Gold Jewellery Buying Tips: Wastage Charges, Making Charges, VA, Karat, 916 and more…

Planning to buy some Gold jewellery in India and confused about how the whole thing works? Well, I was equally puzzled by all those terminologies and promises that you get to hear in Jewellery shop commercials until I decided to dig out some information.

So here’re some tips and education that might help you in the future.

What is Karat, 916, BIS Hallmark etc?

Karat (NOT Carat) is a measure of the purity of gold. 24 carat is considered pure gold.

Since pure gold is too soft (and hence would easily bend) to make any jewellery out of it, there has to be certain other metals such as copper, silver, cadmium etc added to make it strong, shine and with the desired shade. Based on how much extra metals are added, the Karat value of the gold reduces to 22Kt, 18Kt, 14Kt or even 10Kt.

For example, 18K gold is 75% pure gold (i.e. 18/24) where as 14K gold has only 58% real gold in it.

In India, 22K gold is considered the most valuable for jewelries and hence it has more resale value as well. 22Kt gold jewellery means it has 22/24 percent pure gold in it or in other words 91.6% purity.

And this is what is called 916 gold (symbolizes 91.6%).

BIS Hallmark Symbol
BIS Hallmark Symbol
In order to make sure that the jewellers actually sell 91.6% pure gold (when they claim to sell 22Kt gold), the Bureau of Indian Standards (BIS) made it mandatory to emboss a hallmark on all standardized gold jewellery. And such a jewellery is known as a BIS Hallmark jewellery. Before this standardization, many jewellers and goldsmiths used to cheat people with below 22Kt gold while they claimed to sell good quality 22K gold. I figured this out while selling some old gold jewellery recently.

[BIS Hallmark is NOT just for 22Kt gold. You may take a look at the BIS site for all BIS components]

Making Charges, Gold Wastage charges etc

As I mentioned earlier, there has to be certain metals added to pure gold to make it tough and good enough to make jewellery. This is the first level of added cost to the making process followed by the actual making charges to convert the gold bars or blocks into beautiful jewellery patterns.

The making charges (‘Panikkooli’ for Malayali friends) is the cost of converting raw gold into jewellery. This is usually expressed in Rupees per gram of gold. In most cases, the making charges per gram of gold vary from 25 to 35 rupees. Compared to the price of gold today, this is a negligible number.

However, there is another scary number called the ‘wastage charges’ (‘Panikkuravu’ as Keralites call it). In the good old times, the goldsmiths used to make gold jewellery by melting gold, cutting and shaping it into tiny pieces and join them together to make great handmade gold jewellery. In this process they ‘claimed’ that certain quantity of gold go wasted though these goldsmiths are actually smart enough to collect or retrieve most of the gold without wasting any. Nowadays, the gold ornaments are made in advanced machines and nothing really go wasted. However, this tradition of calculating ‘wastage’ continues and this is expressed in terms of ‘percentage’and they charge that to the customers.

The amount charged to the customers for the ‘wastage’ caused is known as the ‘wastage charges’. It’s quite ridiculous that there’s no norm for this wastage charge component and that’s exactly where your jeweller cheats you. The wastage charges typically vary from 10% to 18% in most shops while it’s quite possible to have it as high as 20% or 24% or even as low as 8%. Unfortunately, nobody knows why certain ornaments has to have more wastage than some others as claimed by the jeweller.

Hence the actual cost burden on you while purchasing gold jewellery is:

Actual cost of gold as per the day’s rate + Wastage charges + Making Charges + VAT if any. In addition, if your jewellery has any precious stones, that cost will be added up as well.

Cost of Gold Jewellery = Making Charges + Wastage Charges + Cost of Stones, if any + VAT

For example, assume that the gold rate is at Rs.2500/- per gram for 22 Karat gold. When you buy a 10 gram gold chain with the making charges at 35 rupees per gram and wastage charges at 12%, the following will be the calculation to arrive at the final price:

(1) Cost of gold alone = 10 * 2500 = 25,000/-

(2) Making charges = 10 * 35 = 350/-

(3) Wastage charges = 12 * 25,000 / 100 = 3,000/-

The total cost before VAT = 28,350/-

If the VAT is at 1% that becomes 28,633.50/-

Recently the jewellers have started representing the Wastage Charges and Making charges together as VA or ‘Value Addition’.

Gold Jewellery buying tips for Indians

As a smart buyer, you may keep the following things in mind when you deal with jewellery shops.

