Why Buying a Home Scores Over Investing in Stocks...

I am no fan of real estate, and certainly won't advise investing in property to earn rent. However, I strongly believe that one should own a debt-free house in which one will live in. Most of us have read about how Rakesh Jhunjhunwala sold his Crisil shares in 2005 for Rs 27 crore to buy a flat at Malabar Hill in Mumbai. Had he remained invested, his shares would be worth Rs 600 crore in 2015. The flat, on the other hand, was only worth Rs 65 crore. This story has hindsight wisdom written all over it. If instead of Crisil, Jhunjhunwala was holding Hindalco shares, his Rs 27 crore would now be worth Rs 18 crore. This story has too much of survivorship bias.

Putting all your eggs in the equity basket is not a good idea. Another ludicrous suggestion is to invest in equities in the formative years and then buy a property in the late forties, assuming that you would have built wealth by then. The assumption that you will continue with your job and draw a high salary to pay EMIs in your late forties or early fifties is quite cute, especially when I see voluntary and forced retirements all around. By the late forties, you may have gotten used to a certain lifestyle which could be difficult to cut down with the huge home loan EMI. If the house is bought early, you learn to live within your means. 

Leverage is a beautiful financial concept. When used to buy a property, leverage fetches us tax exemption. But the same leverage used to buy stocks (popularly known as derivatives) is a dangerous game. Can you imagine leveraging heavily year after year to buy the most convincing stock ideas? It is an extremely specialized field and requires phenomenal skill to make money out of leverage trades in the market. But owning a house does not need any special skill. After paying a certain number of EMIs, there is surety that you have a roof of your own. 

What is important is to keep the leverage multiple in check when you buy that mortgage. Stretch it too far and suffer sleepless nights. Keep it too low and you will probably look foolish a few years later for having bought a property much below your aspirations. On the other hand, rent is nothing but a sunk cost. Even if you are claiming tax benefit, it remains money spent which did not build you an asset. Staying on rent forever with a great equity portfolio sounds quite exciting when you are young. But when you get old, the idea may sound criminal. One does not have the energy, patience, willingness or strength to endure the burden of a rental home. All said and done, you are at the mercy of your landlord who may send you packing. 

Another argument against owning a house is that a young person may relocate in future. It's a valid argument, but once you decide to settle down in a city, buy a house quickly. Of course, this will also depend on the buyer's occupation and income. If he is a salaried employee with a regular income, buying a house makes more sense. But if you are living by the adventures of self-employment or upcoming business, it is more logical to live on rent. The return on capital employed in your business will be far higher than blocking money in a house. 

Reverse mortgage is another fantastic financial innovation. A couple gets a stipulated amount every month depending on the value of their property and when they both die, their heirs repay the lender the accrued interest and principle of the annuities given to the owners. This may not be the most efficient or cost effective tool, but it is very useful. It allows a couple to live a better life even when they get old without burdening their children. 

Your wealth can dwindle, plans can go haywire, money can be philandered or lost, businesses can get wiped out, medical ailments or court cases can leave you broke, but a house remains. When I was a child, my dad suffered a huge business loss which stripped us of our savings. But the house which he had bought earlier stayed. He was desperate to sell it to repay debts, but my mom did not allow it. She would send prospective buyers away, saying the house was not for sale. The house gave us a reason to fight it out, giving us comfort. The house was our strength. It can be yours too. 

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Eight Tips on How Not to Invest

Despite loads of information available, investors often jump into the stock market without much of an idea on what lies ahead. Here are a few tips on how not to invest.

1.       Not Knowing Why to Invest: Is it for capital protection, capital appreciation, returns, risk diversification, hedging or pure safety?

2.       Avoid DIY Investing: Investing requires being alert about the state of your investments and calls for active participation - a feat which not many can achieve.

3.       Not Actually Investing: Most of us begin investing with a long-term view, expect returns in the medium term, and end up trading in the short term. So, the grand goal of investing practically gets reduced to trading and speculating.

4.       Stock Tips: It's not the tips that are the problem, it's from whom and how you take them. However, any tip actually means that you don't invest without doing your own research.

5.       Not Asking the Right Questions: Why should I invest in the stock? Is it the right asset to invest? Do I know enough about the company to remain invested? These are worryingly missing from the popular narrative.

6.       What Looks Cheap may Not Be: A stock priced at Rs. 20 doesn't necessarily make it cheap to buy. Price-to-earnings, price-to-book, and price-to-sales ratios will help you judge the true value of a stock.

