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.
Saturday, January 6, 2007
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
Tuesday, December 19, 2006
VCA: A new useful investment approach
Value Cost Averaging
Systematic investment plans (SIPs) concentrate on cost. Every month the investor pumps a designated sum into a financial instrument. This is usually a mutual fund but it could be a stock or commodity.
The SIP offers several advantages over lump sum investments. Apart from enabling the investor to park small sums, it also helps to lower the average cost of acquisition. Every time prices fall, the SIP buys more units. In fact, SIPs are the most powerful argument in favour of open-ended funds versus closed-end funds.
An open-ender can offer SIPs; closed-ended cannot. The supposed edge of a closed-end fund manager who can invest without fear of redemption pressure is negligible compared to the mechanical advantage of a system that automatically averages down.
What about the sophisticated version of the SIP, which concentrates on value rather than cost? Value-cost averaging (VCA) plans aren't offered in automated fashion by mutual funds. Apparently the reconciliation is too much trouble. But it isn't difficult to set up a personal VCA.
All you do is set a monthly portfolio value target. Then you buy or sell the requisite amount of units to meet that target. For example, say you set a portfolio value target of Rs 1,000 growth per month. In month one, your chosen instrument is trading at Rs 13. So, you buy 77 units.
Next month, the price is down to Rs 12. Your portfolio value is Rs 924. You buy Rs 1,076 worth of units -- that's 90 units. You now own 167 units. Month three, the price jumps to Rs 20. Your portfolio is now worth Rs 3,340. Since this exceeds your target, you sell Rs 340 worth or 17 units at Rs 20. And so on.
One difference in the mechanics between an SIP and a VCA is that a VCA incorporates an automatic method of booking profits at high prices as well as a system for buying more units at low prices. The profit-booking can boost returns by a massive degree.
In a strong bull run, a VCA often produces mathematically infinite returns. As prices rise and portfolio targets are successively exceeded, the system books continuous profits which can wipe out all accumulated costs.
For example, look at the attached chart of the Nifty Benchmark Exchange Traded Fund - an instrument which tracks the Nifty and offers units held at a tenth of the Nifty's prevailing level. ETFs can be bought off the exchange just like stocks. This reduces calculation slippage - conventional NAV calculations are always on the last session's closing prices.
Anyhow the Nifty jumped from 1371 in January 2001 to 4015 by December 2006 -- a rise of 92 per cent. Let's say, you implement a VCA of Rs 1000 per month in January 2001. By the end of the 72-month period, you have a portfolio worth about Rs 72,000 (after rounding and slippage) and the net cost is Rs 1086. That's a return of 6,500 per cent.
The costs would turn negative and the return would become infinite if the index continues to rise at this rate for a couple more months.
What's the downside?
The big issue is that a similar 90 per cent drop would lead to an equally sharp rise in monthly costs in order to maintain targets. If you implemented a VCA in a long-term bear market, you would get crucified.
The second problem is that, since costs are never known for certain, you have a problem deciding on the exact installment target. If you set the target too low, the corpus may not be meaningful. If you set the target high and the market crashes, you will be stretched.
One way around this: Set a fixed period VCA. Then calculate the final target value. Say for Rs 1,000 over 36 months, the target value is Rs 36,000. Assume a 10 per cent adverse move in month 35. This will mean a total commitment of Rs 4,500 in month 36. Can you meet it?
So VCA can never be a complete investment method in practice. But if you can set a meaningful target and not stretch the time period too much, it could lead.
Systematic investment plans (SIPs) concentrate on cost. Every month the investor pumps a designated sum into a financial instrument. This is usually a mutual fund but it could be a stock or commodity.
The SIP offers several advantages over lump sum investments. Apart from enabling the investor to park small sums, it also helps to lower the average cost of acquisition. Every time prices fall, the SIP buys more units. In fact, SIPs are the most powerful argument in favour of open-ended funds versus closed-end funds.
An open-ender can offer SIPs; closed-ended cannot. The supposed edge of a closed-end fund manager who can invest without fear of redemption pressure is negligible compared to the mechanical advantage of a system that automatically averages down.
What about the sophisticated version of the SIP, which concentrates on value rather than cost? Value-cost averaging (VCA) plans aren't offered in automated fashion by mutual funds. Apparently the reconciliation is too much trouble. But it isn't difficult to set up a personal VCA.
All you do is set a monthly portfolio value target. Then you buy or sell the requisite amount of units to meet that target. For example, say you set a portfolio value target of Rs 1,000 growth per month. In month one, your chosen instrument is trading at Rs 13. So, you buy 77 units.
Next month, the price is down to Rs 12. Your portfolio value is Rs 924. You buy Rs 1,076 worth of units -- that's 90 units. You now own 167 units. Month three, the price jumps to Rs 20. Your portfolio is now worth Rs 3,340. Since this exceeds your target, you sell Rs 340 worth or 17 units at Rs 20. And so on.
One difference in the mechanics between an SIP and a VCA is that a VCA incorporates an automatic method of booking profits at high prices as well as a system for buying more units at low prices. The profit-booking can boost returns by a massive degree.
In a strong bull run, a VCA often produces mathematically infinite returns. As prices rise and portfolio targets are successively exceeded, the system books continuous profits which can wipe out all accumulated costs.
For example, look at the attached chart of the Nifty Benchmark Exchange Traded Fund - an instrument which tracks the Nifty and offers units held at a tenth of the Nifty's prevailing level. ETFs can be bought off the exchange just like stocks. This reduces calculation slippage - conventional NAV calculations are always on the last session's closing prices.
Anyhow the Nifty jumped from 1371 in January 2001 to 4015 by December 2006 -- a rise of 92 per cent. Let's say, you implement a VCA of Rs 1000 per month in January 2001. By the end of the 72-month period, you have a portfolio worth about Rs 72,000 (after rounding and slippage) and the net cost is Rs 1086. That's a return of 6,500 per cent.
The costs would turn negative and the return would become infinite if the index continues to rise at this rate for a couple more months.
What's the downside?
The big issue is that a similar 90 per cent drop would lead to an equally sharp rise in monthly costs in order to maintain targets. If you implemented a VCA in a long-term bear market, you would get crucified.
The second problem is that, since costs are never known for certain, you have a problem deciding on the exact installment target. If you set the target too low, the corpus may not be meaningful. If you set the target high and the market crashes, you will be stretched.
One way around this: Set a fixed period VCA. Then calculate the final target value. Say for Rs 1,000 over 36 months, the target value is Rs 36,000. Assume a 10 per cent adverse move in month 35. This will mean a total commitment of Rs 4,500 in month 36. Can you meet it?
So VCA can never be a complete investment method in practice. But if you can set a meaningful target and not stretch the time period too much, it could lead.
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