Investing Basics


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Investing Basics

  1. 1. <ul><ul><li>FINANCE's </li></ul></ul><ul><ul><li>BASICS </li></ul></ul><ul><ul><li>- Manish Chauhan </li></ul></ul><ul><ul><li>22 nd Sept , 2008 </li></ul></ul><ul><ul><li>“ The safest way to double your money is to fold it and put it in your pocket. ” </li></ul></ul>
  2. 2. Objective <ul><li>To get a general idea of investment options available and understand the importance of investing early. </li></ul><ul><li>Understanding of terminologies. </li></ul><ul><li>To become more knowledgeable than 90% Indians and 70% human beings on earth in finance and investing. </li></ul><ul><li>To Enjoy </li></ul><ul><li>To know some basics of Investing and making good use of our money. Why Stock market is weird ?? => ” Every time one guy sells, another one buys,and they both think they're smart. ” </li></ul>
  3. 3. Agenda <ul><li>Investment options under Section 80C </li></ul><ul><li>Mutual Funds and its categories </li></ul><ul><li>Basic Terminologies </li></ul><ul><li>Tax Slab and Tax Refund stuff </li></ul><ul><li>Break </li></ul><ul><li>Power of Compounding and Early Investing </li></ul><ul><li>Insurance </li></ul><ul><li>Retirement </li></ul><ul><li>Home Loans </li></ul><ul><li>Suggestions </li></ul><ul><li>Q & A and Doubts ”How to make a million in the stock market? Start with two! ” </li></ul>
  4. 4. <ul><ul><li>What is Section 80C ? </li></ul></ul><ul><ul><li>The government encourages certain types of savings – mostly, long term savings for your retirement – and therefore, offers you tax breaks on such savings. Sec 80C of the Income Tax Act is the section that deals with these tax breaks. It states that qualifying investments, up to a maximum of Rs. 1 Lakh, are deductible from your income. This means that your income gets reduced by this investment amount (up to Rs. 1 Lakh), and you end up paying no tax on it at all! </li></ul></ul><ul><ul><li>Locking Period : </li></ul></ul><ul><ul><li>Whenever you make an investment which is under Sec 80C , that money is locked in for a certain period of time . You can take out your money before the locking period , you will have to pay back the money you saved because of tax exemptions. Sone of them may allow partial withdrawal after some time. </li></ul></ul><ul><ul><li>ELSS : 3 years PPF : 15 years (partial withdrawal after 7 years)‏ </li></ul></ul><ul><ul><li>NSC : 6 years ULIPS : 3 years </li></ul></ul>
  5. 5. Investment Falling under Section 80C <ul><li>Employee Providend Fund (company)‏ : 8.5% </li></ul><ul><li>Public Providend Fund (PPF) : 8% </li></ul><ul><li>Life Insurance Premium (ULIPS also)‏ : Market linked </li></ul><ul><li>ELSS of Mutual Funds : Market linked </li></ul><ul><li>NSC (National Saving Certificate)‏ : 8% </li></ul><ul><li>Principle amount payment towards Home Loan </li></ul>
  6. 6. What is Mutual Fund <ul><li>Financial instrument allowing group of people to pool their money build a huge corpus and then this money is invested by group of people (refered as FUND MANAGERS) who are investment experts, have deep understanding of investing in stock market and overall financial markets. ELSS : These are tax-saving mutual funds loking moniey for 3 years. There are primarily 3 different types of investors: 1) Those who don't know anything. 2) Those who know a little and 3) Those who don't realize they don't know anything! </li></ul>
  7. 7. Advantages and Disadvantages <ul><ul><li>ELSS Pluses </li></ul></ul><ul><ul><li>- Possibility of high returns – Lock-in period of only three years </li></ul></ul><ul><ul><li>- Easy transfer </li></ul></ul><ul><ul><li>- No tax on returns because of long term capital gain </li></ul></ul><ul><ul><li>- Efficient service, especially in the case of private mutual funds </li></ul></ul><ul><ul><li>ELSS Minuses </li></ul></ul><ul><ul><li>- Difficult to choose the right fund </li></ul></ul><ul><ul><li>- High risk </li></ul></ul><ul><ul><li>______________________________________________________________________ </li></ul></ul>