7.       Succumbing to Hype: Consulting financial advisors, investing in time-tested companies or investing based on personal experience as a customer are more effective ways.

8.       Repeating Mistakes: Time-tested classic principles of investing, such as not to follow the herd, buying low and selling high, are forgotten in the rush to make a quick buck.

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Warren Buffett’s 4-Point Strategy to Beat the Stock Market

Warren Buffett’s 4-Point Strategy to Beat the Stock Market

Over the past couple of years, the market has been rather unpredictable. For example, who would have thought oil prices would collapse like they did, or that the market would plunge by nearly 10% during the first six weeks of 2016 only to make it all back and then some?

The point is that nobody knows what’s next for the market. The S&P 500 index could plunge 20% this year, or it could reach new record highs just as easily. So the best course of action is to employ investment principles that work no matter what, like the four that have been used by Warren Buffett and his team to produce incredible returns at Berkshire Hathaway through good times and bad.

Buffett’s investment goals

When Warren Buffett wrote his 2008 letter to Berkshire Hathaway’s shareholders, investors were justifiably nervous about what was going on in the economy. Banks were collapsing, the U.S. auto industry was on the brink of failure, and even rock-solid stocks like Berkshire were trading at levels not seen in years.

Buffett ensured investors that 2008 was just another bump in the road, and said that it’s important to keep things in perspective - especially during the tough times. He pointed out that during the 20^th century, Americans’ real standard of living had improved sevenfold, despite two huge wars, the Great Depression, a period of rapid inflation, and about a dozen other panics and recessions along the way.

He even went on to say that the economy would likely be in shambles for several years, but that there was no need to panic. Berkshire would simply continue to do what it does best by focusing on four specific goals that boost the company’s long-term potential no matter what the market is doing this week, this month, or this year.

1. Maintain Berkshire’s financial position: 

No matter what happens, Berkshire maintains modest to minimal debt levels, lots of liquidity, few near-term obligations, and lots of income streams. This allows the company to not only absorb any adverse market conditions, but to come out of the bad times even better off than it went in. In fact, during the 2008-2009 market turbulence, Berkshire was a provider of liquidity to the banking industry, and ended up with some pretty profitable investments as a result.

2. Widen the moats: 

A “wide economic moat” is a Buffett term that essentially means a durable competitive advantage that should allow a company to prosper in good times and bad for the foreseeable future, and that makes it relatively immune to competition. For example, Wal-Mart’s wide moat consists of its size and distribution network, which allows it to sell goods at a lower price than any of its competitors. As Wal-Mart’s global footprint continues to grow, its moat continues to widen.

3. Acquire and develop new and varied streams of earnings:

Berkshire is always on the lookout for new acquisitions and investments, in good times and bad. During the financial crisis, for example, Berkshire acquired a new revenue stream in the form of Bank of America preferred stock, which came with warrants to buy shares cheaply down the road. Just recently, Berkshire made its biggest acquisition yet when it bought Precision Castparts. The point is that Berkshire is always looking to grow and diversify its revenue stream. While it’s impossible for a company like Berkshire to grow its profits every single year, varied streams of earnings allow it to grow its profit potential every year without fail.

4. Focus on good management: 

I can’t emphasize enough how much value Buffett places on good management. He literally believes that the right management team can add billions to a business’s intrinsic value, while the wrong management can make an otherwise good company an undesirable investment. Therefore, the goal, no matter what the market is doing, is to always be on the lookout for outstanding managers and to nurture those who are already part of the organization.

How you can apply these goals to your own portfolio

While the most obvious way to benefit from these four investment goals in your portfolio would be to invest in Berkshire Hathaway, that’s not really my point here (although Berkshire is one of my favorite stocks and makes up a large portion of my own portfolio).

Rather, the point is that these lessons can be modified slightly in order to apply them to your own investment strategy:

• Buy stocks with financial flexibility and low debt.
• Identify a durable competitive advantage before buying a stock.
• Don’t worry about what the market is doing now - always be on the lookout for opportunities.
• Investing in companies with shareholder-friendly management can make all the difference over the long run.

Successful implementation of these four goals has allowed Berkshire to increase its book value during 48 of the past 50 years. Although the stock price didn’t increase in all 48 of these years, that wasn’t the goal. Rather, the objective was to set the company up for long-term market-beating performance, an objective which was clearly achieved.

You can apply these moves to your own portfolio.

Source: time.com/money

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Warren Buffett’s Best Investing Advice in 10 Quotes

One great way to learn the basics of investing is by studying the greatest buy-and-hold investor of all time, Warren Buffett. Here are 10 of the Oracle of Omaha’s famous quotes that could translate into investing success for you and might prevent you from making mistakes.

