When It Comes To Steve Jobs’ Health, One Thing’s For Sure: Wall Street Hates Uncertainty:- Erick Schonfeld

Jan 17, 2011


Steve Jobs, as you’ve probably heard by now, is taking another medical leave of absence. The last time he took one in January, 2009 it was for six months and it turned out to be for a liver transplant, likely related to his earlier bout with pancreatic cancer. This time the leave is indefinite and Apple is not going into any further details about his condition.

One thing Wall Street hates is uncertainty. Just look at what happened to Apple’s stock between June, 2008 (when a very thin Steve Jobs appeared at Apple’s Worldwide Developer’s Conference, sparking speculation about his health), through his subsequent leave of absence, to June, 2009 (when the Wall Street Journal reported that he had undergone a liver transplant). During that period of uncertainty, the stock was down 23 percent, after dipping even lower (see chart). Will Apple’s stock take another hit this time around?

Already, the stock is trading down on overseas markets, but the timing of the disclosure appears designed to minimize the impact of this news as much as possible. The announcement comes when Apple’s market cap is at its all-time peak, not to mention on a holiday when the U.S. markets are closed (MLK Day), just before Apple is expected to announce another breakout quarter.

Ultimately, the relation of Apple’s stock price to Steve Jobs’ health depends on a few things: How will Apple perform in his absence; how long will he be gone; how serious is his condition; and when will more information be forthcoming. But mostly it depends on how much of Apple’s current $320 billion market cap is tied to the continued leadership of Steve Jobs.

Apple’s momentum looks strong enough to carry it through 2011 with a steady stream of product updates and its product roadmap is likely set for the next few years (MG has more on that in this post). But the entire computing industry is on the cusp of a major transition to mobile, touch devices—thanks in no small part to Apple and Jobs. Apple is leading the way here, but can it continue to fend off the rest of the industry without Jobs fully engaged? We shall soon find out.

Just remember, Apple’s been in this spot before. Jobs came back and it continued to thrive. Let’s hope history repeats itself.

Government mandates retirement funds to trade on bourses- VIKAS DHOOT,ET BUREAU

NEW DELHI: The government has asked all retirement funds to compulsorily trade in debt instruments on the exchanges. The diktat aims at shifting some of the biggest bond buyers from an opaque market where deals are cut over the telephone to a more transparent one. Such one-to-one transactions often hamper liquidity, transparency and price discovery in the secondary bond market.

Thousands of retirement trusts administering provident fund, pension, superannuation and gratuity benefits, buy and sell debt instruments directly from brokers in off-market transactions. Market regulator Sebi has told the government that these institutions are not engaged in transparent trading while investing employees' retirement funds.

"Retirement funds are important players in the bond market and we had noticed that a majority of their trades take place through unregulated intermediaries so they never get reported," a senior Sebi official told ET.

This not only poses a pricing and settlement risk for pension funds, but also hampers liquidity in the corporate debt market, he added.

The government has now set a deadline of February 28 for pension funds to report all bond purchases on BSE, NSE, or with the Fixed Income Money Market Dealers Association (FIMMDA). All bond transactions would also have to go through the two authorised clearing corporations - NSCCL or ICCL.

"From March, corporate bond trades data will become more robust and could trigger a virtuous cycle for our markets," the Sebi official said. "Transparency would bring more investors and push up liquidity, making the market amenable for listing infrastructure bonds and Indian depository receipts," he said.

The move comes nearly a decade after the Seamen's Provident Fund lost 92 crore when brokers like Home Trade failed to deliver securities that had been paid for. The RH Patil Committee on debt markets had recommended bringing all bond trades above board to avoid such situations and boost the corporate debt market.

Sebi had banned primary dealers and banks from dealing with entities that are not registered with the clearing corporations from December 2009. Mutual funds and Irda-regulated entities had signed up at the time along with a couple of hundred savvy corporate retirement funds.

With banks and dealers out of bounds, most retirement funds have had to depend on a clutch of brokers to purchase bonds. "A parallel market has been building up over 2010 where some broker would buy bonds from banks and dealers and sell them at a high margin to pension funds," a senior official at a primary dealer said. "We are heaving a sigh of relief as this move will level the playing field," he added.

HUFs will have to leave PPF after 15 years- SHISHIR ARYA,TNN

NAGPUR: Hindu undivided families (HUFs) will now have to mandatorily exit from the public provident fund (PPF) on completion of 15 years. The move is aimed at checking misuse as several people were investing in PPF to earn 8% tax-free return as an individual as well as an HUF, which are set up by family members to avail of tax benefits. The head of the family is the karta or the main operator of the account, with the others being family members. While daughters can be members of an HUF, on marriage, they cease to be members of the one promoted by their fathers.

After the government stopped fresh investment by HUFs in PPF from May 2005, several of them continued to park funds in the popular savings scheme as it earned them a 8% tax-free interest. Some were older investments though they were yet to complete the 15-year period while others availed of a five-year extension.