  8. 8. Terminologies <ul><li>Entry Load </li></ul><ul><li>Exit Load </li></ul><ul><li>Open Ended MF </li></ul><ul><li>Close Ended MF </li></ul><ul><li>Growth option in MF </li></ul><ul><li>Dividend Option in MF </li></ul><ul><li>Equity Fund </li></ul><ul><li>Debt Fund </li></ul><ul><li>Fund of Fund </li></ul><ul><li>MF benchmark </li></ul><ul><li>Balanced Fund </li></ul><ul><li>NFO </li></ul><ul><li>NAV </li></ul><ul><li>Fund House </li></ul><ul><li>Term insurance </li></ul><ul><li>Endowment Plans </li></ul><ul><li>Sectoral Fund </li></ul><ul><li>Fund Manager </li></ul><ul><li>Short term capital gain </li></ul><ul><li>Long term capital gain </li></ul><ul><li>Sensex and Nifty </li></ul><ul><li>Correction </li></ul><ul><li>Demat A/C </li></ul><ul><li>SIP </li></ul><ul><li>Commodities </li></ul><ul><li>Market capitalization </li></ul><ul><li>Portfolio </li></ul><ul><li>IPO </li></ul>
  9. 9. A look into past returns
  10. 10. Do and Dont's of Investment <ul><li>DONT's </li></ul><ul><li>Investing Without a Plan </li></ul><ul><li>Compromise Long Term Goals For the Short Term Ones </li></ul><ul><li>Ignoring Risk and Overestimating Returns </li></ul><ul><li>Getting Married To Your Investment </li></ul><ul><li>DO's </li></ul><ul><li>Take Help From Professionals </li></ul><ul><li>Don't Allow Others to Take Decisions on Your Behalf </li></ul><ul><li>Rebalance Your Portfolio From Time to Time </li></ul>
  11. 11. Tax Slab (2008)‏ <ul><li>Exemption Limit for Men = 1.5 lacs </li></ul><ul><li>Exemption Limit for Women = 1.8 lacs </li></ul><ul><li>Exemption limit for Senior Citizens = 2.25 lacs </li></ul><ul><li>10% surcharge if taxable income is above 10 Lacs. </li></ul><ul><li>3% Education cess after tax and surcharge. </li></ul>What is Taxable Income ? The pay which you get has many components , like HRA , conveyance allowance and others.Out of this income some things are deductible on your hand and after deducting you arrive at a amount called Taxable income , on which you have to pay tax. Taxable Income = Your Gross Salary - (HRA) - (Investments under Sec 80 C) - (Conveyance allowance) - (Health insurance Premium , Sec 80D) and some more things which you may claim.
  12. 12. TAX REFUND FAQ <ul><li>What is a Tax Refund? Am ount, which the government gives back to a taxpayer who has paid excess taxes. </li></ul><ul><li>How to Claim Tax Refund? You need to file an income tax return to claim your tax refund. The amount of refund receivable is computed and shown in the tax return. </li></ul><ul><li>Am I Eligible For Interest on My Tax Refund? If refund amount is more than 10 per cent of the total taxpayable, you get simple interest @ 0.5 per cent per month, computed from the beginning of the next financial year till the date of grant of the refund. </li></ul><ul><li>Is The Refund Taxable ? Refund amount : TAXABLE Interest amount : NOT TAXABLE </li></ul>
  13. 13. Let's consider an example: <ul><li>For financial year 2005-2006 your total tax liability was Rs 60,000. Tax deducted at source by the employer was Rs 70,000. Therefore, you have paid more than your tax eligibility and can claim a refund of Rs 10,000. Since the refund amount is more than 10 per cent of your tax liability {10,000 > (60,000 X 10 per cent)} you would be eligible to receive interest on your tax refund. Let's say the refund is issued to you in February 2007. Then the total interest on refund would be (10,000 * 0.05 per cent X 11 months) = Rs 550. Therefore, the total amount of refund including interest would be Rs 10,550. </li></ul><ul><ul><li>Which is better : Investing for 10 yrs and then stop for 30 yrs and let money grow OR Stop for 10 yrs and then Invest same money for 30 yrs regularly ... this is an eye opener :) .. coming soon :)‏ </li></ul></ul>
  14. 14. <ul><ul><li>BREAK :)‏ </li></ul></ul><ul><ul><li>Fact : ”You can understand Stock market if you understand Women” </li></ul></ul><ul><ul><li>Conclusion : ” You can never understand Stock market ” </li></ul></ul>