1. “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.”

You may have heard the expression “don’t throw good money after bad,” and this is the point of what Buffett is saying here. If you own a stock that’s gone down and your original reasons for buying it no longer apply — get out. It’s a common mistake to attempt to “average down” on losing positions. Instead, you’re better off cutting your losses and finding a better way to use that money.

On the other hand, if a stock you own has gone down for no other reason than general market or sector weakness, but the business is as strong as ever, that’s the time to double down.

2. “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”

In other words, don’t hesitate when you see a great opportunity. In the aftermath of the financial crisis, Buffett didn’t simply tiptoe into bank stocks. Rather, he made multibillion-dollar investments in Bank of America and Goldman Sachs that have paid off tremendously.

3. “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”

I like to apply what I call the “30-year test” to most of the stocks I consider for my own portfolio. I ask myself if the business will be around in 30 years, and if the company has a clear competitive advantage that should allow it to maintain or grow its market share and profitability during those 30 years. If the answer to either question is “no,” or “I’m not sure,” I move on.

4. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Cheap garbage is still garbage. Radio Shack was trading for a ridiculously low valuation a couple of years back — but that’s because it had serious problems, eventually leading to bankruptcy. Instead, a better idea would be to compare rock-solid retailers such as Wal-Mart, Target, and Costco to see which is trading for the best price.

5. “Our favorite holding period is forever.”

There are plenty of valid reasons to sell stocks. For example, if a company’s business strategy changes, its growth or profitability declines, or if you simply need the money, it can be in your best interest to sell a stock. In fact, Buffett-led Berkshire Hathaway BRK 0% sells stocks regularly, and for a variety of reasons. However, Buffett’s point is that you should go into every stock investment with the intention of holding it forever.

6. “Only when the tide goes out do you discover who’s been swimming naked.”

Anybody can make money in a rising market. We’ve been in a bull market for seven years now, so if someone brags about how much his or her portfolio has risen since 2009, take it with a grain of salt.

On the other hand, it takes real talent and discipline to consistently do well in falling markets. Since 1965, the S&P has finished the year in the red 11 times. In those 11 years, Berkshire has beaten the market in all but two of them.

7. “Never invest in a business you cannot understand.”

Buffett doesn’t understand tech stocks well, so they’re mostly absent from Berkshire’s portfolio. I don’t have a particularly good grasp on the biotech industry, so I’m not going to invest in it.

Before you buy any stock, you should have a thorough understanding of how the business makes its money, and how it expects to continue to make money going forward. Getting into a stock you don’t fully understand is a recipe for disaster.

8. “Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.”

As a classic value investor, Buffett looks for stocks trading below their intrinsic value. While there are many different methods for determining whether a stock is on sale, here’s a quick guide to value investing that can help you get started.

9. “Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1.”

Perhaps the most famous Buffett quote of all, it’s actually one of the most inaccurate — at least in the literal sense. Buffett will be the first to admit that he’s made a few bad investments over the years, and no investor will be right 100% of the time.

Instead, the point is that protecting your principal from losses should be a higher priority than making money. Berkshire Hathaway has produced a 50-year return of nearly 1,600,000% for its shareholders, even though it often underperforms the S&P in years when the market rises quickly. The real trick to long-term success is to outperform during the bad times.

10. On buying individual stocks: “If you like spending six to eight hours per week working on investments, do it. If you don’t, then dollar-cost average into index funds.”

The bottom line is that investing in stocks the right way requires time. You’ll need to do your homework and research and compare stocks before investing, make sure your profile is properly diversified, and monitor your stocks on a regular basis. If you’re not willing to do that, there’s absolutely nothing wrong with buying a low-cost S&P 500 index fund, which Buffett has said is the best investment most people can make. Not only does this method do all of the hard work for you, but history has also shown that you’ll probably beat the majority of mutual funds over the long run.

http://time.com/money

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6 Things Millennials Should Do Now That Will Pay Off Big Later On

Getting started as a saver and investor can be a tricky balancing act. You have bills to pay, student loans to settle, and a career to jump start. You have to create a cash cushion for emergencies at the same time that you are being urged to salt away money for a far-off retirement date. Here’s some smart advice on how set your priorities.

Adapted from “101 Ways to Build Wealth,” by Daniel Bortz, Kara Brandeisky, Paul J. Lim, and Taylor Tepper, which originally appeared in the May 2015 issue of MONEY magazine.