But a recent finance ministry notification has said that money should be refunded as soon as the 15-year period ends for PPF accounts opened by HUFs before May 13, 2005. For the accounts where the 15-year period has already ended, the money will be refunded on March 31 next year.

This means accounts opened after the ban was imposed in 2005 will be allowed to continue only till the tenure ends, while the others will be terminated at the end of the current financial year.

There are many accounts which are running on a fiveyear extension. But, with the current rule, they will be terminated by March end, no matter whether theextension period has ended or not, said a source dealing with PPF and other small savings schemes such as the National Savings Certificate ( NSC )) and post office deposits.

Fresh investments by HUFs into PPF was stopped as it was observed that the facility was being misused. Investments were made in the name of HUFs as well as individuals as both are considered as separate entities. This allowed the investors to earn 8% tax-free returns both as an HUF and an individual . This continued even after the ban came into place.

The philosophy of small savings is to provide a savings window to the middle class or those living in remote areas where banking services are not available.

Eight tax saving secrets you should know - VIVEK KAUL & KHYATI DHRAMSI,ET BUREAU

The Income Tax Act 1961 is a voluminous piece of legislation. Taxmann Publications’ latest edition of the Act runs into 1,125 pages. It’s enough to intimidate even the most diligent law student and tax expert, leave alone ordinary taxpayers. But hidden away in the 300-odd sections and 14 schedules are clauses that can benefit ordinary taxpayers-provided they know how to claim those benefit.

ET Wealth spoke to a range of tax experts to glean information on little-known tax benefits you may be entitled to. Here are eight deductions that can help you save tax over and above the tax saving investments you make during the year.

1. Use losses in stocks to cut tax

Can you gain from the short-term losses you made on stocks? Yes, says the Income Tax Act. If you have made any long-term capital gains from sale of property, gold or debt funds, you can set them off against short-term capital losses made on stocks and bring down your tax liability. “Short term capital losses can be set off against both shortterm capital gains as well as taxable long-term capital gains,” says Sandeep Shanbhag, director of Wonderland Consultants, a Mumbai-based tax planning and financial consultancy. This can be especially useful for someone who has booked profits on gold ETFs and physical gold this year. Suppose you have sold a property and made a long-term capital gain of Rs 30 lakh after indexation.

At 20%, the tax payable on this long-term capital gain is Rs 6 lakh. However, if you have also sold some junk stocks during the year and made a short-term loss of Rs 3 lakh, you can set this off against the gains from the property. Then the gain from the property will get reduced to only Rs 27 lakh and the tax payable will be Rs 5.4 lakh. However, the law makes a distinction here. One cannot set off short-term gains from stocks against long-term capital losses from the other assets. “Long term capital losses can only be set off against taxable long-term capital gains,” says Shanbhag.

How much tax can you save: Setting off a short-term loss of Rs 3 lakh against longterm gains can help you save Rs 60,000.

Proof required: Keep record of your equity trading account statement with details of the transactions that resulted in losses.

2. Get deduction for rent even without HRA

House rent can account for as much as 40-50% of the total household expense. That’s why the house rent allowance is exempt from tax to a certain limit. But what if your salary does not include an HRA component or you are a self-employed professional or businessman? Under Section 80GG, you can claim deduction of the rent paid even if you don’t get HRA. “Not many people are aware of this deduction,” says chartered accountant Mehul Sheth. But there are stiff conditions to be met. The least of the following three can be claimed as deduction: rent paid less 10% of total income; or Rs 2,000 a month; or 25% of total income. Also, the taxpayer should not be drawing any HRA or any housing benefit.

Besides, he or his spouse or minor child should not own a house in the city where he stays and he should not be claiming tax benefits for some other self-occupied house. Whew. Incidentally, if you are living in your parents’ house, you can pay rent to them. If your parent has no other income or pays a lower tax, this can bring down your tax liability significantly. However, the rent will be taxable as the income of the parent after a 30% standard deduction. This means, you can pay a senior citizen parent up to Rs 3.43 lakh a year.

How much tax can you save: Given the stiff conditions, one can’t claim more than Rs 2,000 as deduction per month under Sec 80GG. But this can bring down your tax by Rs 7,400 a year in the highest tax bracket.

Proof required: Taxpayer has to submit a declaration on form 10-BA that he is paying rent and not receiving HRA.

3. Pay lower tax if someone is ill

The treatment of a chronic illness can be a drain on the finances of a taxpayer. That’s why the Income tax Act allows a taxpayer to claim a deduction of Rs 40,000 if he has a dependent who suffers from any of the ailments specified under Section 80DDB. “The deduction is higher at Rs 60,000 if the patient is a senior citizen,” says chartered accountant Paras Savla. The diseases include, neurological diseases (including dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and Parkinson’s disease), malignant cancers, full-blown AIDS, chronic kidney failure and haematological disorders (haemophilia and thalassaemia). Dependents can include spouse, children, parents and siblings. However, there are a few conditions.

