Category: Investments

Yesterday I wrote about investing in US based funds in India, and I think the most practical way for Indian investors to buy into these funds is to buy mutual funds and ETFs that trade in India and then in turn buy assets in the US.

There are two types of risks that you take when you buy such a fund – the first one is the risk that the American markets fall, and the second one is the risk that the Rupee appreciates. If the Rupee appreciates against the Dollar then the value of your holding will reduce and that’s something we discussed yesterday, and you can read that post to get more details on that. (Read: Utility of US Based Funds in India)

As far as I know there are only three such funds currently trading in India. Here are the details of each of these.

Fund Name	What does it invest in?	1 Year Return	2012 Annual Return
MOSt Shares NASDAQ 10	Passive funds that invests in NASDAQ 100 stocks.	29.3%	16.4%
ICICI Prudential US Bluechip Equity Fund	Actively managed fund that invests in in securities of large cap companies that are part of S&P 500 listed on NASDAQ and NYSE.	32.6%	5.4%
DSP BlackRock US Flexible Equity Fund	This is a fund of funds that invest BlackRock Global Funds US Flexible Equity Fund, which is an actively managed fund that invests in American securities.	–	2.2%
FT India Feeder – Franklin U.S. Opportunities Fund	Is an open-end fund of funds scheme investing overseas that seeks to provide capital appreciation by investing predominantly in units of Franklin U. S. Opportunities Fund, an overseas Franklin Templeton mutual fund, which primarily invests in securities in the United States of America.	36.9%	8.5%

Update: Added Franklin Feeder US Opportunities Fund after receiving Devadoss E’s email below. 

I am sorry to say that your inputs are not exhaustive .

Thus, you have clearly left out the top performing Franklin Feeder US Opportunities fund !

So, before you continue to write your inputs, think well and review before publishing !

 

Sincerely,

 

Devadoss E

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected].in

Will you deposit your hard-earned money with a company for which even the existing lenders have closed their doors? Is 11.5% rate of interest for 1-year deposit or 12.5% rate of interest for 3-year deposit attractive enough for you to risk your principal investment itself?

Shilpa raised a query regarding Gitanjali Gems’ Fixed Deposit scheme under Suggest A Topic.

Shilpa Ganeriwal  July 4, 2013 at 9:16 am

The recent full page advertisement in ET about the fixed deposit scheme launch by geetanjali jewellers looked interesting. THe interest rate offered was 11.5 %. I was looking for CRISIL rating or any such type but could not get.

My question is what could be the reason for such a way of raising money, is it something like an NBFC and how reliable could this be.

Details of Gitanjali Gems Fixed Deposit Scheme:

The company does not allow premature withdrawal during first 6 months from the date of deposit. The terms of the deposit also states “Request for premature withdrawal may be permitted after 6 months with specific reason at the sole discretion of the Company only and cannot be claimed as a matter of right by the Depositor”.

Also, even if you are permitted to withdraw your investment anytime after 6 months, the company will pay 1% lower rate of interest than the applicable rate.

As I started writing this post, the share price of Gitanjali Gems Ltd. was at Rs. 181.10 on the National Stock Exchange (NSE) and Rs. 183.15 on the Bombay Stock Exchange (BSE), locked down at the lower circuit of 5%. Let me tell you that there were 404 sell orders pending on the NSE alone, with the sellers desperate to find an exit door by selling 1,32,37,259 shares of the company. But they are not able to do so as the buyers are just not interested in paying even Rs. 181.10 for a stock which touched an intraday high of Rs. 534.05 on June 20th this year and has fallen 66.08% since then, hitting new 52-week lows.

In fact, Gitanjali Gems is not the only stock in the Gems & Jewellery sector which has seen a sharp fall in its share prices. Titan, Shree Ganesh Jewellery House, Tribhovandas Bhimji Zaveri (TBZ) etc. are some of the companies which have suffered huge market cap erosion due to a sharp fall in their share prices in the last one month or so.