1. Tuck away a month of expenses.

Even if this means paying off debt more slowly. The money can cover surprises like car repairs. Once you’ve hit that point, focus on the next goal: six months of expenses, to cover you should you lose a job.  

2. Juggle emergency saving and a provident funds by playing it safe.

Until you have six months’ liquid savings (see No. 1 above), investing isn’t a top priority. But you should put enough into a provident funds i.e. EPF and PPF to get retire peacefully. To partly reconcile the two goals, hold some less risky fare like bonds. With taxes and penalties, cashing out a 401(k) and provident funds is a last resort. But if you’re forced to do it, it’s better to have some safe money.

3. Start first, be an expert later.

Getting going on a 401(k) and provident funds can feel like jumping into the deep end. How much in stock funds? What about bonds? But early on, saving at all matters more than picking the best mix. Say you put away 6% of your pay, with a 3% match, starting at 25. For 10 years you earn a lousy 2%, and then adjust your portfolio so that you earn 6% for the next 30 years. That wobbly first decade will still have added 47% to your total wealth by age 65.

4. Begin your career in a wealth-building city.

Zillow.com says these metros offer job growth above the median 1.3% and homes for less than the typical 2.9 times income:

Dallas: Its many affordable ‘burbs include MONEY’s No. 1 Best Place to Live in 2014, McKinney. Job Growth: 3.3% Housing Cost: 2.5 x income

Atlanta: Home to HQs of Fortune 500 companies including Coca-Cola and the United Parcel Service. Job Growth: 2.4% Housing Cost: 2.7 x income

Indianapolis: Metro boasts another Best Place: walkable, arts-rich Carmel. Job Growth: 2% Housing Cost: 2.4 x income

5. Go ahead, have a latte.

Reducing small expenses can’t hurt, but housing is where you can save real money when you’re young. Rent on a two-bedroom, with a roommate, can be 44% less than for a one-bedroom alone, according to Apartment List data.

6. Spend money to invest in yourself too.

Economists at the Federal Reserve Bank of New York have found that most Americans get their biggest raises during their first decade in the workforce. So lay the groundwork for wage growth early. Don’t be afraid to shell out some money for a business communication class, technology training, or an additional job certification. A $500 class that leads to a promotion and raise could pay off in compounding returns throughout your career, as future raises build on top of your higher base wage. It may literally be the single greatest investment you can make.

http://time.com/money/3817434/saving-tips-advice-millennials/

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Six tips that can help you to save Money

Many individuals asking this question- How should I save money? Many of them started with a lucrative career but after a while they find it difficult to generate enough surplus from their income. Different reasons can be attributed to it- a sudden increase in debt, high lifestyle, insufficient increase in salaries etc. Whatever be the scenario, it's always important that one keeps generating a healthy savings to have enough money to cater to future requirements.

Here are few steps one should take to ensure savings rate do not take a bigger hit:

1. Know what’s coming in and what’s going out

It is necessary that you should know what you are earning. There is a difference between the salary package and the net income in your hand. You need to pay taxes on the income you receive. You have to plan your expenses and future with money that you get after paying taxes on your income. For salaried employees, tax payment is done by employers but you may still have to pay tax when you file your income tax returns. Do a detailed analysis and find out how much money you will really get in your hand. Once you know your right income, it pays to understand your outflows too. If your spending behavior is your main concern then analyze your bills. This will help you to know where you are overspending. It can be your outings or impulsive buying which might be forming a major chunk of these. It may also be high debt which you availed with expectation of increase in salary which never happened. Whatever be the cause find ways to curtail your overspending. If your cash outflows are high due to debt repayment then prepare a strategy to reduce your interest burden so that you can have more savings in your hand.

2. Stick to your budget

Once you know where your money goes and how much money you have, budgeting becomes essential. It helps to keep track of your money matters. It gives a very good picture of what’s happening with your cash flows and why. When you are at initial stages of your career this exercise may look too boring. Even if so, make it a point to prepare a budget. By making a budget you will do well in restraining yourselves from spending on items which you may want but are not needed today. You also get a glimpse of the surplus you are going to generate in next few months- provided you stick to your budget.

3. Separate your savings account

Savings will not be there unless you accumulate some money. Make it a practice of letting your savings go into a specific bank account from where you can invest them. As we say ‘Pay Yourself First’, this savings first need to be in practice to actually save money. You can divide your expense and savings account so that both do not get mixed up and you know clearly what you are saving.

4. How can you earn more?

Many times, your job growth is not decent enough to take care of rising expenses. But changing of job or a career is easier said than done. Identify, if there can be earning opportunities along with your job which can help you to increase your income. Part time teaching, consultancy assignments can become a good source of your extra earnings.