The patient should be wholly or mainly dependent on the taxpayer and should not have separately claimed deduction for the disability. If the amount spent is reimbursed by the employer or an insurance company, there is no deduction. If the taxpayer gets a partial reimbursement of the expenses, the balance can be claimed as deduction.

How much tax can you save: If a dependent is a patient, the taxpayer’s liability comes down by 12,360 in the highest income bracket. If the patient is a senior citizen, the tax is lower by Rs 18,540.

Proof required: One needs a certificate of the illness from a specialist in a government hospital.


4. Claim benefits for your political affiliations

Can you lower your tax if you have political connections? Apparently you can. Any amount contributed to a recognized political party can be claimed as a deduction under Section 80GGC (80GGB for corporates). “This is a new deduction and was introduced in April 2010. The donation can also be made to the electoral trust which works for the purpose of conducting elections,” says Sheth. Interestingly, unlike other deductions, there is no ceiling on the amount that can be claimed as a deduction. Of course, the deduction is available only if the donation went into the party coffers.

Cash given to individuals doesn’t count. Other donations also get you tax benefits. Under Section 80G, donations to charitable organizations get deduction ranging from 50% to 100%. It’s a good idea to know how much deduction would be available before you write a cheque. However, There is a ceiling to the deduction a taxpayer can claim in a year. “The quantum of deduction is limited to 10% of the gross total income of the donor,” says Tapati Ghose, partner at Deloitte Haskins & Sells. Also, only cash donations are taken into account. Food, clothes and medicines do not qualify.

How much tax can you save: In the highest tax bracket, a donation of Rs 1 lakh to a political party can bring down your tax by Rs 30,900.

Proof required: You must have a stamped receipt of the payment from the political party.


5. Use education loan to lower tax

The rising cost of higher education is forcing people to borrow money to pay the fee of their children’s professional courses. The taxman is sympathetic and offers a deduction that can lower the cost of the loan. The interest paid on an education loan is fully deductible from taxable income under Section 80E. Till a few years back, this deduction was available only to the borrower. Now, even a parent or a spouse can avail of it. What’s more, this now includes loans taken for vocational courses. “If a parent or legal guardian takes the loan, he can claim deduction for the interest paid for up to eight successive years, starting from the year in which the interest is first paid,” says Shanbhag.

However, loans taken for siblings and other relatives do not qualify. Also, the lender must be a recognised financial institution; loans from employers or individuals do not count.

How much tax can you save: If you take a Rs 10 lakh education loan at 10% interest for 8 years, you can save Rs 1.41 lakh in tax in the highest tax bracket. This will bring down the effective cost of the loan to 7% per annum.

Proof required: Loan statement from lender.

6. Disabilities can be tax savers

There are other signs to suggest that the taxman is not the heartless Scrooge he is often made out to be. If a taxpayer suffers from a disability, he can claim deduction of Rs 75,000 under Sec 80U. If he has a disabled dependent, he can claim the deduction under Sec 80DD. Disability includes blindness, low vision, leprosy, hearing impairment, loco-motor disability, mental retardation and mental illness and deduction is available only if the impairment is at least 40%. If the disability is severe (80% or above), the deduction is Rs 1 lakh a year. The dependant could include the taxpayer’s spouse, children, parents and even siblings.

Incidentally, the deduction is offered as a lump sum and does not depend on the actual amount that the taxpayer may spend on himself or on the disabled dependent. However, the disabled person should be wholly or mainly dependent on the taxpayer for maintenance, and should not have claimed deduction for the disability under Section 80U separately.

How much tax can you save: A deduction of Rs 75,000 can cut tax by Rs 23,175 in the highest tax bracket. In case of severe disability, the tax is lower by Rs 30,900.

Proof required: A certificate of disability from a civil surgeon or the chief medical officer of a government hospital.

7. Take unlimited deduction for your second home loan

When it comes to buying a second house, the taxman can be very encouraging. Under Section 24b, one can claim deduction of up to Rs 1.5 lakh a lakh for interest paid on a home loan. But if the taxpayer buys a second house through another home loan and gives it on rent, the entire interest paid on the home loan during a given year can be claimed as a deduction. As Savla says, “If you have more than one house, any one is deemed to be rented out. So the interest income on the home loan for that house can be claimed entirely for deduction, provided the rental income or a deemed income is charged to tax.”

How much tax can you save: If you have taken a home loan of Rs 50 lakh at 9.5% for 20 years, your interest payment in the first year will be Rs 4.7 lakh and you can save tax up to Rs 1.09 lakh.

Proof required: Loan account statement from your lender

8. Claim HRA as well as home loan benefits

But you can claim both house rent allowance (HRA) exemption as well as the tax benefits on the interest paid on a home loan. Many organizations do not allow employees to claim both benefits. Their logic is that HRA is exempt if you are paying rent and home loan benefits apply only for a self-occupied house. You can’t be doing both at the same time. But this is a gray area in the Income Tax Act. “In legal terms, silence signifies approval.