Gitanjali Gems 1-Year Price Chart

Titan Industries 1-Year Price Chart

Shree Ganesh Jewellery House Limited (SGJHL) 1-Year Price Chart

Tribhovandas Bhimji Zaveri (TBZ) 1-Year Price Chart

Images Source: Bloomberg.com

 

The primary reason behind this huge fall in the share prices of all these companies which belong to the Gems & Jewellery sector is very well known – a steep fall in gold prices in the international markets, which was triggered by fears of the US Federal Reserve tapering quantitative easing (QE). Gold prices have fallen around 35% from a 52-week high of $1804/oz on October 4th last year to touch a 52-week low of $1179/oz on June 28th last week.

Also, the government and the Reserve Bank of India (RBI) have taken several measures in the past few months to slow down gold imports, which have been blamed for the widening of our current account deficit (CAD). Last month, the government raised the import duty on gold from 6% to 8%, after which the RBI issued a notification, restricting gold imports only with 100% cash margin. Due to all these factors, gold demand has slowed down considerably here in India.

But, what is wrong with Gitanjali Gems? Analysing its financial statements, it seems the company has been doing quite well in the past and stands on a very strong footing. So, do the measures taken by the government and the RBI make business so difficult for the company that it is likely to see a sharp fall in its profitability or make the company default on its loans and other credit facilities? Are all these the only factors behind this kind of a steep fall in the share prices of Gitanjali Gems? I do not think so. I think there is something else also and SEBI is likely probing that.

SEBI’s surveillance department has taken up the matter and sought reports from exchanges on the stock’s sharp price movement. Market rumors also suggest that SEBI is also examining a suspicious trading link between Gitanjali and Prime Securities, a well known broker firm. It suspects that Prime Securities had a role to play in the internal funding of as much as Rs. 75-100 crore during Gitanjali’s IPO period.

At the end of March 31, 2013, Gitanjali Gems carries a gross debt of Rs. 5,000 crore in its balance sheet, at an average rate of interest of approximately 8%. As on this date, the promoters of Gitanjali have around 34.96% of their shareholding being pledged with their lenders.

Since June 18th, Gitanjali Gems has made several filings to the BSE, in which it has disclosed that Mehul Choksi, Chairman and Managing Director of Gitanjali Gems, has purchased a large quantity of Gitanjali shares from the open market and have pledged them further to the company’s lenders. In the past few days, some of the lenders have even invoked these pledges, including Macquarie Finance (India) Private Limited (MFIPL) which has invoked 5 million pledged shares in just two days, June 28th and July 1st, acquiring 5.43% stake in the company. Lenders generally invoke pledged shares when a borrower, faced with a steep fall in its share price, is not able to deposit additional margin with the lenders.

So, amid all this high-tension drama playing out within the company and the gold market, is it advisable to lock your money for 3 years in Gitanjali Gems’ Fixed Deposit scheme for 12.5% annual return?

Personally, I am not going to do that as the safety of my principal is more important for me rather than a promise of higher returns and I am sure the investors also know the answer and need no further advice regarding the same.

Some financial advisors have different views regarding the same and their views are also welcome.

Myinvestmentideas.com

Saving-Ideas.com

ProfitKrishna.com

I got the following question in the Forum yesterday, and it is a great example of common investor psychology, and the need for SIPs.

With the markets losing ground, is it a good strategy to switch to Debt funds from Equity Funds? I have invested in equity funds (Reliance TOP 200 and Reliance Regular Savings Funds), I am planning to switch the investment to Reliance Monthly Income funds. Not sure if this is the right thing to do.

Also, should debt fund be a part of investment portfolio?

 

When the market is up like it has been in the past few months, it is common for people to say that the market going down by 20% or so in a year is an expected event and you should anticipate such a thing and not worry too much about it. If you are in it for the long term then such temporary blips shouldn’t worry you.

However, when the market does actually fall by that much people forget all about the long term and either stop their investments or switch to debt funds or do something similar. This is the exact opposite of what you should be doing which is to buy when the market is low and sell when it is high.

Somehow, this is very hard to do as far as stocks are concerned. Psychologically, it is just so much easier to buy when the market is rising, and then sell when the market is falling because that’s what everyone else tends to be do.