  • First, if you are exchanging gold (selling old ornaments and buying new) make sure that you are getting the full price of what you are selling. i.e. As long as you are selling 22K gold, the shop may not reduce any price but give you the actual market price of the 22K gold by its weight. There are some jewellers who charge melting charges, handling charges or whatever they may call it but never ever fall into that trap
  • Each and every piece has to be weighed separately and tested for purity using the electronic purity tester while selling. i.e. if you have a pair of ear rings, test them separately
  • Ask for the current gold price on your purchase day and their standard making charges before commencing your shopping
  • Check for the BIS hallmark on the inner or back side of each of the pieces you are buying
  • Ask for the ‘wastage charges’ for each of the pieces that you are picking and be prepared for the negotiation
  • You may start by asking the ‘BEST wastage charge’ as per the salesman. Negotiate with him and tell him that you are serious about the purchase if he’s forthcoming in terms of a reduced rate. He will mostly give one percent less. Take it to the store manager or supervisor at the next level to get 2-3% negotiation done. You WILL definitely get 2-3% discount if you are making bigger purchases. If you are gone there just to pick a little 2gm earring or so, you better not negotiate much. But if you are on wedding or engagement shopping, you may save a lot by negotiating


Further tips:
There may be some sales people who may try to belittle you on your miserliness and even might raise their voice. You may remind such people that you know this business and it’s your money that is at stake. Further, you may ask them why there’s no norm for this so-called wastage charges (Hopefully at some point the government will normalize this as well).

Most jewellers may offer you a discount of 40 or 50 rupees per gram on the prevailing rate as if they are doing you a great favour. Please note that your REAL saving comes from the wastage charge negotiation. The ‘special discount valid only for today’, or ‘pick a chit and get your lucky discount’ etc are the gimmicks that they play to preempt further negotiation. Don’t fall for those tricks.

You may advise your respective wives to stop exchanging jewellery too often. Because, every time you exchange, all those value addition charges come into play and you lose a lot of money.

If investment is your goal, avoid buying jewellery but go for gold coins or even Exchange Traded Funds on Gold (ETF Gold Funds).

That’s pretty much for now. I just thought of jotting down these points after coming back from a minor purchase at Chemmanur Jewellers – not that I was hugely successful in negotiating this time. But I have certainly seen my relatives, in-laws, friends etc negotiating big time and making a huge difference in the final bill.

Advantages of SIP (Systematic Investment Plan) and Why is it a Safer Approach?

When it comes to investments and personal finance management, there are quite a few options and instruments available in India. Based on your risk profile, risk appetite and liquidity requirements there are options like fixed or term deposits, postal deposits, recurring deposits, mutual funds (equity based), equities, gold investments, real estate, bonds etc.

As for the equity market linked investment opportunities, open-ended mutual funds are probably one of the easiest to pick and dispose (liquidity). Though, investing in mutual funds still has stock market linked risks, you are managing and reducing that risk by allowing your fund manager and fund house (e.g. HDFC, Reliance Capital, SBI etc) make investment decisions for you.

Investing in mutual funds through SIP (Systematic Investment Plan) for longer term will reduce these market linked risks further. Just in case you do not know what a SIP is, here’s the definition:

SIP is a method of investing regularly (e.g. monthly) in a mutual fund. It’s very similar to a recurring deposit whereby the investment amount is the same for each deposit, but you get to purchase a varying number of mutual fund units based on the current market price of the particular fund.

For example, when you open a SIP with Reliance Growth Fund for 2 years with a monthly recurring deposit of say Rs.1000/-, the amount that you invest per month is always fixed. But for a particular month, the Reliance Growth Fund’s market price (called NAV or Net Asset Value) may be Rs. 450 and some other month it may be Rs. 250 based on the equity market fluctuations. Hence, the number of units that you receive per month also varies. For example, when the mutual fund NAV is 450/- you get only 2.22 units for your thousand rupees where as when the NAV is 250/- you get 4 units (1000 / 250 = 4).

In other words, when the mutual fund NAVs are cheaper, you are getting more units and hence you average out your prices. e.g. based on the above two transactions for two months you are getting 6.22 units for 2000 rupees or your per unit cost is 2000 / 6.22 = ~321.54

My current Mutual Funds Portfolio

The following is my actual mutual fund portfolio as of June 28, 2010. I am not specifying the number of units or amount invested.

Fund name Investment Date Overall Gain
Reliance Growth Fund 22.02.2007 (SIP) 65.67%
HDFC Tax Saver Fund 15.01.2007 (SIP) 47.44%
Reliance Vision Fund 15.01.2007 (SIP) 27.44%
HDFC Equity Fund 08.08.2007 44.19%
SBI Magnum Global Fund 08.06.2007 16.43%
Franklin Prima Plus Fund 07.09.2007 5.65%
DSP Blackrock Focus 25 Fund 14.05.2010 3.08%

Off the above, the first three were done on Systematic Investment Plan with monthly contributions for at least 24 consecutive months (Ideally you need a much longer duration). You will notice that despite, the Sensex hitting 21,000 in December 2007 and correcting big time all the way to 8000 two years back, the funds invested via SIP are still returning a handsome positive figure. On the other hand the other funds which I invested also in 2007, returned digit figures the only exception being the HDFC Equity Fund which was like a fluke when it comes to timing.