In other words, the Act need not expressly allow something. The lack of express disallowance also signifies intention of approval,” says Shanbhag. So given this, HRA and interest on home loan are two separate provisions and claiming one of them as a deduction does not influence the other. As Shanbhag puts it, “The taxpayer may own any number of flats, either in the same city that he works in or anywhere else in the whole of India or for that matter abroad, but that in no way influences the HRA deduction that he is entitled to.”

There are many such examples in the tax laws. Let’s take for instance, Section 80C (PPF, NSC, ELSS etc.) and Section 80D (medical insurance premium). “Everyone will agree that both Section 80C and Section 80D can be separately claimed. But does it expressly say so anywhere?” asks Shanbhag.

How much tax can you save: In the highest tax bracket, a deduction for Rs 1.5 lakh will bring down your tax by Rs 46,350.

Proof required: Loan account statement from your lender

IT dept plans new measures to curb tax evasion

NEW DELHI: The Income Tax department plans to "immediately capture" on receipt the data of returns filed by taxpayers to enhance their investigation and enforcement action to curb tax evasion and reduce tax gap over the next few years.

The department is also mooting developing a "criminal investigation" system within its establishment to combat terror financing, money laundering, offshore tax evasion and other illegal trades which impact national security.

"Income Tax department intends to use innovative methods to supplement its traditional enforcement tools in order to reduce the tax gap during the strategic plan period 2011-15. A conscious effort will be made to move towards non-intrusive targeted enforcement tools," the 'Vision 2020' document of the department said.

The 30-page document, which charts out the course of action for the I-T department over next few years, was unveiled recently by Finance Minister Pranab Mukherjee.

To achieve this objective, the I-T department will "make internal data available almost on real time basis by capturing data from paper returns immediately after receipt," the document said.

The department also aims at making internal data (of I-T) "robust and current" by including information gathered during enforcement action by the investigation wing and the assessing officers.

The I-T department, will also consider modification of Income Tax Return forms to capture relevant information to facilitate matching of external information, it added.

The department, which is currently probing a host of high-profile financial irregularities from and to overseas destinations, considers that the "next decade" will see an increased role (of I-T) in scrutinising" such transactions and fund flows.

"This will require the income tax department to deploy considerable resource and energy on criminal investigation. Effective criminal investigation will necessarily include a comprehensive international strategy to combat offshore tax evasion, and fund flows that threaten security of the country."

The document, which will undergo a mid-term review in 2013, aims at taking forward the strategic planning of the department and its policies from 2011-2015 along with the new Direct Taxes Code (DTC) which is proposed to replace the current Income Tax Act from next fiscal.

Why Fixed income will grow in 2011 -

2010 has been a tough time for those living on fixed income investments. Rising fuel and food prices have increased inflation and the middle class is struggling with its monthly finances. With inflation moving up due to rising commodity and oil prices, the central bank may be forced to increase rates in the near future despite already raising it six times in 2010. So, what should a fixed income investor do in such a situation?

Bank Fixed Deposits: Around 55% of Indian savings find their way to bank fixed deposits (FDs). The simplest of all investment products, a bank FD is easy to operate. All you have to do is walk in to your friendly neighbourhood bank and open an FD. In case of bank FDs, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. A point to be noted is that different banks offer different rates on FDs.

So, the rate offered by the State Bank of India (SBI) will be different from that offered by ICICI Bank or a foreign bank such as HSBC. “Most retired people find FDs easy to operate. The fact that they give an assured return is another positive,” says Harish Sabharwal, chief operating officer, Bajaj Capital. FDs are available across tenures ranging from seven days to 10 years. However, the interest rate on a seven-day deposit is merely 3% per annum, so choose your tenure accordingly.

With the recent revision in bank deposit rates, you could get as much as 8.5% per annum. If you are a senior citizen, you could earn 50 basis points extra on your FD. A 555-day SBI FD offers you an interest rate of 8.5% per annum. For a senior citizen, it goes up to 9% per annum. So, if you have not yet built your FD portfolio or are looking for higher interest from bank deposits, this could be the best time to get into it.

Post Office Schemes: The schemes offered by the post office give guaranteed returns and are attractive investment options. “These schemes find favour with investors who are looking for sovereign guarantee,” says Anil Chopra, Group CEO, Bajaj Capital. Interest rates here are fixed by the Government of India, and do not change often, unlike bank deposits. So, even though banks have revised deposit rates upwards, post offices are yet to follow suit.

Currently, National Savings Certificate and Post Office Monthly Scheme and Public Provident Fund offer you a return of 8% p. a. “NSC and PPF are eligible for deduction under Section 80C and, hence, find favour with some taxpayers,” says Anup Bhaiya, MD and CEO, Money Honey Financial . In addition, the Senior Citizens Savings Scheme offers you a 9% per annum rate of interest, but for that you need to be 60 years of age. “People generally flock to post office schemes when bank deposits pay lower than them,” adds Chopra. It would make more sense to invest in a PPF as interest income is tax-free.

