this was taxable as it is not beyond the initial tax slab available to senior citizens.
In one stroke, Mr Mehta, effectively made income from over Rs 42 lakh of capital tax-free in the family's hands. Realise that had Mr Mehta invested the funds himself, he would have paid full tax on it. However, since the gift was tax-free and the tax slab was available, this strategy could be put to work.
Now, Mr Mehta finds that his children have some time to go before they start earning. His daughter can earn up to Rs 135,000 without having to pay tax, while his son can earn Rs 100,000 without having to pay tax. But they aren't earning as of now, are they? They are studying and will continue to do so for the next five to seven years.
So what does he do? He gifts them around Rs 17 lakh (Rs 1.7 million) and Rs 12.50 lakh (Rs 1.25 million), respectively. This money in turn they invest in the 8% RBI Bonds. Rs 17 lakh earns Mr Mehta's daughter around Rs 135,000. Of course, as explained earlier, no tax would be payable. Now you can work out the math for yourself in case of Mr Mehta's son.
In effect, by using two simple tools that the Income Tax Act offers, Mr Mehta had managed to make almost Rs 6 lakh (Rs 600,000) of income tax-free for the family. Putting it differently, over Rs 71 lakh (Rs 7.1 million) of capital was deployed, however, the income therefrom was totally tax-free.
Now admittedly, Mr Mehta is an extremely rich man. He had Rs 70 lakh (Rs 7 million) to spare in the first place before trying to make it tax-free. Not everyone will have this kind of money.
However, the example given is an optimal one. You can use a similar strategy with the funds at your disposal and the benefit you derive will be proportional. In other words, it is not an all or none strategy. . . use it to the best of your ability.
Also note that Mr Mehta's profile was an ideal one. A man working in the highest tax bracket with retired parents having no income of their own and two major children who are still studying. Again, not every taxpayer will have a similar profile. You father may have income of his own, but your mom may not be working. Or your children may be earning already. However, the point is to use that particular element in the equation which applies in your case directly. The rest can't be helped.
Note that we have left Mr Mehta's home maker wife out of the picture. There are reasons for this -- the Act specifies that any income earned out of money gifted to spouse is added back to the donor's income for tax purposes. There are ways out of this too, but that is the topic for another column.
Last point
Beyond a point (barring ideas such as discussed above), tax saving is not possible. The worst mistake any investor could make is to invest with the primary objective of saving tax. The question to ask is would you have made the investment if it didn't offer tax saving? If the answer is no, don't touch the investment. It is better to try and optimise post-tax income instead of making a sub-optimal investment just to save on tax.
Or like Donald Trump says, some of your best investments are the ones that you don't make.
The writer is Director A N Shanbhag NR Group, a tax and investment advisory firm. He may be contacted at sandeep.shanbhag@gmail.com
Outlook money: Top 10 Mutual Funds with good growth potential in future
10 top mutual funds you MUST own
Throughout the year, on several occasions, Outlook Money tells you to invest in mutual funds. And now we come to you to say it one more time. Rational thinking says that the equity markets cannot go much higher than the current levels. Yet, who knows?
With each milestone that the Sensex crossed in the past year, experts claimed that a big correction was due. Even today, stockmarket experts do not see much steam in the markets for the next one year.
Yet, on November 22, the Sensex closed at another all-time high of 13,706.53. By the time you read this, don't be surprised if there has been another high. So, what do you do?
Multiple investment options are at your service, but none are as regulated or sharply focused on you, the small investor, as mutual funds.
10 Top Mutual Funds*
DSP ML Opportunities Fund
Franklin India Flexi Cap
HDFC Equity Fund
HDFC Top 200
Prudential ICICI Dynamic Fund
Reliance Vision
SBI Magnum Contra
SBI Magnum Global 94
Sundaram BNP Paribas Leadership
Sundaram BNP Paribas Select Midcap
Click on each fund to find out why you MUST buy it.
* The fund names are in alphabetical order and not in order of any ranking
Outlook Money gives you a list of 10 diversified equity schemes that must form a part of your core portfolio. Why 10? Because putting all your eggs in one basket is risky and it is necessary to diversify across schemes. Because 10 is an easy number of schemes to monitor; it is difficult to manage too many.
Because if Nobel laureate Harry Markowitz showed the risk reduction benefits of holding a diversified portfolio, academicians Evans and Archer, showed that most of the risk reduction due to diversification takes place with the aggregation of eight to 10 securities.
How we chose the 10: To come up with the 10, we considered diversified equity schemes with a two-year track record and crunched their risk-adjusted returns.