  15. 15. Welcome to the world of Stock Markets <ul><li>Investment of 2 lacs in HDFC Taxsaver MF before 11 years has become 1.02 Crore's today ... with 43% average return till date, since launch in Mar 96. </li></ul><ul><li>Rs 50,000 Invested in Ranbaxy Puts (Derivatives in Stock markets) were worth 25 Lacs within 36 Hrs After US FDA filed a case against Company in 2008 . </li></ul><ul><li>Do you know Rs 10,000 invested in 1979 in which company is worth Rs 200 Crore today. </li></ul><ul><li>Ans : WIPRO </li></ul><ul><li>Had you invested Rs 2 Lac in ”Unitech” in Nov 2004 ... Within 2 years , you could have </li></ul><ul><li>4 Bedroom Flat in Bangalore </li></ul><ul><li>1 BMW car </li></ul><ul><li>Might have started some business on your own. </li></ul><ul><li>Go for a long vacation all around the world. </li></ul><ul><li>And still left with enough money in you bank to live for next 20-30 years ... </li></ul>
  16. 16. <ul><ul><li>BREAK :)‏ </li></ul></ul><ul><ul><li>Fact : ”You can understand Stock market if you understand Women” </li></ul></ul><ul><ul><li>Conclusion : ” You can never understand Stock market ” </li></ul></ul>
  17. 17. Power of Compounding and Early Investing <ul><ul><li>Compound Interest is the 8th Wonder! </li></ul></ul><ul><ul><li>of the World </li></ul></ul><ul><ul><li>- Albert Einstein (1879– 1955)‏ </li></ul></ul><ul><ul><li>Suppose Christopher Columbus had invested $1 (before 500+ years back) which gave 8% return, today his future generation would have got. </li></ul></ul><ul><ul><li>- With simple interest $41 - With Compound Interest $38336110 Trillion or (60 million Bill Gates) </li></ul></ul>
  18. 18. Power of Compounding and Early Investing <ul><ul><li>Robert and Ajay start career same time at age 23 </li></ul></ul><ul><ul><li>Case 1 (Ajay) : </li></ul></ul><ul><ul><li>- Understand the importance of investing Early, enjoys some time and then ... </li></ul></ul><ul><ul><li>- Start investing early (at 25) and invests Rs 50,000 every year. </li></ul></ul><ul><ul><li>- Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10 th year. (This is annuity , dont confuse with Compount interest :) ) </li></ul></ul><ul><ul><li>- Stops after that and doesnt invest extra money till he is 65 , he just leaves that 8.77 lakhs in investment and that keeps growing. </li></ul></ul><ul><ul><li>- when he is 65 , he has Rs 1 Crore 40 Lacs :)‏ </li></ul></ul><ul><ul><li>Case 2 (Robert): </li></ul></ul><ul><ul><li>- Spends a lot and doesnt believe in investing early, gets married, and then when he is 35 he starts investing for next 30 years he regularly invests 50,000 till he is 65. </li></ul></ul><ul><ul><li>- Assuming the same return of 10% per year. </li></ul></ul><ul><ul><li>- He has only 82.2 lacs :( </li></ul></ul><ul><ul><li>Even after saving for extra 20 years Robert has 43% less than Ajay . </li></ul></ul><ul><ul><li>Total amount after n years with A amount every year at i return=A *[(1+i)^n-1]/i </li></ul></ul><ul><ul><li>Ref : </li></ul></ul>
  19. 19. Power of Compounding and Early Investing <ul><ul><li>After 100 years : Robert from UP and Ajay from Haryana , This time Robert is extra smart and ajay is a software engineer. </li></ul></ul><ul><ul><li>Both are 25 and want to retire at 60 , both earn good money ... (both can invest 1 lac per/year) ... assuming return at 12% per/annum ... </li></ul></ul><ul><ul><li>Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money grows to good amount and he just keep that money invested till he retires ..., he can invest for another 20 years also but now he spends all this 1 lac for travelling and enjoying his life every year ... </li></ul></ul><ul><ul><li>Case 2: Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts after 5 years . </li></ul></ul><ul><ul><li>Case 2.1 : </li></ul></ul><ul><ul><li>After 5 yrs he starts investing 1 lac every year for next 5 year ... He sees that Robert has stoped investing now and enjoying now, so he also does same , stops investing and leaves his money invested which is growing ... </li></ul></ul><ul><ul><li>Case 2.2 : </li></ul></ul><ul><ul><li>After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement, he wants to have more money than Robert at the end </li></ul></ul>