5. Resist impulsive buying

Youngsters fall prey to the advertisements offering big discounts. Impulsive buying is spending money on items which you have not planned to buy. If one goes on spending on things he does not need in a reckless way, there is a high chance of the landing in debts. Better plan what you want to buy and prepare a plan to fund that purchase. This will help you resisting impulsive buying and save for a brighter tomorrow.

6. Avoid credit to satisfy ‘wants’

If you are borrowing to pay for your ‘wants’ and not needs, better to avoid such borrowings. If you avail a personal loan to go for a long vacation overseas, you not only have to repay the money borrowed but also have to pay heavy interest on it, which further reduces possibility of saving money. Instead if you take a short holiday in India, you may end up saving some money.

To make savings a habit, it is necessary to remember below points:

§  Plan for all purchases.

§  Know what you need and what you want. Wants are the things which brings overspending in your finances.

§  While buying things try to negotiate. What is available in a mall may be available at an old shopping market but at a reduced cost. No harm in going there.

§  Fix time wise target for savings and follow it rigorously. Maintain a minimum saving rate of 10%- higher the better.

Source: MoneyControl.com

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Five investment mistakes you must avoid in 2016

Making mistakes is part of the learning process. However, it's all too often that plain old common sense separates a successful investor from a poor one. At the same time, nearly all investors, new or experienced, have fallen astray from common sense and made a mistake or two. Being perfect may be impossible, but knowing some of common investing errors can help deter you from going down the well-traveled, yet rocky, path of losses.

This time of the year, many individuals want to begin with their financial plans. Sometimes it pays not to make mistakes. While it is not possible for anyone to predict definite returns when investing, it sure is possible to avoid some common mistakes which can help you from losing your money.

Encapsulated below are some mistakes that you sure must avoid starting in 2016:

1.     Over investing in one asset class:

Like Warren Buffett rightly said “Don’t put all your eggs in one basket”, it is always advisable to manage your financial portfolio by the way of diversification. Diversification is when one chooses to put his money in more than one investment platform than just one, for example having the right balance of equities and debt funds in your portfolio. Most Indians have a poor exposure in equities which is not advisable; to make profits a right amount of equity investment is proposed. It should be noted that fixed deposits, real estate and gold are almost similar in nature, as over a long period of time all three asset classes perform at par with inflation.

2.     Postponing investment decisions:

Most people are too busy to invest; they just wait for the right time to invest. May be for a next promotion, a better salary or also a good raise. It should be noted that investment decisions should not be postponed. You can start as early as 20 years of age; you can save from your pocket money itself. Imagine your money resting in your savings bank account where it will earn only an interest of 4%, whereas when invested wisely it can earn you anything from 14% to 16%.

3.     Constantly looking for “What is New” syndrome:

Anyone who makes systematic investment decisions can easily say that the Indian equity market has performed 14-16% over the period of 10-20 years. An individual can easily keep adding more to it systematically to gain on their investments. However, people are more bothered about the “What is New” craze and unknowingly over diversify or what we call it as diworsefy.

4.     Periodic review:

Reviewing and analyzing ones wealth pie is very important, most individuals skip the process, in turn losing money. A holistic view of the assets one has and taking corrective measures at the right time is what is required to keep the investments healthy. It is imperative to note that reviewing your investments once a year is advisable, as this helps you to keep a check on what asset classes are performing and which are giving a negative return. If you notice negative returns you may want to switch your investments.

5.     Being affected by “Get Rich Quick” syndrome:

In the hurry to get rich most individuals do not want to give time, often falling prey to fast trading and quick losses. They buy expensive stocks and the moment the stocks start depreciating they sell them, as they get scared of losing money. The result is, instead of making money they end up incurring a loss. The worrying aspect of this syndrome is that both first time and experienced investors are affected by this. The ideal thing to do is to buy slow but steady, in this process you should ignore the highs and the lows. For stable returns one needs to stay invested for a considerable amount of time. Seek professional help as and when you need.

Summing up, I would like to add that it’s a pleasure to see your money go up, but it can be devastating to see your money going away. The idea is to avoid the above mistakes and stay safe. One just needs to stay focused on your wealth creation.

Source: Moneycontrol.com

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How to book stock market losses and make money

Booking losses at the right time forms the most important part of wealth management strategy.

Do you book profit or book loss?

You have bought the shares of ABC Ltd at a rate of Rs.100 per share. The current market price is Rs.150 per share. Also you have bought the shares of XYZ Ltd at a rate of Rs.200 and the current market price is Rs 125.

