Is elections right time to invest ?

If I knew with confidence we would have a decisive government, India would be at the top" . These are the words of Mr. Jim O'Neill, the former chairman of Goldman Sachs who coined the famous BRICs (Brazil Russia, India, and China) acronym. He is of the view that it is better for one to take a wait and watch approach - until the election results come out - before buying into India. 

In an interview with Mint, Mr. O'Neill mentioned that China, Mexico and Nigeria are his current top picks amongst emerging markets. 

The rationale behind choosing India his top emerging market pick are those similar to the traits of the country's long term consumption story. These include favourable demographics, rapid urbanisation, and strong growth opportunities. 

It would not be wrong in saying that the broader view that Mr. O'Neill shares pretty much reflects the sentiments of all long term foreign investors - who have been quite bullish on Indian stocks in recent times. While they have been praising the country's central bank, their views on the current government are quite the opposite. Essentially what the country requires is positive change, something which an effective government would bring in. 

Mr. O'Neill also discussed his views on India being included in the list of Fragile Five, a term coined by Morgan Stanley. Countries that form part of this group - India, Indonesia, Brazil, Turkey and South Africa - have been included because of their vulnerability to volatile capital flows. Nevertheless, Mr. O'Neill believes that the worst for India is over. He however does believe that there is no escaping the US dollar dependent market in the short to medium term, which is why the US government's monetary policies will continue to keep the markets volatile; and that for countries to safeguard themselves from this vulnerability, the focus should be on increasing foreign direct investments. 

All said and done, this is just one of the many views making rounds. 

Essentially, there is a lot of uncertainty around. And with investing veterans providing views that are quite varied in terms of their outlooks - with some predicting the scenario to get worse than what it was a few years ago - how things will actually turnout is anyone's guess. 

One thing is sure. All of this has led retail investors in India to simply stay away from investing in stocks; with them pulling out because of having their fingers burnt or just simply booking profits, making up for past losses. Relatively safer instruments are being preferred now. With yields of such instruments being at high single to low double digits, the demand for fixed deposits and bonds has increased substantially. 

But as we all know, over the long term such instruments do not have tendencies to beat inflation levels as one's purchasing power gets eroded over time. So it would be a matter of time before people start moving back to stocks. And this seems almost certain given that the current retail participation levels are at their lowest in many years. 

Retail investors (in general) have the tendency to enter markets when stocks are not very cheap. Only after having seen the performance of the markets is when they consider parking money into stocks. Morgan Stanley in its retail survey last year learned that retail investors tend to look at the short term performance of the market to base their decisions on whether to invest in stocks. The period gauged by them is usually one year. 

The outcome of the general elections is being keenly awaited. As such, people have taken a wait and watch approach. Stocks of quality largecaps are seemingly expensive at the moment. Whether their valuations will remain at similar levels post the elections cannot be commented on. We urge investors not to blindly enter markets and believe they would do well by keeping a close watch on good companies at attractive valuations. Buying into stocks at higher valuations (even in the cases of good quality companies) has not always been a market beating strategy, which is why retail investors have had bad experiences with stocks in the past. 

Tips to save Tax

• Forming an HUF:Formation of HUF is an effective way of reducing the tax liability for an individual. Since HUF is treated as a separate assessee as per the income tax act, 1961 therefore by transferring some of his income to his HUF an individual can avail slab benefit as well as the benefit of deductions under section 80 for his own income as well as the income of HUF thus reducing the overall tax liability. Let us assume an individual is having an income of Rs. 10 lakhs and is also having an ancestral property which is on rent (Rs. 4,00,000 annually). Now if he decides to form an HUF then he can separately show his rental income as income of HUF thus availing the slab benefit as well as benefit of deductions under section 80 on his own income of Rs. 10 Lakhs and also on the income of HUF.
• Claiming of HRA as well as interest paid on home loan upto Rs. 1.5 lacs: Many of the salaried persons are not aware of the fact that they can simultaneously claim HRA as well as the interest paid on their home loan provided their house on which loan has been taken is in some other city. For e.g. if a person working in Gurgaon has bought a home in Delhi then he can claim both HRA (upto limit specified) as well as interest paid on home loan (upto Rs. 1.5 lacs annually).
• Pay rent to your parents: If you are living in your parent’s house you can pay them rent and can claim House Rent Allowance provided the property is registered in the name of either of your parent. Your parents will be taxed after allowing the standard deduction of 30% which means if you are paying  a rent of around 2 lakh a year, your parent will be taxed on Rs.1,40,000 which will be tax free in their hands. It gets better if the property is jointly owned by both the parents. In such a case you can divide the rent in between both of them hence splitting the tax liability.
• Education expenses of your children: Amount spent by you on the school fees of your children can also be claimed as a deduction from your overall income under section 80c (upto maximum limit of Rs. 1 lakh). The deduction, however, is not available for capitation fees/donation collected by the school or college. Also under section 80E of income tax deduction can be claimed on interest paid on education loan taken for higher education.
• Income arising from transfer of asset to spouse: In normal circumstances whenever an individual transfers any asset to his or her spouse for an inadequate consideration the income arising from the respective asset is clubbed in the hands of the person transferring the asset. However any asset transferred to the spouse before marriage or when the couple is no longer husband and wife at the time of transfer or accrual of income then no clubbing provisions apply. So, for all of you who are going to be married soon this could be a handy tool to save tax. 

Do we need to invest in actively mange funds or index funds ?

Should one invest in actively managed funds or should one put his money in passively managed funds such as index funds? An article in Moneynews makes a case for the latter. And this by a comparison with Warren Buffett's performance. 