Employee Provident Fund: EPF is a retirement benefit provided to the salaried class. Every month a small amount is deducted from your salary which is invested in the EPF account, with the employer also contributing a similar amount. On September 15, 2010, the Employees’ Provident Fund Organisation raised the interest rate by 1% for 2010-11 to 9.5%. This figure is the highest in the past five years. Liquidity is an issue in this and partial withdrawal is possible but only if you have completed five years of service.

Company Deposits: These are unsecured instruments. Their safety depends on the financial position of the company. Hence, investors have to be very careful while choosing a company. High returns come with higher risks. So, take the trouble of checking the company’s credit rating.

Stick to known names, and profit-making companies even though it means lower returns. Go for companies which command an AAA rating. In the past, there have been several instances when companies were not able to repay interest as well as principal on deposits, leaving investors high and dry. Returns here could be in the range of 9-12%, depending on the company. Certain real estate companies offer higher returns, but investors should avoid such companies.

“Since the instruments are unsecured, we do not advise investors to invest in such products,” says Sumeet Vaid, CEO Ffreedom Financial Planners. Like FDs, even these are not tax-efficient. Interest earned from FDs is taxable, and hence these instruments also do not score on tax efficiency. Investors must not fall prey high-paying FDs of companies in troubled sectors.

Mutual Funds: Mutual funds are preferred by investors as they score on liquidity and the tax front. There are various products available in this category, including fixed maturity products (FMPs), liquid funds, short-term bond funds and gilt funds. Dividend income from mutual funds is tax-free in the hands of investors. Based on your time horizon and interest rate view, you choose products. Debt funds have a fairly wide range of schemes offering something for all types of investors. Liquid fund, short-term income funds, gilt funds, income funds, fixed maturity plans (FMPs) and hybrid funds are some of the more popular categories.

“Conservative investors could invest in a three-month FMP where returns could be in the range of 8.6-9%,” says Ramesh Rachuri, fund manager-fixed income, Bharti Axa Investment Managers. He feels that there will be more clarity in March as to where interest rates are headed and investors could take their decision accordingly. If you have a slightly longer time-frame of say 3-6 months, then you could invest in a short-term bond fund. While FDs have a lock-in period wherein premature withdrawal attracts a penalty.

Debt funds can generate better yields during economic growth, depending on the kind of scheme chosen by the investor. A debt fund invests in a range of securities leading to diversification of risk. Also, debt funds offer regular income schemes where the interest payment is given to investor for his investment at regular intervals. From a tax-efficient and liquidity angle, investors should opt for fixed maturity plans as returns there could be 8.5-9%.

Non-Convertible Debentures: Recently companies like SBI, Shriram Transport, L&T Finance have come up with these offerings. There has been a mad rush of late among investors for such instruments. Along with the higher rate of interest, investors are also drawn to NCDs as there is no tax deducted at source on the coupon. The tenure of these bonds varies from company to company. Some of them may have a put/call option involved. These debentures are listed on the National Stock Exchange, but liquidity is poor. Investors will have to consider these on a case-to-case basis as and when they hit the markets.

So, What Should You Do In 2011?: “Investors would do well to choose products depending on their liquidity requirements and risk appetite,” says Bhaiya. “Typically investors should divide their portfolio into short-term debt and long-term debt,” adds Chopra. Around 20-30% of your money should be kept in liquid products such as short-term funds or liquid-plus funds , while another 50% could go into bonds, company FDs and post office products, with the balance 20-25% going into your employee provident fund or public provident fund (PPF).

Are you saving enough for your child’s education?- Pankaj Mathpal CFP, MD, Optima Money Managers

Child’s professional or higher education is one of the most important financial goals for every parent . Parents start imagining right from their child’s birth that their baby will grow up to become a doctor, engineer, pilot or an astronaut.

But with the cost of education increasing drastically over the past few years, turning such dreams into reality may require a lot more planning than earlier.

Many schools in metros are charging fees as high as .Rs 75,000 to Rs 1 lakh per annum for a kindergarten student, which is probably equal to the total amount that our parents paid for our entire education. Tuition fee for IIM-Ahmedabad for the 2010-12 batch is around Rs 13.70 lakh, which may go up to Rs 57.23 lakh after 15 years, assuming education inflation at 10% per annum.

Do The Maths Before Investing:

Calculate the amount you will require for your child’s education considering the current cost of a particular course and keeping the education inflation in mind, may be 10% per annum. Once you calculate the expected cost for your child’s education you can start investing monthly to build the corpus. There can be two methods of deciding the amount of investment.

One is investing a fixed sum every month throughout the accumulation phase. For example, if you want to accumulate Rs 50 lakh in the next 15 years you need to invest Rs 10,506 per month considering 12% return from your investment. If you feel the amount is quite big, you can follow the growing annuity method, where you start with a smaller amount initially and increase it subsequently with rise in your income .

For example, if you expect a 10% rise in your income on a year-on-year basis and decide that you will increase your investment accordingly. You can start with Rs 6,000 per month in first year and keep increasing it by 10% every year to build the corpus of Rs 50 lakh in the next 15 years with CAGR of 12% from your portfolio.