When I look at my investments, a large part of the success has been because of taking advantage of panics and buying when the market has been low and people didn’t want to touch stocks with a 10 foot pole. If you follow me on Twitter or have been reading this blog for a while then you would see me Tweeting or writing about buying when the market falls fairly consistently.

After doing it a few times, this just becomes habit and a very useful one at that too. Please don’t look to sell off your investments when the market is going down, rather look to increase them. For young people this should be a lot easier than it looks, you have a lot longer for the market to recover and pay off.

Quite a few readers have done this here and I’d request you to share your experience on how you were able to hold on to your investments when the market went down, what made you hold on to them when others around you panicked? I’m sure there are lessons for everyone from these stories.

Rajeev posted the following comment yesterday:

Rajeev Srivastava May 22, 2013 at 6:06 pm [edit]

Reader Pattu had developed a great retirement calculator and shared it for free here on OneMint about two years ago, and several people have downloaded and benefitted from that calculator.

Since then he has developed a few other calculators, and the latest is an Excel based RD calculator. You can download it here.

Comprehensive RD calculator

What I liked most about this calculator is that it calculates taxes also, and in that respect it is a lot more useful than most other online RD calculators.

Of course, being an Excel RD calculator also has the added advantage of not needing an internet connection, and then it is faster as well since you don’t have to click a button to recalculate amounts.

Taxes on Recurring Deposits

A quick word on taxes on RDs – RDs don’t attract TDS, however that doesn’t mean they are tax free. You are supposed to pay tax on RD interest just like you would pay tax on other interest.

To the best of my understanding, the proper way of doing this is to declare the interest that accrues to you every year, and then pay tax on it regardless of when your RD matures. For details read my  post on taxes and interest rates on recurring deposits.

Advantage and Disadvantage of Recurring Deposits

When I looked at RD rates some time ago I noticed that banks don’t give you their maximum interest rates as RD rates, so if a bank gives 9% on a 400 day deposit, and 8% on a 1 year deposit then you are likely to get 8% on a 12 month RD, so in that sense you never get the best rate on a RD.

However, RDs are great when you want to get in the habit of saving regularly, and in this case even small sums add up. Most of us talk about how compounding greatly enhances returns, and while that is true, I feel that we don’t realize enough how quickly time passes.

What seems like just Rs. 10,000 a month now, will amount to a little over Rs. 4 lakhs in 3 years at 8%, and 3 years will also pass in the blink of an eye.

And then you will thank yourself for putting the little money away every month. This I say with personal experience, and I think everyone should get in the habit of forcing themselves to save at least a little every month and with time all of this adds up.

This great Excel RD Calculator will help you in getting an exact number on how much you will get in a few years time, and is a very useful tool. Please download it and keep it with you as a ready reference.

Please post any feedback, or report any bugs that you may have in comments – it is greatly appreciated.

Finally, a big thank you to Pattu for letting me share this great tool and I certainly do appreciate the hard work and skills that have gone into making it and I am sure other readers do too!

A shareholder is a part owner in a company, and therefore has a certain share in the profits of the company.

Many companies return this profit to their shareholders in the form of a dividend. Usually, the companies that regularly declare dividends, do it multiple times a year. If the dividend is declared before the company’s AGM (Annual General Meeting) it is called an interim dividend, and if it is declared at the AGM of the company, then it’s called final dividend. 

This needn’t be the case always, and Andhra Bank is a good example of a regular dividend paying company that declares dividends just once a year.

For 2011 and 2012, they paid Rs. 5.50 as dividend, and for 2010, they paid Rs. 5 as dividend.

How to calculate the dividend yield of a stock?

To calculate the dividend yield, you have to simply calculate the percentage of how much money you got from the company in the form of dividends for the price per share.

In the case of Andhra Bank, they closed at Rs. 91.20 yesterday so at 5.50 dividend, the yield comes out to be (5.50/91.20)x100 = 6.03%.

As you can well imagine, the exact dividend yield changes very frequently because the stock price is different every second of the day. And then with a market as volatile as the Indian one, the yield may look quite different in a 12 month time frame.

In the case of Andhra Bank itself, the 52 week high of the share is Rs. 130 so sometime within the last year the dividend yield on this share was 4.2% which is not bad, but isn’t quite as impressive as 6 odd percent.