We took the one-year rolling returns (an average of one-year returns over the past two-year period) and divided it by their downside risk - the possibility of a scheme giving negative returns - to get their RAR.
We left out sectoral schemes, as these are the riskiest of all equity schemes and merit frequent churning depending on your sector view. We also left out thematic funds, as they are less diversified than plain-vanilla diversified equity schemes. They work best when part of your satellite portfolio.
Next, we looked at a set of qualitative parameters. For instance, our list of 10 schemes comes from fund houses with good pedigree and a long-term track record. Schemes that have witnessed frequent fund management changes were avoided. We also avoided excessive fund house concentration, though HDFC and Sundaram BNP Paribas Mutual Funds have two each of their schemes in our list.
Two schemes that have made it to our list are a slight deviation from the above. While one has a lower RAR, the other is a little less than two years old. Despite this, we feel you must own them; we'll tell you why once we get to them.
Our schemes are not necessarily the 10 best performing schemes in the past year. Our focus is to give you 10 schemes that we think will perform well in the next two to three years, using a healthy mix of numbers and qualitative parameters.
While it's good to own these schemes, you need not own all of them. Depending on the amount you want to invest, you may pick and choose from the list. Read more about each scheme to see which fits you the best.
Just holding is not enough: Your job is not done once you buy into a mutual fund. It's imperative that you consistently, not day-to-day, but, say, once in a month or two, monitor your scheme's performance.
Remember, you invest for the long term. So ignore short term blips. But if your scheme consistently underperforms its benchmark index, it's time for you to look around for better options.
Also, watch out for a change in fund management. The past two years has seen a lot of churn of fund managements. When fund managers change, styles and, at times, even fund strategies change. So watch out. You may want to give a year's time to the new fund manager to perform. If he does not match up to his predecessor, it is time for you to move out.
For now, it's time for you to move in. Over the next few pages, in no particular order, we present the 10 schemes we think you should own.
Ways to invest in Mutual Funds
Five ways to invest in a mutual fund
How do I buy the units of a fund?" someone asked me the other day. This query was followed by a mail from a reader who wanted to know if he had to buy mutual fund units from the stock market.
For all of you who are plagued with similar questions, here is the answer.
We have listed five ways in which you can buy your fund units.
Have I invested in the right funds?
1. Get in touch with the Asset Management Company
The first step is to track the AMC -- as fund houses are known -- online.
Once you get onto their Web site, you will get their office addresses, phone numbers and a contact e-mail address. You will even be able to transact online with some of them.
Online addresses of the AMCs
ABN AMRO Mutual Fund
Benchmark Mutual Fund
Birla Sun Life Mutual Fund
BOB Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
Deutsche Mutual Fund
DSP Merrill Lynch Mutual Fund
Escorts Mutual Fund
Fidelity Mutual Fund
Franklin Templeton Mutual Fund
GIC Mutual Fund
HDFC Mutual Fund
HSBC Mutual Fund
ING Vysya Mutual Fund
J M Financial Mutual Fund
Kotak Mahindra Mutual Fund
LIC Mutual Fund
Morgan Stanley Mutual Fund
Principal Mutual Fund
Prudential ICICI Mutual Fund
Reliance Mutual Fund
Sahara Mutual Fund
SBI Mutual Fund
Standard Chartered Mutual Fund
Sundaram Mutual Fund
Tata Mutual Fund
Taurus Mutual Fund
UTI Mutual Fund
Invest online with the mutual fund
Some mutual fund Web sites allow you to invest online. However, you must check if you have an account with the banks they have partnered with.
For example, Prudential ICICI Mutual Fund allows you to buy funds online if you have a banking account with any of the following banks: Centurion Bank, HDFC Bank, ICICI Bank, IDBI Bank and UTI Bank.
You can buy units of SBI Mutual Fund's schemes only if you have an account with the State Bank of India or HDFC Bank.
Get in touch with the fund house
By going online, you will be able to locate the fund house's address and phone number (toll free number in some cases). You can call and request them to send an agent over.
Or, if you want, go over personally. Do make an appointment; you may end up wasting time if the person you want to speak to is not available.
Some, like Prudential ICICI Mutual Fund, have a form you can fill and submit online. Do so and they will send someone over to meet you.
An aggressive tax saving fund
2. Visit your bank
A number of banks are mutual fund agents.
Just walk into your branch and ask if they are selling any funds. See if they have a tie-up with the fund house you want to invest in.
6 large-cap funds to consider
3. Ask around
Ask your colleagues, neighbours, friends and relatives. Someone will know an agent. Just ask them for his contact details or ask that he get in touch with you.