Buy An Adequate Cover:

Every parent wants that his child should get the best education. Parents should always buy adequate life insurance cover to take care of a child’s education in case of any unforeseen event. Sum assured may not be the amount which is required for the education in future but the amount which can generate an amount equal to that in future , considering some returns on that investment . Term plan can be the best choice to get the higher sum assured with low premium.

Stick To Your Asset Allocation:

Asset allocation refers to how much of the various asset classes you have in your portfolio. The idea of asset allocation is that if one of your asset classes in your portfolio performs poorly then returns of your other asset classes will balance the returns of your portfolio. Some general asset classes are equity, debt, gold and real estate.

You can consider equity shares or equityoriented mutual funds, fixed income instruments like fixed deposits, PPF, small saving schemes of post office, bonds, debtoriented mutual funds, gold or gold ETF etc. in your portfolio. Percentage allocation of each asset class in your portfolio may depend on your risk-appetite but don’t avoid equity just because it is more volatile than a fixed-income instrument.

We all know that equity has always delivered higher returns in the long-term but we should also not forget that a portfolio could be 40% down in 2008 if there was only equity in the portfolio.

Monitor & Rebalance Your Portfolio :

Monitor the performance of your portfolio regularly and take the necessary action, if required. Rebalancing is an important part of investment. Portfolio rebalancing is accomplished by occasionally resetting the proportion of each asset class back to their original percentage.

For example, you start investing a fixed amount every month in debt and equity in the ratio of 50:50 and debt delivers 8% returns whereas equity delivers 14%. Debt equity ratio in your portfolio will change to 46:54 after five year.

To rebalance your portfolio you will need to sell a portion of the asset which is more from the target allocation in your portfolio and buying the assets which are less.
So, proper planning, implementation and monitoring your plan periodically are key to achieving the financial goal for your child’s education.

Weathering a Correction By Devangshu Datta | Jan 8, 2011

After months of irrational exuberance, the market is set to go into a period of irrational depression. This is normal — markets are manic-depressive. Stock prices rarely trade at fair value — they either overshoot or underperform.
We have a political crisis of sorts with the 2G scam. We have a sell off in bank and financial stocks that may be a response to the trend of rising interest rates and inflation. We had average to mildly disappointing first half results when rising interest costs impacted corporate profit growth though turnover grew. Most of all, we have a shift in FIIs’ (foreign institutional investors) attitude to negative due to external factors.


There’s no telling how long the downturn could last. It could be a small correction (the Nifty has dropped 5-6 per cent from its recent peaks). It could be a major correction (more than 15 per cent). There may be a v-shaped move with a sharp correction followed by a sharp recovery. There’s no point in panicking. The government is unlikely to fall. Nor does it appear likely that the external situation will turn into a full-blown global crisis.
Valuations are high with the Nifty trading at a PE of 23-plus (5,900 levels) even post-correction. For a value-investor, India is not a buy. It will need to drop to a PE of around 18-20 before it looks comfortable from a value-investing perspective. That would qualify as a deep correction. Waiting for a correction of that magnitude is unlikely to be a good strategy — it may never happen.
On the other hand, increasing equity exposure on a 5-6 per cent downturn is also a dangerous strategy. The market is coming off 33-month highs and it could fall quite a bit further. So, I’d say continue with any normal systematic investment plans that you are holding, but don’t tinker much with equity allocations — either up, or down.
A case for hedging
Rather than passively increasing equity allocation across the board or panicking and cutting down on equity exposure, there’s a case to be made for smart hedging. Increase equity allocations but do so in stocks that are less highly priced and thus, unlikely to be hurt that much in case of a downturn.
There aren’t too many counter-cyclicals available. But sectors such as FMCG and Pharma have not gained as much in the past 18 months as metals, finance, IT and auto. Both FMCG and Pharma have a reputation for holding value through downturns and they could actually gain because of traders switching out of more volatile sectors.
Infrastructure in general has been an underperformer but one would hesitate to recommend it right now because the fallout from the 2G scam could affect not only telecom but other policy-sensitive infra-sectors as well. Enforced higher provisioning for housing mortgages and higher interest costs suggest that housing finance will not be an outperformer in the second half of 2010-11 at least.
Another possible angle, if you wish to be proactive and make money during the decline, is to risk buying deep out of the money long-term options on the Nifty. Due to the fall, January calls at the Nifty 6,300 to 6,500 level, for instance, are available cheap. If the market does recover within the next two months, those call premiums will multiply. Alternatively, buy out of money January puts at 5,500 Nifty. If the market falls, those puts multiply in value and protect your portfolio downside.
The classic derivative trader’s strategy is to set up hedged positions that could gain if the market loses ground. For example, sell the Nifty futures and buy cheap calls at the same time. That way, if the market falls, you gain on the futures and if the market rises, your losses are limited by the appreciation in the calls.
There are more or less risky variations of these methods — using bear spreads, using calendar spreads, etc. The really sophisticated hedge funds will set up market neutral positions, which should gain regardless of short-term direction. However, this is difficult for the average long-term passive investor to even conceptualise, much less exercise.
What the average long-term investor must do is find the courage to continue investing steadily through a possible fall. If you decide to go overweight, do it selectively in less high-priced sectors.
If you want to be pro-active, hedge your portfolio or find some other way to profit from a fall. Just don’t go underweight, or worse still, exit the market.