The moral of the story is that SIPs for long term always return well while managing your risks.

6 Unique Advantages of SIP

The following are some of the major advantages of SIO or investing in mutual funds through Systematic Investment Plans.

#1 You don’t need to time the market

One of the key problems of investing in equities (or even mutual funds other than the SIP route) is that unless you time the market, you are in trouble. But in the case of SIPs you don’t have that issue – Just keep investing a fixed amount per month (or biweekly) via the SIP route for long term and the rest is taken care of. When the market is down you get more units and when the price is high you automatically buy smaller amounts, as explained above.

#2 It’s not a crime, if you miss one SIP installment

Unlike your bank loan EMIs, nobody will come after you with legal notice even if you miss one SIP installment due to lack of funds or you just forgot it. However, in order to make the best out of SIPs, you should have the disciplined approach of investing at the predetermined frequency without fail.

#3 High liquidity – You can terminate it any time

If you are investing in Open Ended mutual funds, you can terminate your investment at any point of time and get your deposited money in the bank within two business days. Unlike fixed deposits, there is no penalty for terminating a SIP earlier. Please note that tax saver funds usually have a lock in period of three years. This is not specific to SIP but about the nature of the tax free funds.

#4 Relatively low risk

Investing via SIPs offer reduced risk exposure to the stock markets as compared to putting money in bulk via funds or stocks. Basically, in long term you do the risk leveling without even you knowing about it and there is a automatic cushioning against the volatility of the stock market due to cost averaging.

#5 No special fees

Investing in SIPs do not need any special fees per month or at the time of opening. The entry load of the underlying instrument (i.e. the fund), if applicable, will be the only charges.

#6 Long Term Tax benfits

Unlike Fixed Deposits, the Mutual Funds enjoy long term tax benefits as the returns from these investments are not taxable if you hold them for more than a year at least. The same inherent benefit is available when you take the SIP route as well.

Summary

I hope you got some ideas about the Systematic Investment Plan and advantages of the same. Sorry if you already knew about it but this post was mainly meant for the newbies in personal finance. I shall talk about the Systematic Withdrawal Plan in another post.

Start your SIP today because any day is a good day for SIPs…

Happy Investing!

Disclaimer: It is highly advised to pick only the best and stable funds for SIP investment from well known fund houses such as HDFC Asset Management and Reliance Capital. Also, it’s not a good idea to enter SIPs on new fund offers (NFOs). There are a number of funds with proven track record of 5-10 years to choose from.

Further, I am not a Certified Personal Finance Advisor and this post is meant for educational purpose only. Always consult a qualified professional in this field or do your own homework before making your investment decisions.

Diesel – Petrol Price Deregulation in India – Good or Bad?

Yesterday, the Government of India has taken a bold decision and Diesel and Petrol price Deregulation came into effect – of course, clubbed with a price hike. petrol price deregulation indiaAs usual the vote bank politicians on the UPA alliance, opposition leaders and the left have voiced their protest. They claim that they are ‘with the people of India’ and whole lot of other crap. Two of the most politically spoiled states in India – The West Bengal and Kerala – have readily jumped on to ‘celebrate’ the situation with a ‘Hartal’ (strike). But do they even know how pampered the people of India already are how much they are misusing one of the most limited natural resources such as petrol (LPG and diesel as well)?

What does deregulation means?

Decontrolling or deregulating the petrol prices mean that, the government will no longer be subsidizing petrol prices and the prices will be purely linked to the international crude prices. In the case of diesel, though, it will be only partially regulated – the reason being an attempt to avoid sudden spike in inflation.

Why should Petrol cost more?

As all of us know, petrol (or Gasoline) is produced out of crude oil which is a natural resource that’s available in limited quantity. It is a matter of a few years before the crude gets totally exhausted. Although, there have been several crude discoveries in India, we are still dependent on the OPEC (Oil Producing and Exporting Countries) to import crude and refine it to produce petrol, LPG, diesel, aviation fuel, kerosene etc.

Petrol production cost

As of today (26 June 2010), the crude oil costs $79 a barrel (159 Litres). Since this has to be transported to India via the marine route, there is a shipping cost. Let’s say it’s something like 10%. Since the import duty on crude oil was waived sometime back, let us not count that part. Hence by the time the crude arrives in India, it is already costing something like $85 per 159L.

So the petrol refining calculation goes as follows:

Cost of 1 barrel crude: $85 or Rs. 3910.00 (exchange rate of 46)
Quantity of petrol produced from 1 barrel crude: 72L (45.4%)

Since almost 100% of the crude is refined into some product or other, we can calculate the raw material cost of producing 72L or petrol as 45.4% of the price of crude barrel.