Do you book profits by selling ABC or book losses by selling XYZ.

Rule No.1: Never lose money. Rule No.2: Never forget rule No.1: Warren Buffett

This quote from Warren Buffet is the essence of selling loss-making investments as part of wealth management. However, to the contrary, most of us tend to sell those investments that make us money and prefer to hold on to those that are already making losses. It is just probably a feeling that we could not have gone wrong and the investment would revive, or on the other hand a feeling that we have been fooled and do not want to be fooled again and do not want to take action.

What to do with loss making investments?

"It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong" - George Soros

I recollected this saying when an investor told me that he always invested in right investments at the right time. I acknowledged his prudent nature, but felt that he and many other financially prudent persons needed to know that they also required to regularly review their investments to eliminate non-productive ones for productive and paying ones.

Wealth management is all about making money work best for you.

George Soros's lessons of prudent wealth management lie in not allowing your investment to depreciate (fall in value).This involves being ready to leave your comfort zone and revise your investment decision with the right attitude of being proud of the right investment and at the same time not being disgraced or regretful in making revisions or corrections in decisions already made.

Review your investments with the current outlook

Most of us make investments that are based on the information available to us at a given point in time. But it is important to know that with times the profitability or loss of an investment could change. It definitely proves useful to review and revise our decisions when we find that we are holding on to something that no one would buy or invest in now.

It is right that it is human to make mistakes, but holding on to a mistake just for emotional reasons cannot be pardoned. Subsequent events might alter the attractiveness of the investment.

Should we be possessive in our attachment to those investments for which the outlook has changed now? So I would say that if you need to create wealth and manage it, there is nothing wrong in being a fair weather friend; investments have to work for you and not accomplishing this goal means getting out of these investments for better avenues.

Do I need to book losses when the market is falling?

However I wish to be excused when I say it is not good to sell when the prices on the whole have fallen down. However it is again important to believe that poor stocks would surely be losing more than good ones; fall in price just does not indicate a downturn, it is a combination of various factors like production, sales and profits also; so poor stocks or small companies may find it difficult to recoup even when we experience favorable times in the market.

Again during the fall in the market it is common for us to see that even good stocks may be available at a discount. I would say such times are ideal to liquidate poor performing stocks that are not doing well and purchase good stocks.

Why should you book loss?

Booking losses in poor performing investments has got some advantages. So as to quit the poor performing investments, you are forced to quit your ego and admit that you have made a wrong investment decision.

As you admit your mistake, you learn a lesson. As you learn a lesson you do not take similar wrong investment decisions in the future.

The advantage of booking losses is you move out of poor performing investments and moving into better performing investments. So you will be able to recover your losses faster.

How to Get Tax Gains from Your Losses in Shares

For the purpose of tax computation of total income of an individual, all incomes are classified under five heads, under the Income Tax Act: Salary, Income from House Property, Income from Business or Profession, Capital Gains and Income from Other Sources. The total income under all these five heads of income are added and after allowing deductions the total income tax is calculated based on the tax slabs.

However, tax laws allow setting off of losses against gains in the same category, based on different criteria. If an income is tax-exempt, it however cannot be adjusted against any loss from an income that is taxable. For tax computation, profit or losses in shares are clubbed under the head of capital gains.

If an investor has held shares for less than 12 months from the date of buying, then the resulting loss on its transaction on stock exchanges, if any, is termed as Short-Term Capital Loss (STCL). On the other side, if an investor has held shares for more than 12 months, then the resulting gain/loss is termed Long-Term Capital Gain/Loss.

This loss can be adjusted against the Short-Term Capital Loss (STCG) or Long-Term Capital Gain (LTCG) from shares, if any, thus lowering the tax outgo. Short-term capital gains from equities are taxed at 15 per cent.

If the short-term loss cannot be set off in the same fiscal, then the balance can be carried forward to subsequent eight years. In each of these, the said short-term losses can be set-off against short-term capital gain (STCG) or long-term capital gain, if any.

To reduce outgo, many investors set off gains made from equities in the fiscal against losses occurred in same year or previous year. They book losses, if any, on existing holdings and then later repurchase the stock to keep their holdings intact.

For example, an investor has already booked short-term profit (by selling within 12 months) of Rs. 10,000 in some stocks. At the same time, the investor is sitting on un-realized loss of Rs. 4,000 in some other stocks.