Then there is the case of splits, bonuses and special dividends. Kilitich  Drugs announced a special dividend of Rs. 30 sometime last year, and right now the market price of this company is Rs. 22 making the dividend yield ridiculously high. It isn’t likely that you get another dividend this high ever again so looking at the dividend yield is pretty much useless for this company.

How to find high dividend yield stocks?

I created a big list of high dividend yielding shares last year, and that was a very time consuming exercise for me. It took days if I remember correctly, and while it was quite useful, for the time it took, I couldn’t do it again.

I searched for this information again, and this time I got a link from Moneycontrol that has a list of high dividend yield shares neatly arranged by descending order.

I think this is a great place to start if you are looking for high dividend yield shares. I say great starting point because you need to dig deeper once you find names on this list. The company that I mentioned earlier – Kilitich – tops the Moneycontrol list and while the dividend yield may be technically correct, it doesn’t do you a lot of good practically speaking.

How to use high dividend yield stocks for investing?

Although there are many ways to look at dividend yields, I feel it is quite useful in one very specific instance. If you are a risk averse investor who wants to start out in the stock markets, then buying a few very old companies with low debt, low P/E and a decent dividend yield is a good way to get started.

I did this for my wife’s portfolio during the last crisis and bought a few companies that had been around for ages, had low debts, and a reasonable dividend yield.

The results aren’t mind boggling but for the risk that she wanted to take, I think they are pretty satisfactory. If the dividends keep coming in then you are at peace that although there is panic in the market, this company seems to be doing okay, and you don’t panic yourself and sell the shares.

Finally, dividend yields can be a starting point to narrow down your choices, but that alone shouldn’t drive your decision. You need to look at other aspects like the financial strength of the company, debt levels, competition, promoter pledges etc. before making a final decision to buy.

You have several options when it comes to opening an NPS account, and if you are just starting out — it is better to familiarize yourself with at least these three options:

1. Tier 1 NPS Account
2. Tier 2 NPS Account
3. Swavalamban Scheme

In this post, I’m going to talk about them briefly, discuss what differentiates one from the other, and which one is appropriate for what type of investor.

Tier 1 NPS Account

The first account is called Tier 1 NPS Account, and the Tier 1 Account is mandatory for all central government employees. It is mandatory for them to contribute 10% of their basic salary plus DA plus DP every month towards this account, and the government matches this contribution.

There are severe restrictions on how money can be withdrawn from the Tier 1 account, as it is necessary to invest 80% of your money in an annuity with Insurance Regulatory Development Authority (IRDA) if you withdraw before age 60. You can keep the remaining 20% with you.

When you attain the age of 60, you have to invest at least 40% in an annuity with IRDA; the remaining can be withdrawn in lump-sum or in a phased manner.

Even if you are not a government employee, you can still open a Tier 1 account, and if you are interested in NPS, you will need to open a Tier 1 account as that’s necessary in order to open a Tier 2 account, which I’ll come to in a moment.

There is a minimum that you have to commit to investing in NPS, and for the Tier 1 account that minimum is Rs. 6,000 per year.

Tier 2 NPS Account

The Tier 2 NPS account is very similar to the Tier 1 account, and if you are not a government employee who wants to invest in NPS, you would want to invest the minimum of Rs. 6,000 in Tier 1 and then invest the rest of your money in the Tier 2 account.

This is because Tier 2 is quite similar to Tier 1 in all respects except for the harsh withdrawal conditions. You are free to withdraw your money from the Tier 2 account any time that you want without any penalties.

Minimum amount for opening Tier 2 account is Rs. 1,000 and minimum balance required at the end of the year is Rs. 2,000. You need to make at least 4 contributions in a year.

Swavalamban Scheme

This scheme is really for the financially less fortunate members of the society and is really a way for the government to incentivize investments for them.

The government pays Rs. 1,000 every year for four years, if you open a NPS account under the Swavalamban scheme, but there are limitations on who can open an account under the Swavalamban scheme.