Hence 72L petrol’s material cost alone is 3910 * 45.4 / 100 = Rs. 1775.00

Raw material cost of 1L of Petrol = 1775.00 / 72 = ~25 rupees

Obviously, the raw materials alone do not contribute to a product. You need electric power, thousands of paid employees, machinery, maintenance etc to finally produce petrol. So finally when it’s of consumable form, it is costing around 30 rupees in the oil refining spot itself.

Taxes, marketing and distribution cost

The following are the other additional expense before you can consume the petrol at your favorite gas station:

Excise duty
Education tax
VAT
Distribution and transportation cost
Dealer commission

As I understand, all the above added up comes to around 27 rupees per litre of petrol the majority of the cost is towards excise duty, transportation cost and VAT (Isn’t it a pity you have to spend more petrol or diesel to distribute petrol?)

Essentially, one litre of petrol, by the time it reaches the petrol filling stations, is costing you already Rs. 57/- without any profit added to the petroleum marketing companies. Obviously most of these companies are state run companies and hence cannot afford to reap 100% profit. Let’s turn our back on them and tell them that you can make say 20% profit. And if you add that your 1L of petrol should actually cost you around Rs. 68/-

Now, aren’t you really lucky that it’s available below Rs.60/- even with the latest hike in petrol prices?

Subsidy woes

The story is not over yet. One needs to do similar calculations for other products such as diesel, aviation fuel, kerosene and LPG. Unfortunately diesel is the primary thing that fuel public transport and distribution system in India and kerosene – LPG are house hold lifesavers when it comes to cooking purposes. In order to curb the inflation and protect the below poverty line people, the government has to subsidize it big time. A part of this subsidy cost is absorbed by the government while the oil marketing companies bear the other half. This puts some pressure on the government to increase taxes on luxury consumption sectors such as airlines by increasing aviation or jet fuel prices. They are also taxed heavily which is mainly borne by the rich or upper middle class people in India.

Why deregulation of petrol prices is good?

The deregulation of petrol prices will definitely increase the rate of inflation in short term. Virtually there will be immediate price rise in commodities and other consumables. However, for long term I think it is a good move because at the end it will definitely reduce our long term debt and fiscal deficit. Our overall economy will get stabler in this case.

Secondly, this measure will be a boost to the oil producing and marketing companies to recover their losses immediately. Remember, lakhs of people work in these huge companies and they need a life too. Moreover, the government run oil companies will be candidates for disinvestment which means that the government can lower their fiscal deficits further with additional income.

The other advantage is that the inflation, at the moment, is a fake figure. You will get to know the actual inflation and variation of commodity prices only when the petrol prices move according to the international crude prices.

This will also bring in big private players (e.g. Reliance) into the petrol marketing game. Remember that companies like Shell and Reliance used to provide excellent quality of petrol and service until Reliance pumps were forced to close down due to government regulations. This kind of competition will eventually bring in good service, good quality and in the future competitive pricing as well. The immediate woes will be compensated in the mid term – that’s my strong belief.

The government, in the meantime, should try to reduce the excise duties and restructure the VAT to minimize the impact of immediate fuel price rise on inflation and the poor people.

Long term solutions to curb petrol prices

In the long term, there are several viable solutions that needs to be done from the sourcing point to distribution and consumption.

There are possibilities of under sea pipes (just like the one we were planning with Iran for gas sourcing) from the vendor nation to India to reduce shipping cost. This has a very good long term positive impact though initial cost of incorporation is high.

The oil refining companies sourcing and storing mechanism needs to be optimized in a way that when the crude prices are low, we are able to store more. I am not sure, how much of optimization is done in this regard. Since we keep getting new and new governments every few years, they may not go for a long term plan for the same. Please remember that not too long back, the crude prices were at $35 or so per barrel.

There is a scope for improving the internal distribution system as well. Though, India has a huge geographical region, we can still have oil distribution pipes from refineries directly to the regional distribution centers. This needs long term planning.

Final thoughts

I think our citizens (and even people from rest of the world) are misusing petroleum products and this kind of abuse needs to be first controlled via price hikes and then by introducing alternate energy options and technologies to optimize the usage. There is a lot of scope for India to take out those old, fuel inefficient vehicles from our roads. I think the taxation needs to be restructured so that people and families who own more than one vehicle should be taxed more. There can be several other long term steps to improve the overall situation but please remember that at the end of it the petrol will anyhow get exhausted.

And a request to our great politicians who always oppose what the government is trying to implement. If you are really with the people of India, please come up with real practical suggestions to improve the situation. It wouldn’t be too long before you will be stone-pelt by the younger generation for preventing them an opportunity to live in a developed country by 2020.

And my questions to my friends (not the poor) who are earning in thousands and lakhs. How dare you crib about a three rupees rise in petrol while you still prefer to drive to office alone in a 5, 10 or 15 lakh car?. More over I haven’t seen you cribbing while spending 1000 rupees for a dinner or while buying a shirt worth 1500 rupees.