First of all, what are index funds? These funds are aligned to a particular benchmark index such as the S&P CNX Nifty,BSE Sensex, or even for that matter a sectoral index such as BSE Bankex. The endeavour of these funds is to mirror the performance of the designated benchmark index, by investing only in the stocks of the index with the corresponding allocation or weightage. Hence, investing in index funds is less cumbersome as compared to investing in actively managed funds. Also they carry with them a low expense ratio along with a low risk (as compared to actively managed mutual funds), making market timing irrelevant. Low portfolio churning also adds to their merit. The fund manager in an index fund exits a certain stock only when a respective stock exits from the index and is replaced by another one. 

Recently, it was highlighted how the legendary investor Warren Buffett's Berkshire Hathaway vastly outperformed the stock market during the last 49 years. In comparison, Berkshire's performance in the last 5 years has not been that exceptional. Thus, the article has stated this increased the attractiveness of index funds given that even an experienced investor like Buffett is not able to beat the market. 

Does this mean that one should stop investing in actively managed funds and only invest in index funds? We do not think so. There is no hardcore proof which suggests that index funds always consistently perform better than actively managed funds. The Warren Buffett comparison only highlights the benefits of investing in index funds. But does not conclusively prove that they are the best performing of all mutual funds out there. Besides, many investors prefer diversity which an index fund, by its very nature, does not provide. 

Ultimately, whether one chooses to invest in an index fund would depend on factors such as your investment objective, your risk taking ability, age and income profile among others. If you have enough risk taking ability and are willing to do your homework in terms of investing in good quality stocks at attractive prices, there is no reason why your portfolio should not deliver better returns than if you had put your money in index funds. 

Source : 

5 minute wrapup 

India's forex reserve : Do we need to worry ?

It was barely a year ago that the condition of the India rupee was 'fit to be in ICU', as declared by the media. Global media called the rupee one of the world's "fragile five" currencies. This was as India struggled with a chronic current account deficit that was eating into its limited forex reserves. Between now and then, India's macroeconomic fundamentals have not changed dramatically. However, the status of the rupee has certainly improved. This is all thanks to the consistent flow of FII money in anticipation of a change in government. The curb on gold imports and Indian banks being allowed to raise dollar deposits also helped.  India's forex reserves: Nothing to worry about? All put together, India's foreign exchange reserves stood a tad over US$ 303 bn at the end of March 2014. This is about 10% higher on YoY basis. The only fiscal years that ended with higher reserves were the years ending March 2008 and March 2011. Having said that, India's current forex reserve covers just 8 months of imports. And as per Wall Street Journal, most economists believe that the RBI should stock up more dollars. Especially in the event of unwinding of the QE a stronger forex cover can make India less vulnerable.  02:20

India's forex reserve : Do we need to worry ?

It was barely a year ago that the condition of the India rupee was 'fit to be in ICU', as declared by the media. Global media called the rupee one of the world's "fragile five" currencies. This was as India struggled with a chronic current account deficit that was eating into its limited forex reserves. Between now and then, India's macroeconomic fundamentals have not changed dramatically. However, the status of the rupee has certainly improved. This is all thanks to the consistent flow of FII money in anticipation of a change in government. The curb on gold imports and Indian banks being allowed to raise dollar deposits also helped.  India's forex reserves: Nothing to worry about? All put together, India's foreign exchange reserves stood a tad over US$ 303 bn at the end of March 2014. This is about 10% higher on YoY basis. The only fiscal years that ended with higher reserves were the years ending March 2008 and March 2011. Having said that, India's current forex reserve covers just 8 months of imports. And as per Wall Street Journal, most economists believe that the RBI should stock up more dollars. Especially in the event of unwinding of the QE a stronger forex cover can make India less vulnerable.  02:20

India's forex reserve : Do we need to worry ?

It was barely a year ago that the condition of the India rupee was 'fit to be in ICU', as declared by the media. Global media called the rupee one of the world's "fragile five" currencies. This was as India struggled with a chronic current account deficit that was eating into its limited forex reserves. Between now and then, India's macroeconomic fundamentals have not changed dramatically. However, the status of the rupee has certainly improved. This is all thanks to the consistent flow of FII money in anticipation of a change in government. The curb on gold imports and Indian banks being allowed to raise dollar deposits also helped.  India's forex reserves: Nothing to worry about? All put together, India's foreign exchange reserves stood a tad over US$ 303 bn at the end of March 2014. This is about 10% higher on YoY basis. The only fiscal years that ended with higher reserves were the years ending March 2008 and March 2011. Having said that, India's current forex reserve covers just 8 months of imports. And as per Wall Street Journal, most economists believe that the RBI should stock up more dollars. Especially in the event of unwinding of the QE a stronger forex cover can make India less vulnerable.  02:20

Rising leverage !! Danger !!

Excessive leverage poses balance sheet risk. It also makes interest servicing a difficult task. If one were to go by the IMF's latest financial stability report, leverage ratios in India's corporate sector appear to be a potent source of risk. As can be seen in today's chart, the debt to equity ratio of India's corporate sector stands at 83%. This is highest amongst emerging market peers. When compared to advanced economies, only Greece and Italy have higher debt to equity ratio than that of India. 

Higher leverage signifies that India's corporate sector is quite sensitive to interest rate changes. If interest rates increase, the borrowing cost of corporates will rise further. With debt already being at un-proportionate levels servicing the same could be a challenge. This may result in defaults. Higher debt also reflects the inherent non-performing asset (NPA) risk prevailing in the banking system. If corporates fail to repay their loans and default Indian banks may turn vulnerable. This can have serious repercussions on the economy. 

Source : 

5 minute wrapup