In that case, the investor has to pay short-term capital gains tax at 15 per cent on Rs.10,000 profit. To reduce short-term capital gains tax liability, the investor can sell the stock on which he is incurring Rs. 4,000 of losses. In that case, the investor's has to pay tax on Rs. 6,000 (Rs. 10,000 - Rs. 4,000), not Rs. 10,000. To keep his holding intact, the investor can later repurchase the stock.

However, long-term capital losses on shares can only be set off against long-term capital gains, if any. Further, any long-term capital losses that cannot be set off against long-term capital gains arising in the same fiscal can be carried forward to subsequent eight years.

Disclaimer: "Investors are advised to make their own assessment and counter checks before acting on the information. - Tax Rules are subject to changes”

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Stashing Your Cash: Mattress or Market?

When stock markets become volatile, investors get nervous. In many cases, this prompts them to take money out of the market and keep it in cash. Cash can be seen, felt and spent at will, and having money on hand makes many people feel more secure. But how safe is it really? 

Read on to find out whether your money is safer in the market or under your mattress.

All Hail Cash?

There are definitely some benefits to holding cash. When the stock market is in free fall, holding cash helps you avoid further losses. Even if the stock market doesn't fall on a particular day, there is always the potential that it could have fallen. This possibility is known as systematic risk, and it can be completely avoided by holding cash. Cash is also psychologically soothing. During troubled times, you can see and touch cash. Unlike the rapidly dwindling balance in your portfolio, cash will still be in your pocket or in your bank account in the morning.
However, while moving to cash might feel good mentally and help you avoid short-term stock market volatility, it is unlikely to be a wise move over the long term.

A Loss Is Not a Loss

When your money is in the stock market and the market is down, you may feel like you've lost money, but you really haven't. At this point, it's a paper loss. A turnaround in the market can put you right back to break even and maybe even put a profit in your pocket. If you sell your holdings and move to cash, you lock in your losses. They go from being paper losses to being real losses with no hope of recovery. While paper losses don't feel good, long-term investors accept that the stock market rises and falls. Maintaining your positions when the market is down is the only way that your portfolio will have a chance to benefit when the market rebounds.

Inflation Is a Cash Killer

While having cash in your hand seems like a great way to stem your losses, cash is no defense against inflation. You think your money is safe when it's in cash, but over time, its value erodes. Inflation is less dramatic than a crash, but in some cases it can be more devastating to your portfolio in the long term.

Opportunity Costs Add Up.

Opportunity cost is the cost of an alternative that must be forgone in order to pursue a certain action. Put another way, opportunity cost refers to the benefits you could have received by taking an alternative action. In the case of cash, taking your money out of the stock market requires that you compare the growth of your cash portfolio, which will be negative over the long term as inflation erodes your purchasing power, against the potential gains in the stock market. Historically, the stock market has been the better bet.

Time Is Money

When you sell your stocks and put your money in cash, odds are that you will eventually reinvest in the stock market. The question then becomes, "when should you make this move?" Trying to choose the right time to get in or out of the stock market is referred to as market timing. If you were unable to successfully predict the market's peak and sell, it is highly unlikely that you'll be any better at predicting its bottom and buying in just before it rises.

Common Sense Is King

Common sense may be the best argument against moving to cash, and selling your stocks after the market tanks means that you bought high and are selling low. That would be the exact opposite of a good investing strategy. While your instincts may be telling you to save what you have left, your instincts are in direct opposition with the most basic tenet of investing. The time to sell was back when your investments were in the black - not when you are deep in the red.

Buy and Hold on Tight.

You were happy to buy when the price was high because you expected it to go higher. Now that it is low, you expect it to fall forever. Look at the markets over time. They have historically gone up. Companies are in business to make money. They have a vested interest in profitability. Investing in equities should be a long-term endeavor, and the long term favors those who stay invested. Serious investors understand that the markets are no place for the faint of heart.

This is also the time to review the strength and weakness of our portfolio and make necessary reshuffling to make it ready for next up move. Don't hesitate to sell the stock of a company in loss if we could find a better opportunity in another one considering the changing business environment.

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Seven product combinations for different financial needs

A variety of ingredients come together to make a complete meal. In personal finance too, it's about getting the mix right. 

Here are seven product combinations for different financial needs for you to consider.

1. Tax Planning

ELSS + PPF + NPS

When choosing products under Section 80C, opt for a mix that will not only help you preserve capital and save tax, but also make your wealth grow. ELSS gives the benefit of superior wealth accretion coupled with tax saving, with a low 3 year lock-in period. PPF offers guaranteed interest income, with a 15 year lock-in.