Think long term friends!

Are you selling your stocks at the wrong time?

First of all, let me take disclaimer that I am not an expert in the equity markets nor a qualified personal finance professional to advise anyone. However, since I have been doing online share trading for almost 12 years now, I thought of sharing my experiences on how I could have made more profits by exiting stocks at the right time (By the way, I never made huge profits but fortunately I am not at loss)

Stock selling strategies and tips

Most people are good at making the right calls when it comes to picking the right stocks at the right time. However, more often than not, after they sell they will be shocked to see that the shares that they sold are moving up faster. This is because they never had a proper exit plan for that particular stock. The following are some tips for you to help you sell your stocks at the right time.

Have a target price when you buy

When you buy a particular stock or share, you should have a target exit price in mind already. This has to be arrived on the basis of the valuation of the stock, prevailing sector conditions, momentum etc. Even if you are investing for five days or five years, this is very important and more over you have to record that planned exit price.

Your first analysis is almost always the best

When you set a target price while buying, that exit price is probably based on thorough analysis and hence the best exit price. You should not keep changing that figure unless the valuation of the stock or the sector it belongs to dramatically changes. If that is the case, you have to re-rate the stock after further analysis and keep an additional exit point and make it a point to sell at this price. If there is no change in prevailing conditions around the stock or the company, it is always advised to sell at the original exit price.

Never sell a stock that is peaking day by day

If a stock is flying on a momentum and hitting 52-week highs day after day, then you may get a better price. Keep putting higher stop losses and change your sell price (above original exit price) to get maximum profits. As a thumb rule, never sell a momentum stock that has just hit the 52 week high.

Sell ASAP if the company falters

If there is negative news on your invested company, it is a call for immediate sell at whatever loss or profit. You have to always keep track of the stock news of your favorite companies via online stock news alerts and not through news papers. By the time you read your financial news papers, you are already very late.

Sell early to balance you portfolio

Another situation where you might exit a stock prematurely is to balance your overall finance portfolio or equity portfolio alone. In the first case, you have decided to keep say 30% in equities and due to several recent transactions if that proportion has gone way up, you may want to de-risk your portfolio by selling a few stocks. Similarly, within your equity portfolio, if a particular sector is over represented you may want to adjust it via further selling of some existing entities.

Sell early for any tax benefits

At times, especially towards the end of the financial or taxation year, you see that your capital gains may be offset via booking loss on certain non-performing or turtle stocks. This is sometimes good to reduce your taxes – based on the existing rules of course – as well as to give further and better buying opportunities in the next financial year.

…and finally…

Never listen to analysts on TV

These are the bunch of foxes who basically wants to play with the sentiments of investors and keep changing their stand from time to time. If necessary, you may have a paid financial adviser, who is interested in making money for you because he gets paid by you but never take those analysts’ free advice. But as I mentioned in one of the tips above, keep track of all news related to your stock and be smarter.

By the way, the tips mentioned here are applicable for those who are investing in stocks and not trading.

Happy investing!

Investment strategy in a volatile market

Indian bourses have been setting new and new index highs every other week amidst heavy volatile trading. There are many arguments in favour of the Indian growth story. Some believe that what we are seeing here is a fundamental move where as some others swear that India is a special case compared to other emerging markets and we will keep going up. Some wisemen and analysts even predict targets for the ‘Sensitive Index‘ for not just 2008 but for 2010 and 2020 as well. The weakening dollar combined with the huge market capitalization gains have made Mukesh Ambani the richest person on earth in less than two months time. However, it may be a matter of couple of months before 9 out of 10 retail investors loose out in the market after being exposed to the high-risk game in the volatile market. Having seen and experienced three huge market falls in my investment life, I would like to advise the inexperienced retail investors to be very cautious at this point of time.

Good, bad and ugly…

There are a couple of things that are going really good in India recently. The first and foremost thing is the consistent economic growth rate of 8% and above that the country has been achieving of late. The other good thing (which resulted in the first one) is that there are couple of wise men sitting on top
who are driving the Indian economic story – P, Chidambaram and Y.B. Reddy being the prominent ones supported by other organizational leaders of SEBI etc. Strengthening rupee, low inflation rates, increase in foreign exchange reserve, turned-around PSUs, focus on futuristic infrastructure planning etc are some of the positive results of good overall leadership. The current Indian finance ministry, Reserve Bank of India and SEBI are almost always prompt in rolling out policies for positive growth and also to curb abnormalities like credit or sub-prime issues and indirect FII inflows.