Beware of Frauds By Dhirendra Kumar | Jan 10, 2011

Following the Citibank scam, India’s wealth management business is under siege. The financial industry’s grapevine is buzzing with talk of customers redeeming their investments, insisting on recordings of conversations, pulling out blank signed documents they had handed over, and generally acting as if there trust level has dropped to zero. And so it should. Even though there’s no shortage of people trying hard to spin Shivraj Puri’s actions as an isolated case of fraud, it’s clear that this was something that was waiting to happen.
The modus operandi of the service is heavily dependant on individual being trustworthy. Far too big a role is played by word of mouth and by pre-signed blank cheques and documents. This is not a critique of wealth management itself (which is a separate story by itself), but of its general method of operation.


This system that has the deliberate impersonation of customers built into it. In the financial and legal system, your signature is taken as proof of your approval of an action. If a document has your signature, then it is understood that you signed it with full knowledge of what it contained and are in full concurrence with that document’s intent.
However, the officially-sanctioned operating procedures of Citibank, and of other wealth managers, are designed to fake this process. Getting blank documents signed from customers is standard operating procedure for banks, brokers and other entities. Curiously, lawyers will tell you that the sanctity of a pre-signed document is not the same as that of a properly signed one but this legal point doesn’t appear to have been challenged in such cases.
To all appearances, the RBI and SEBI are okay with this practice of routinely undermining the sanctity of the signature. As the Citibank case shows, this is a dangerous practice that is open to abuse. Using the old principle of there never being just one cockroach in a kitchen, there could have been any number of cases where this sort of abuse has already happened and has been settled quietly or otherwise hushed up.
Whether your wealth manager is making good investments or not comes later. The least you can do is to make sure that is that you are not leaving yourself open to obvious frauds.
This column first appeared in The Economic Times on January 10, 2011

Tracing families’ escape from poverty Economist’s study shows how the poor in developing countries become wealthier. Peter Dizikes, MIT News Office

For all the detailed tools developed to study finance in past decades, relatively few scholars have brought those methods to bear on a pressing social question: How do poor people manage their finances?

Now, a long-term study of the poor in small villages in Thailand is shedding light on the issue. Having a sound financial strategy, including a commitment to saving money, has a large impact on lifting families out of poverty, the research reveals. Moreover, advances in wealth are linked to highest level of education obtained by a household member, as well as a willingness to try new ventures.

The study, based on a unique set of data collected under the direction of MIT economist Robert M. Townsend, shows that among rural households, 43 percent realized significant and lasting gains in net worth over a seven-year period, and that 81 percent of that wealth accumulation was due to savings of income, as opposed to gifts or remittances, that is, contributions the family did not earn.

“There is not a poverty trap in these Thai villages,” says Townsend, the Elizabeth and James Killian Professor of Economics at MIT. “There are strategies people can pursue to increase their relative wealth.”

The findings are summarized in a new working paper, “Wealth Accumulation and Factors Accounting for Success,” written by Townsend and Anan Pawasutipaisit of Thammasat University in Thailand, and slated to be published in the Journal of Econometrics. The conclusions are based on a pioneering survey of household finances in 16 Thai villages that Townsend initiated in 1997. This paper takes monthly data from 1999 through 2006, for 531 households, and represents a unique view into the month-by-month financial lives of rural villagers in a country that has demonstrated substantial economic growth in recent years, yet still has substantial pockets of poverty.

The Thai villagers in the survey tend to be farmers, fishermen, laborers or run small businesses. Households that do get ahead have some generally shared characteristics. The heads of households tend to be younger than in the families that do not increase their worth. Additionally, gains in wealth correlate specifically to the highest level of education obtained by a family member, and not the family’s median educational level, as Townsend notes.

“It’s not the average wisdom of household members pulled together,” says Townsend. Rather, he notes, “It’s suggestive that it is the ability or talent of one individual” that can change a family’s entire economic trajectory.

Moreover, the data show financial success to be a persistent feature of certain households, meaning it is not the case that “successful entrepreneurs are those that simply get lucky” due to one good crop or fish harvest, as Townsend and Pawasutipaisit write in the paper. But new ventures are sometimes behind the accrual of wealth. In one survey village, the household with the highest annual rate of return on assets (17 percent) was headed by a corn farmer whose wife insisted that they try raising dairy cows instead, sensing that owning livestock would be more profitable in their area; the idea came in part after a milk cooperative sent workers to educate villagers about cows.