  20. 20. Power of Compounding and Early Investing <ul><li>Results at 12% return </li></ul><ul><li>Case 2.1 : Ajay get how much ?? </li></ul><ul><li>66 lacs </li></ul><ul><li>Case 2.2 Ajay gets ?? </li></ul><ul><li>1.64 crore </li></ul><ul><li>And what about Robert? investing 10 yrs and stoping after that and enjoying for next 20 years </li></ul><ul><li>1.72 crores !!! </li></ul><ul><li>See compounding.xls </li></ul>
  21. 21. Insurance <ul><ul><li>What Insurance is NOT? </li></ul></ul><ul><ul><li>Insurance is not a investment product. </li></ul></ul><ul><ul><li>Only your financial dependents can benefit from Insurance and not you , If that is not the case you have taken something wrong. </li></ul></ul><ul><ul><li>Endowment Policies a.k.a “LIC Policies” : You are insured for some amount for certain tenure , If you die during Tenure , your dependents get the money , if you survive you get the money back + some BONUS . </li></ul></ul><ul><ul><li>You pay high premium for this . </li></ul></ul><ul><ul><li>Term Insurance : This is the Best form of Insurance , you are insured for high amount , but pay very less for premium . This is best form for Insurance . Always take this . The premium are almost 90% cheaper compared to Endowment Plans </li></ul></ul>Life Insurance
  22. 22. How to Calculate Insurance Cover <ul><ul><li>Why it is important? </li></ul></ul><ul><ul><li>- Life is uncertain, Insurance money must be </li></ul></ul><ul><ul><li>able to provide the same inflow of money as </li></ul></ul><ul><ul><li>provided by Earning member , and all future </li></ul></ul><ul><ul><li>expenses. </li></ul></ul><ul><ul><li>Insurance cover = A + B + C – D where </li></ul></ul><ul><ul><li>A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest rate which bank gives in a year , example 9.5%)‏ </li></ul></ul><ul><ul><li>B = Future Debts or Expenses. </li></ul></ul><ul><ul><li>C = Some money for contingency or emergency . </li></ul></ul><ul><ul><li>D = Your investments or Assets (excluding HOME)‏ </li></ul></ul>
  23. 23. Creating Wealth For Retirement <ul><ul><li>Can you invest Rs 5,000/month , for next 35 years in Equity Diversified Mutual Funds ? Return expected = 15% CAGR </li></ul></ul><ul><ul><li>Any idea how much will it Become ? </li></ul></ul><ul><ul><li>Ans : 7.43 Crores </li></ul></ul><ul><ul><li>What If you just want to invest for 10 years and then leave it for 25 yrs , but still want to generate 7.43 Crores. ? </li></ul></ul><ul><ul><li>Ans : Rs 6240 / month (Rs 1240 more)‏ </li></ul></ul><ul><ul><li>What if you can invest for only 2 years , but a lot of money per month , like Rs 20,000 Per month . And leave it for 33 years ? What will happen in that case ? </li></ul></ul><ul><ul><li>Ans : 9.24 Crores </li></ul></ul>
  24. 24. HOME LOANS <ul><ul><li>Tax Treatment </li></ul></ul><ul><ul><li>- Interest : Upto 1.5 lacs under Sec 24(b) (loans taken after March 1, 1999) </li></ul></ul><ul><ul><li>- Principle : Upto 1 lacs under sec 80C </li></ul></ul><ul><ul><li>- You get 85% amount as loan. generally 15% is the down payment. </li></ul></ul><ul><ul><li>- House must be self occupied to claim tax benefit under Sec 80C. </li></ul></ul><ul><ul><li>- Spouse can be the co-applicant in the loan and both can claim tax benefits seperately </li></ul></ul><ul><ul><li>which will save a lot of tax for both. </li></ul></ul><ul><ul><li>- Fixed rate and Floating rate of payment. </li></ul></ul><ul><ul><li>Example : </li></ul></ul><ul><ul><li>Your taxable Income: Rs 5,50,000 </li></ul></ul><ul><ul><li>Principal repayment : Rs 1,10,000 and Interest payable : Rs 1,60,000 </li></ul></ul><ul><ul><li>Total Deductions allowed: Rs 2,50,000 (Rs 1,50,000 towards interest payable & Rs 1,00,000 for principal repayment of the loan)‏ </li></ul></ul><ul><ul><li>Thus, your taxable income will reduce to Rs 3,00,000 ( Rs 5,50,000 - Rs 2,50,000 ). </li></ul></ul>