However, there are couple of other things that are not really in favour of a stable economy – the first being the fact that we are having a very unpredictable political alliance at the center that can fall anytime. Many of the economical reforms, tie-ups with developed countries and global capital institutions etc are often thwarted by one or the ally. Secondly, the inability to manage (appreciate/depreciate rupee!) the rupee value at an optimum level against the US dollar has badly affected the export houses and industries like Software, textile and jewelry. Third biggest factor is that the huge FII money that is coming as foreign exchange is not really used for any long term planning. Due to the high volatility, this kind of money is not being used for developmental activities.

Some myths associated to the volatility

India is a special case and the bull run has to continue: Wrong! I personally believe that the fair value for the sensex should be around 13000-14000 at the moment as compared to the PE multiples of other stable emerging markets. The market has been fueled by the FII inflows and it can reduce anytime and India is
not really a special case.

Sensex is so high that I cannot enter now!: Wrong! Sensex is only an indicator of a small set of 30 stocks. At any point of time there are enough value stocks available in the market that you can buy.

PE valuations don’t apply any longer: Stupidity! If a few stocks are shot up because of momentum, it doesn’t mean that we are in a special situation and we can forget the valuations. If Educomp and RNRL are currently being traded at 400 or 500 times forward earnings, they are dangerously risky trading bets and not
any good for investment. Another example: Majority of IT stocks used to trade at 30 to 40 PE multiples for almost ten years now. This does not mean that, going forward Infosys is still fairly valued and be a multibagger!

Momentum trading is better than value buying in a volatile market: Wrong! Value buying is always the best mechanism to invest. Momentum trading may not be there for ever and can wipe out your money at any time.

It’s better to keep booking profits regularly to reduce risk: Wrong! If you have done your homework about your investment portfolio (See long term portfolio below) you don’t need to do this. In fact, booking profits at regular intervals will badly affect your returns. However, it is also a good option if you maintain your investment portfolio and trading portfolio altogether separated. For fun and high risk gambling you could use the trading path while the investment portfolio is probably for your retirement life.

I should book profit on my mutual funds now: No, unless you are in urgent need of money. Mutual funds are long term instruments for wealth accumulation and an ideal way to enter them is via Systematic Investment Plans (SIPs). It is not investor’s job to time the market for MF investment but your fund manager will take care of that part. So never trade a mutual fund.

A few investment tips

If you are in doubt whether you should enter the market now or not, opt for the SIP route of investment via mutual funds. Ideally SIPs should be for subscribed
for a longer investment period of say greater than two years.

Never buy your stocks in bulk: The self managed SIP route can be taken for buying even stocks. ie. You buy larger quantities when the prices go down and smaller quantities when you feel that the prices are a big high. In other words, build your portfolio over a number of months and years and not overnight. Please note that this rule is applicable only to fundamentally strong long term portfolio stocks.

Avoid playing momentum stocks. 8 out of 10 traders make losses on such trading opportunities.

If you want to play volatility then opt for some of the best exchange traded index funds. One great example for the same is Benchmark Nifty Exchange Traded
Scheme. This is a fund that invests in NIFTY stocks and is pretty much reliable in terms of low tracking error.

Don’t buy a stock due to market or analyst pressure or rumours. Do your homework before entering each and every counter.

Avoid having more than 25 or 30 percent weightage on mid and small cap stocks in your long term portfolio.

Identify sectors that have long term value and those sectors and companies that are often affected by government policies, weather, margin pressure etc. For example, textile stocks and software companies are affected big time by the rising rupee and hence they may not yield the same kind of returns as in the past. Another sector which should be almost always avoided is the airlines which are always under margin pressure.

Periodically (every three months or so) inspect your long term portfolio for any fundamental changes or external parameter influence.

Try to diversify your investment across at least four to five sectors and six to ten different stocks. Never put your bulk investment into one or two stocks alone.

Try to diversify in terms of investment instruments. One should have a good mix of Post Office deposits, equities, mutual funds, fixed/term deposits, gold and real estate in their long term portfolio. For long term, gold may be an excellent investment. Again Benchmark’s gold exchange traded fund (ETF) and DSP Merril Lynch’s World Goldfund are excellent picks for low risk investments.

My long term portfolio picks (In the order of portfolio weightage and large cap to small cap order)

L&T
Grasim
BHEL
Punj Lloyd
Reliance Communications
Crompton Greaves
Tata Steel
Bajaj Auto
ACC
SBI
NTPC
HCL Technologies
Voltas
Britannia Industries
Cipla
Kesoram Industries
Bharati Shipyard
EIH Ltd
Apollo Hospitals
NIIT Technologies
Glaxo Smithkline Consumer
Ballarpur Industries
Orient Paper
City Union Bank
Hanung Toys

Note: Some of the above stocks are already fairly valued while some others should be entered during the next correction.

Disclaimer: As a retail investor I may or may not have vested interest in some of the scrips mentioned here. Readers are advised to do their homework and exercise discretion before attempting any investment.