Based on your risk appetite and time horizon, decide whether to put more in ELSS or PPF. This can be supplemented with Rs 50,000 in NPS under Sec 80CCD (2), which is entirely tax deductible. This scheme is a good vehicle for building a retirement kitty.

Total tax saving: Up to Rs 61,800 for a person in highest tax bracket

2. Post-Retirement Income

SCSS + Bank FD

For those about to retire without the benefit of NPS or government pension, there are several options for generating income. The Senior Citizen Savings Scheme is the ideal fit with an assured return of 9.2% (currently) for 5 years, coupled with a tax break of up to Rs 1.5 lakh under Section 80C. You can invest a maximum of Rs 15 lakh a year in this scheme.

Any surplus should be parked in a 5-year tax-saving fixed deposit offered by banks at interest rates similar to traditional bank FDs. These investments are also eligible for tax deduction under 80C. However, interest earned on both instruments is not tax exempt. The two instruments combined offer retirees a steady stream of income.

The interest on SCSS investments are paid on a quarterly basis, i.e. on the first working days of January, April, July and October.

3. Capital Preservation

Tax-free bonds + Arbitrage funds

Safety of capital is very important yet safe instruments like FDs are not tax-efficient. Investors can instead put their money in a mix of tax-free bonds and arbitrage funds. The former are fixed income instruments issued by government-backed companies that guarantee safety of capital.

The interest rate of 7.3-7.6% is completely tax-free, making them more tax-efficient than FDs. While these come with a tenure of 10-20 years, investors can sell them on exchanges before maturity.

For enhanced liquidity, consider arbitrage funds. They yield returns comparable to debt instruments and are very safe. They are-tax efficient as they are treated as equity funds for taxation.

Tax-free bonds issued in 2013-14 have yielded returns of around 20%, apart from a near double-digit rate of interest for the investor.

4. Wealth Accumulation

Diversified equity funds + Dynamic asset allocation/Balanced funds

To build a corpus for long-term goals like buying a house, building a retirement kitty or funding a child's education, investors must choose products that provide enhanced earning power. This can come in the form of diversified equity funds. Those with a steady cash flow should ideally set up SIPs in 3-4 funds with a proven track record.

Additionally, investors can invest in a balanced fund or dynamic asset allocation fund to ride out the volatility inherent in equity markets. These will automatically shift the investor's money between equity and debt instruments depending on market conditions and introduce stability to the portfolio.

A Rs 10,000 monthly SIP in a multi-cap diversified equity fund starting January 2006 would have generated a corpus of Rs 23.5 lakh today.

5. Emergency Fund

FD sweep-in + Liquid fund

Put in place an emergency fund (ideally amounting to 6 months' expenses) to act as a buffer against unforeseen events. This fund is best created with a combination of a sweep-in account and a liquid or ultra-short term debt fund. Put 3 months' worth of expense in a fixed deposit with a sweep-in facility.

Under the sweep-in, any amount beyond a threshold is automatically moved into a fixed deposit, earning a higher rate of interest. In case of an emergency, the deficit in savings can be met by pulling from the FD. The remaining funds can be put in a liquid fund that not only offers high liquidity but also yields better return on idle savings.

Some funds like Reliance Money Manager Fund provide an ATM card which can be used to withdraw money instantly from the fund any time.

6. Insurance

Pure term plan + Family floater health plan + Accident insurance + Critical illness protection

For complete protection of yourself and your family, it is necessary to look beyond life insurance. A pure term plan will provide financial cover to your family in the event of your death. But this would be of no help if the policyholder meets with an accident and loses a limb. Supplement the term plan with an accident disability cover.

To prevent any medical exigency wiping out your savings, opt for a family floater health plan that can reimburse such expenses. Also consider a critical illness rider to go with a term or health policy to protect against costs associated with diseases like cancer.

A life insurance policy should ideally provide a cover of at least 8-10 times your annual income; health cover is best enhanced through a top-up plan to reduce costs.

7. Payments

Credit cards + Internet banking + e-wallets

Paying with cash is so last decade. Internet banking now allows you to carry out most transactions from home. Pay bills, transfer funds or create a fixed deposit at the click of a mouse. While shopping online or in the mall, make the experience more rewarding by using credit cards or e-wallets smartly. Credit cards allow you to enjoy interest-free credit for up to 50 days provided you pay the card bills on time.

They also offer rewards on every purchase. E-wallets being prepaid accounts help you buy merchandise and transact online without using your debit or credit card. The discounts and cash-back offers on various products make them a rewarding payments solution.

E-wallets allow you to store Rs 10 to Rs 10,000 in your online account at any time.

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