  25. 25. <ul><ul><li>CASE: </li></ul></ul><ul><ul><li>Loan : 10,00,000 Tenure : 20 years </li></ul></ul><ul><ul><li>Interest rate : 9% EMI per month : Rs 9700 (approx)‏ </li></ul></ul><ul><ul><li>Now if interest rate goes up by 1.5% ... There are two options : </li></ul></ul><ul><ul><li>Case 1 : Pay more EMI every month, ie : 11.7% more or Rs. 1130 , total Rs. 10830 per/month... Extra burden : 1130*12*20 = Rs. 2.71 lacs </li></ul></ul><ul><ul><li>Case 2 : Increase the tenure with same EMI . Can you guess how much more time you will have to pay? Its 9.8 more years !!! , which will cost 9.8 * 12 * 9700 = 11.4 lacs .. </li></ul></ul><ul><ul><li>What if interest rate goes up by extra .5 % ie: 2% ... </li></ul></ul><ul><ul><li>Case 1 : you either pay more EMI per month , ie : 15.7% more or Rs 1520 . </li></ul></ul><ul><ul><li>Extra burden : 1520*12*20 = Rs 3.65 lacs </li></ul></ul><ul><ul><li>Case 2: Pay same money for extra tenure ... this time extra tenure is 22.9 years. </li></ul></ul><ul><ul><li>Extra burden : 9700*12*20 = 23.28 lacs </li></ul></ul><ul><ul><li>Learning : Take the loan for minimum tenure and maximum EMI you can afford... After some years of taking Home laon , if its possible increase the EMI and decrease the tenure... </li></ul></ul>
  26. 26. Some good Mutual funds <ul><li>ELSS </li></ul><ul><li>Sundaram BNP Paribas Taxsaver </li></ul><ul><li>Prudential ICICI Tax Plan </li></ul><ul><li>HDFC Long Term Advantage </li></ul><ul><li>Franklin India Taxshield </li></ul><ul><li>HDFC Tax Saver </li></ul><ul><li>SBI Magnum TaxGain </li></ul><ul><li>Non-ELSS </li></ul><ul><li>Reliance Diversified Power Sector </li></ul><ul><li>Magnum Taxgain </li></ul><ul><li>Magnum Multiplier Plus </li></ul><ul><li>UTI Infrastructure </li></ul><ul><li>Magnum Contra </li></ul><ul><li>Magnum Global </li></ul><ul><li>Sundaram BNP Paribas Select Midcap </li></ul><ul><li>Reliance Growth - Growth </li></ul><ul><li>SBI Magnum Global Fund 94 - Growth </li></ul><ul><li>Reliance growth fund </li></ul><ul><li>HDFC Top 200 Fund </li></ul><ul><li>Sundaram BNP Paribas Select Midcap </li></ul>
  27. 27. Suggestions <ul><li>Equity Exposure= 100-age % , Debt Exposure = age % (for eg , i have 76000 in MF (100-24) and rest is in PF)‏ </li></ul><ul><li>Invest in ELSS and other MF's with high exposure in equity through SIP. </li></ul><ul><li>Invest for long term. </li></ul><ul><li>Invest in good IPO's and NFO's </li></ul><ul><li>Dont go blindly with tips and recommendations , do your research yourself. </li></ul><ul><li>Invest some money in equities directly </li></ul><ul><li>Top sectors for future are Power , Infrastructure , Energy , Real Estate (and all of them are related to each other). </li></ul><ul><li>Make sure ideal cash is not in bank account, try out new things like Commodities and Futures and Options. </li></ul>
  28. 28. Some Questions Asked ... <ul><li>I am planning to invest some money in mutual funds. Whats the best mutual fund based company to invest in ? what are the formalities involved in that ? </li></ul><ul><li>what is the right time to invest in shares or mutual fund... </li></ul><ul><li>How are tax saving funds different from normal funds? </li></ul><ul><li>How difficult is it to trade directly as compared to investment in mutual funds? </li></ul><ul><li>Is there any tax that I hav to pay if I trade directly? </li></ul><ul><li>What are ULIPS? </li></ul><ul><li>On wat basis do u see which company to invest in or not (I mean buy shares) some key points to be kept in mind or which areas to do research on before investing. </li></ul><ul><li>I am really interested in real estate/property. So can u suggest some strategic locations etc for the same and how to go about it from process of looking for the property till we actually buy it? </li></ul><ul><li>And in general how to handle the money we earn , like ways to invest , put in MF etc etc in order to have max gains. </li></ul><ul><li>What is Sensex and Nifty ? How is it calculated ? </li></ul>
  29. 29. TODO <ul><li>Read my blog : </li></ul><ul><li>To find all the articles according to category : </li></ul><ul><li>Read “Money Today” or/and “Outlook Money to keep yourself updated.Read Money Today online at </li></ul><ul><li>Review your investments once in a month (small review) and once in 6 months (major review). </li></ul><ul><li>Plan you taxes Early , Dont be part of “March Rush” . “Good Tax planning happens automatically with good investment planning and not vice versa” </li></ul>
  30. 30. <ul><ul><li>Q&A </li></ul></ul>