Homeloan rates heading north – What to do?

Home loan rates are skyrocketing following several hikes in the rates (repo and reverse repo rates) and cash-reserve ratio, by the RBI. While the central bank’s main agenda is to provide enough liquidity for the banks and to help the government control inflation rate to an ‘acceptable’ limit, nothing seems to be in the vicinity to save the middle-class from the home loan headache. In this scenario let us analyze what are the best strategies for you in planning your debts for long term financial stability.

First of all, let us not forget the thumb rule that if you have good enough funds – either as loose cash or parked in other investment instruments – with you, it is always better to pre-close the loan, either fully or partly. Two years back the scenario was different, where a tax-free and risk free 8% return from the provident funds like investments complemented a long-term home loan at 7.5% or 8.0% rate. The case now, however, is that if you want to maintain both the home loan and liquid investments, then the before tax returns from the investments should be at least 12%. And if you would like to make a part payment, make such decisions faster before the next interest hike is effected.

Secondly, if you are in no position to pre-close or part-pay the loans, you need to work out the best possible loan options for you. First and foremost thing to do is to call up your bank and check the fresh loan interest rates for your kind of loan amount and tenor. Usually, there will be a disparity of 0.25 to 0.50% between fresh loan rates and already running ones. You need to correct it via personal requests made to the bank, without fail every quarter. Also while the rates are going up opt for an increased tenor against increasing the EMI option. If not, knowingly or unknowingly it could affect your monthly budget (could even run into higher risk debts like credit cards over usage). Also you don’t want to shell out more money early enough when the rupee has more value. In the long run, the interest rates will anyway come down to bring the tenor back to your original term or even lesser. However, there is an exception here. You should know that your interest part of your EMI will steadily be coming down every year while the contribution to the principal goes up. If the annual interest portion has fallen far below 1.5 lakhs, you might want to opt for an increase in EMI option (once in a while) to avail maximum tax benefits on interest. Care should be applied here to make sure that you don’t end up paying a lot more than 1.5 lakhs an year, via adjusting the EMI. Another thing not to be done at all at this point of time is to convert your floating loan debt into fixed rates.

Thirdly, owing to the new monetary policy of the RBI, loans below 20 lakhs are likely to get some sops from the banks. This is due to the fact that risk weightage of loans below 20 lakhs have been reduced from 75% to 50% which might result in banks offering marginally lower interest rates for this category. If your current outstanding balance is slightly above 20 lakhs, you might want to check with your bank (or another bank) for a switchover option. This should be, however, done with care after working out the processing fee factor etc.

Next, be aware of the hidden charges and the penalties that banks might be revising from time to time. The home loan market for them will be coming down by 15% to 20% due to the rate hikes and other parameters in the construction industry. Banks will try various ways to make money to keep their bottom line intact. Fresh loan seekers too should be more careful now than ever before.

It is a good time now to sit back and think of own expenses structure of your monthly salary. Ideally, you should not have more than 25% of your take home
salary going towards the payment of loans. This figure is probably optimal if it’s below 20%. If this is the case, you should be in a position to save 30% of your income into various short and long (mixed with high risk and low risk) investment instruments. If you are a young (less than 40 years) borrower, you might want to restructure your investments now. You might want to convert up to 60% of your savings into high risk instruments like equities or equity oriented funds for long term investment horizon (>5 years) in mind. Another great option is to put up to 20% of your investments in gold with an investment horizon of three years. The gold is sure to return 15% or more annualized returns for the next three years (Visit http://www.forecasts.org/). Investments like this will surely compensate for the money outflow caused by high interest loans.

Investment strategy for 2007 and beyond

The jittery that the Indian equity market is offering right now might make one wonder as to what instruments are right for this kind of conditions. A lot of people had hope in the real estate and infrastructure until the middle of 2006. This does not seem to hold good anymore with the financial minister rolling out a very ordinary Union Budget 2007-08. Interest rates are further heading northward and cement sector has been hammered with additional excise duties stamped on them.

The Indian market, unlike the not-so-recent-past, seems to be reading and vigorously reacting to the global cues. Earlier the upcoming economies and bourses were generally driven by one or two major factors such as global crude prices, local agricultural and manufacturing growth predictions, monsoon/rain forecasts etc. Nowadays FII (Foreign Institutional Investors) activities, far eastern market movements, US employment rates, terrorist threats, Greenspan’s untimely statements (and may be even George Bush’s mother-in-law catching a mild cold) etc seems to be taking the Indian market for a roller coaster ride. The volatility is so high that small-time retail investors are the worst suffered in most cases.

(Before trying to analyze what is the best form of investment going forward, let me put forth a disclaimer. Here I am going to talk only from the view point of young – includes middle-aged persons like me – investors. I cannot really talk on behalf of the older and matured lot of investors.)