Following conditions apply:

• Subscriber is not covered under employer assisted retirement benefit scheme and also not covered by social security schemes under any of the following laws:
  • Employee Provident Fund and Miscellaneous Provision Act, 1952
  • The Coal Mines Provident Fund and Miscellaneous Provision Act, 1948
  • The Seamen’s Provident Fund Act, 1966
  • The Assam Tea Plantation Provident Fund and Pension Fund Scheme Act, 1955
  • The Jammu & Kashmir Employee Provident Fund Act, 1961
• Subscriber contribution in NPS is minimum Rs. 1000 and maximum Rs.12000 per annum, for both Tier1 and Tier II taken together, provided subscriber makes minimum contribution of Rs.1000 per annum to his Tier 1 account

Based on the limitations mentioned above, I think most people reading this blog will be ineligible.

Conclusion

If you are not a Central Government employee who has to put in money mandatorily in NPS then you should be very cautious about saving money here.

This is because there are restrictions on where you can invest your money after you get it at retirement. They make you buy annuities which are not the greatest products right now. I don’t see much value in investing in NPS as it stands today because of the frequent changes, and uncertainties surrounding this scheme. You may as well invest this money on your own in the a debt or equity product based on your preference, and stay away from the restrictions imposed on you by the scheme.

This post is from the Suggest a Topic page.

I wrote about 5 ways to generate share investing ideas a few weeks ago, and once you have the initial idea – the next thing is to evaluate how good or bad the company is with respect to its price.

There are several parameters for this, and in this post I’d like to talk about two that I was reminded recently when AOL (American Online) declared its quarterly results.

I’m interested in both Indian and American markets, and AOL is a stock that’s listed on NYSE. The company has two main business segments – it provides dial up internet service and runs popular websites such as TechCrunch and Huffington Post.

This company used to be a lot more relevant a few years ago, and somewhere about a year and a half ago I got the idea to see if this company will be a suitable short candidate (like thousands of other people I’m sure).

Here are my notes from that time (absolutely unedited):

S.No.	Question	Comment
1	What is the product and is this a good product?	AOL has two products – it has content websites like aol.com huffington post and TechCrunch and it is a dialup internet service provider
2	What is the size relative to its peers?	It has a market cap of 1.4 billion so not very big
3	Category	Short candidate due to declining revenues
4	Conclusion	Should DEFINITELY NOT short it yet, but it will become a short candidate in the future. Why you shouldn’t short it now:1. The company has a share buyback program2. It generates free cash flow.Free cash flow has declined from 389.5 mm in the 9 months 2010 to 92.1 mm this year. Keep observing if the free cash flow continues to decline and keep it in the short list.The company has authorized 250 mm buyback program and the market cap is 1.4 bn so they are going to buy back about 20% of their own stock, and then with the free cash flow they can authorize more buybacks as well.
5	List the products & their contribution to bottomline	Advertising – which is ads on its websites, and subscription viz. monthly charges for its internet service.

Since the time I wrote down these things, the stock has almost doubled so I feel rather stupid when I read this today. Not only was this not a short candidate, but instead it was a great long candidate!

However, for the purpose this post, I’d like to highlight the two things that I paid attention to at the time, and are worth your time too if you are looking at analyzing stocks.

Free Cash Flow: Free cash flow (FCF) is perhaps one of the most important things to look for in a business. Simply put, it’s the surplus cash with the business. Every business that generates cash needs to put some of it back in its operations to sustain the business. FCF is the cash that’s left after that.

Investopedia has a good definition:

A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it’s tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as:

EBIT(1-Tax Rate) + Depreciation & Amortization – Change in Net Working Capital – Capital Expenditure

It can also be calculated by taking operating cash flow and subtracting capital expenditures.

Read more:

http://www.investopedia.com/terms/f/freecashflow.asp#ixzz2KSeVPpbl

 

Share Buybacks: Share buybacks are another interesting thing to look out for because a company that’s buying back its shares has a smaller capital base and thus the profits available to each shareholder increase over time if the company makes money at the same rate. It also implies that the company is generating sufficient cash to pay for its operations, pay down debt, and can now reward the shareholders in this way.

These two things are good to look at, but remember that they have to be seen within the whole context of the company and its operating environment, and you can’t rely on just these two factors alone.

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