“This work really lifts the veil on the lives of low-income people that had been hidden, largely because we don’t usually collect data with this frequency,” says Jonathan Morduch, a professor of public policy and finance at New York University. “Once you do that, you see that people are not passively accepting their fates. We see a lot of consumption smoothing — people’s incomes are going up and down, but they’re borrowing, saving, insuring with each other and reducing risk in an informal way. People are actively seizing opportunities. That’s exciting and important to know.”

Townsend has also summarized some of his research in a 2010 book, Households as Corporate Firms (Cambridge University Press), written with economist Krislert Samphantharak of the University of California, San Diego. Now, as the survey continues, Townsend and Christopher Woodruff, another economist at the University of California, San Diego, are trying to further define just what it is that makes some households more entrepreneurial-minded and able to generate a higher return on assets than others. Currently the survey is asking questions about financial literacy and risk-taking tendencies in an attempt to create a more detailed profile of the types of households that escape poverty as a result of trying new businesses.

How do small gains feed a large economy?

In turn, another area of ongoing research for Townsend and his colleagues is the attempt to take the microeconomic data from individual households and villages, and use it to flesh out the macroeconomic analysis of Thailand’s economy as a whole.

“It’s easy to think of Thailand and countries like it as producing GDP [gross domestic product] from the factories which line the highways as you enter Bangkok,” says Townsend, referring to firms like Ford and Nike with large operations in the area. But multinationals and incorporated businesses only account for 20 percent of Thailand’s national income. “We already know that households as firms are a big building block of the national economy,” he adds. “We want to understand the evolution of that as the economy itself gets bigger. Where did the bigger, domestically owned Thai firms come from? Did they grow from some interesting earlier existence?”

The financial activities of people in the more rural areas of Thailand are linked to the larger economic situation in the country in other ways as well. Households in many Thai villages run businesses that do not earn as great a rate of return as, for instance, savings accounts; some of the more financially savvy Thai households put their savings into banks.

“And then that money becomes somebody else’s loan,” says Townsend. “In the United States, people talk about Main Street and Wall Street as if they are separate. But we think it’s really important to understand how these financial institutions and markets are put together, and how that fabric is woven into the national-level economy. That’s a very big part of our ongoing research.”

Some funding for the research was provided by the John Templeton Foundation, the Bill & Melinda Gates Foundation, and the National Institute of Child Health and Human Development.

Getting Off On The Right Foot In 2011: Mint’s Personal Finance Roundup Silicon Valley Blogger on 1/10/201

Happy 2011! It’s that time of the year when people are still a little sedate because of holiday hangovers. The work grind is still picking up momentum from the holidays, and these pockets of “calm before the storm” are perfect moments for us to start the year right. Hopefully, we have time to reassess our lives in order to see areas where we can improve, directions that we can take and goals we can set for 2011 and beyond. Here are a few financial articles to guide you.
One major reason why most of us don’t stick to our New Years’ resolutions beyond the third week of January is that they may not be realistic, sustainable, nor practical. Check out Faith and Finance‘s list of 6 Ways To Make New Year Resolutions That Work for some tips on how to stick to yours.
One of the most common New Years’ resolutions and goals for 2011 is improving one’s career situation or making more money. Here are two great articles that can give you some insight on this matter. Studenomics’ post on Top Three Dream Jobs of 2010 & Why They’re So Popular may give you ideas about where to take your career next, or may allow you to think about your options should you hit a rough patch at your job.
For ideas on earning more and keeping more of your money, regardless of your career situation, check out The Smarter Wallet’s Get Extra Cash & Make An Additional $100 A Month .
Have you always been meaning to start your investment portfolio but never really had the guts, inclination or time to do so? How about reading through Are You Ready To Invest In The Stock Market? This article by NerdWallet may help you figure out if you’re prepared to become a stock investor.
When investing in stocks, it’s important to check on industry trends. Things Don’t Cost What They Used To: 10 Major Price Shifts in 2010 by Wisebread may point out those areas where prices are on the rise. This may be bad news for the consumer, but is better news for the investor. Either way, this article offers extra insight into price trends that should prove useful.
Planning for the year ahead also involves simplifying, organizing and improving our efficiency. One great way to handle our finances more quickly and efficiently is to go paperless: I’m Switching To E-Bills And E-Statements by Money Smarts Blog discusses one person’s decision to try out online billing management.
Let’s take a look at the tax front and see what’s in store for us this 2011. Kiplinger’s Tax Deal: What’s In It for You? reviews the tax developments that President Barack Obama has signed. Though the financial world is apprehensive about what this could mean for our economy, to the individual consumer, this could mean more breathing room.
If you’re looking for a way to minimize the impact of the Alternative Minimum Tax, try increasing your charitable donations. The New York Times’ Bucks personal finance blog discusses Minimizing A.M.T. Through Charitable Donations. The article gives a great background on how the Alternative Minimum Tax arose and how you can work around it and get a bit of a break from your taxes.
The new year may still hold a degree of uncertainty for us all, but no one can deny that new beginnings always signal hope. Sure, life could deal us a bum card, but it’s up to us to make the most out of the cards we are dealt and to find the positive in any situation we face. So here’s to a great new year and a fresh start!