Why investing in an SIP is important
4. Visit the AMFI website
The Web site of the Association of Mutual Funds in India has a list of mutual fund agents across the country.
Under the heading Investors Zone, you will find another one called ARN Search. This refers to the AMFI Registration Number.
Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city.
3 balanced funds to consider
5. Check the online finance portals
Do you have an online trading account? Then you could check if they also sell mutual funds online.
If you do not have an online trading account and are considering opening one, you could look for a player that offers both.
Some like ICICI Direct sell funds online. But you must have a trading account with them. Others, like India Bulls and Motilal Oswal, do not have this facility online but if you call and leave your contact details, they will send an agent over.
Here are some of the prominent players.
5 paisa
Geojit Securities
HDFC Securities
ICICI Direct
India Bulls
InvestSmart Online
Investmentz.com
Kotak Street
Motilal Oswal
Sharekhan
How do I buy the units of a fund?" someone asked me the other day. This query was followed by a mail from a reader who wanted to know if he had to buy mutual fund units from the stock market.
For all of you who are plagued with similar questions, here is the answer.
We have listed five ways in which you can buy your fund units.
Have I invested in the right funds?
1. Get in touch with the Asset Management Company
The first step is to track the AMC -- as fund houses are known -- online.
Once you get onto their Web site, you will get their office addresses, phone numbers and a contact e-mail address. You will even be able to transact online with some of them.
Online addresses of the AMCs
ABN AMRO Mutual Fund
Benchmark Mutual Fund
Birla Sun Life Mutual Fund
BOB Mutual Fund
Canbank Mutual Fund
Chola Mutual Fund
Deutsche Mutual Fund
DSP Merrill Lynch Mutual Fund
Escorts Mutual Fund
Fidelity Mutual Fund
Franklin Templeton Mutual Fund
GIC Mutual Fund
HDFC Mutual Fund
HSBC Mutual Fund
ING Vysya Mutual Fund
J M Financial Mutual Fund
Kotak Mahindra Mutual Fund
LIC Mutual Fund
Morgan Stanley Mutual Fund
Principal Mutual Fund
Prudential ICICI Mutual Fund
Reliance Mutual Fund
Sahara Mutual Fund
SBI Mutual Fund
Standard Chartered Mutual Fund
Sundaram Mutual Fund
Tata Mutual Fund
Taurus Mutual Fund
UTI Mutual Fund
Invest online with the mutual fund
Some mutual fund Web sites allow you to invest online. However, you must check if you have an account with the banks they have partnered with.
For example, Prudential ICICI Mutual Fund allows you to buy funds online if you have a banking account with any of the following banks: Centurion Bank, HDFC Bank, ICICI Bank, IDBI Bank and UTI Bank.
You can buy units of SBI Mutual Fund's schemes only if you have an account with the State Bank of India or HDFC Bank.
Get in touch with the fund house
By going online, you will be able to locate the fund house's address and phone number (toll free number in some cases). You can call and request them to send an agent over.
Or, if you want, go over personally. Do make an appointment; you may end up wasting time if the person you want to speak to is not available.
Some, like Prudential ICICI Mutual Fund, have a form you can fill and submit online. Do so and they will send someone over to meet you.
An aggressive tax saving fund
2. Visit your bank
A number of banks are mutual fund agents.
Just walk into your branch and ask if they are selling any funds. See if they have a tie-up with the fund house you want to invest in.
6 large-cap funds to consider
3. Ask around
Ask your colleagues, neighbours, friends and relatives. Someone will know an agent. Just ask them for his contact details or ask that he get in touch with you.
Why investing in an SIP is important
4. Visit the AMFI website
The Web site of the Association of Mutual Funds in India has a list of mutual fund agents across the country.
Under the heading Investors Zone, you will find another one called ARN Search. This refers to the AMFI Registration Number.
Click on it and you will arrive at a search page. You can locate an agent in your vicinity by just putting in your PIN code or name of your city.
3 balanced funds to consider
5. Check the online finance portals
Do you have an online trading account? Then you could check if they also sell mutual funds online.
If you do not have an online trading account and are considering opening one, you could look for a player that offers both.
Some like ICICI Direct sell funds online. But you must have a trading account with them. Others, like India Bulls and Motilal Oswal, do not have this facility online but if you call and leave your contact details, they will send an agent over.
Here are some of the prominent players.
5 paisa
Geojit Securities
HDFC Securities
ICICI Direct
India Bulls
InvestSmart Online
Investmentz.com
Kotak Street
Motilal Oswal
Sharekhan
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