Equities for long term

I still believe that equities are the best instruments to meet your long term financial needs. This is because of the fact that no other options could yield good enough returns to beat the high inflation rates. With proper planning it is possible that the equities can yield upward of 12% annualized returns in long term. No other instruments can possibly guarantee this kind of returns on investment. So if you are below thirty or thirty five, it may be a good idea to expose 50% of your portfolio to equity market (stocks or equity oriented funds – both with long term horizon in mind). Now I am sure that most of the youngsters out there have already taken care of this aspect. The missing trick could the ‘long term’ factor. Most of the younger lot that I interact with want fast money that matches their fast lifestyle – This does not quite work with equities. Long term investment is preferred (Tip 1) over risky trading. Also, stock or fund picking becomes easier in this case.

The most critical aspect is in picking the right stocks with long term (10-20 years) value in mind. If you look at the past performance of certain blue-chip companies this may not be all that difficult. But any portfolio will get some extra punch (Tip 2) if it has one or two mid-caps that offers greater mid-term growth. Most of the time the difficult part is picking these strap-on boosters that mostly keep changing in your portfolio every other year or so. In this case one might need professional advice (and not rumours) and help from company research reports. One can afford to have one or two such scrips (Max 15% of your equity exposure) in a portfolio of 12-15 pure long-term plays. If you are sure about your long-term picks, don’t let the market fluctuations affect your decisions. Ups and downs are common in the market and you never loose in holding a good long term play that temporarily goes down. In other words, even if the current market price (CMP) is less than your purchase price, it is only notional. i.e. You don’t loose anything unless you sell them. So never sell your shares at loss (Tip 3)!

Mutual Funds

Equity oriented mutual funds are for those who don’t want to take risks on which stocks to pick. If one goes for a mutual fund he/she is basically delegating this management risk to the fund managers those who have better insights and scientific research capabilities and tools to analyze potential companies to invest and their shares better. This is always a wise choice for long term growth.

Picking an equity oriented fund is far easier than picking a stock. Most of the fund performance data (as well as fund manager’s reputation and profile) is published on various portals and is available for your reference. One needs to consider at least past three years’ – preferably more than 5 years – performance of a fund before making a decision. One might want to pick a mix of funds than just one to make sure that the equity exposure is spread across a good blend of large cap stocks of huge companies and mid cap stocks of upcoming companies. One should take care not to invest all the money in mid cap oriented funds

Systematic Investment Plans (SIPs) are very good for those have as steady income and who don’t want take decisions on when to invest. This is indeed a very good mechanism to make sure that investment as a ‘systematic’ habit is built into an individual. But please remember that SIPs are only worth if you have a longer investment horizon. Ideally, one should think of investing in SIPs if you opt of 2-5 years (or even more) of monthly recurring investment. If you don’t want to commit for a systematic plan and you are an adamant investor, you could still invest systematically by entering your selected funds on low market days of every month. But then you should stick to your own resolutions and plans. Go sip is my tip 4 for you.

SIPs can be really good for entering mutual funds. But why not SIP or similar approach for buying stocks? Say, you want to purchase 100 shares of ITC this year. Why not buy 10 each every month at possible dips? It is always better to buy shares in smaller quantities (Tip 5) over a number of times until you acquire as much as you want.

All that glitters is GOLD!

As long as the Indians have their craze for the yellow metal, investing in gold is a very effective mechanism for wealth creation. If you see the way the gold prices have been shooting up for the past six years you will realize that purchasing gold is a lot better option than investments such as bank deposits or post office schemes. So whenever the gold prices are having minor dips or if it is non-wedding seasons in India, make it a habit to buy some gold (Tip 6). One can have as much as 15% (ideally 10%) gold in his portfolio. Also, never buy gold as jewelery but buy them in the form gold bars or coins which is easier to sell and will not have any depreciation or making charge related issues. The purity of the gold should be confirmed before buying the same. A good bet could be purchasing the same from banks like ICICI that offers 99.9% pure gold bars at market rates. Those who travel via gulf countries like UAE may make it a habit to buy gold abroad which is probably 10% cheaper than Indian gold prices. Also purity is guaranteed in that case.

Another excellent way of investing in gold is via the newly launched Gold Exchange Traded Funds (ETF). This option also provides you the protection that comes along with the dematerialized form of investing – you don’t need lockers and strong rooms in this case. Systematically adding a few units every month to the gold scheme may help in the long run.

Plan your Provident Fund

One of the other ways to passively invest for long term is via additional contribution to your provident fund. Why is this important? It is important because it is the only guaranteed mechanism towards your retirement planning unless you opt for some pension funds. Also, I personally believe that it is meant for the times when India becomes a developed nation (20-25 years from now) where interest rates are below 2.5% or 3% and inflation is almost nil. You will realize the value of money that you saved then. However, it is not a good idea to put more than 10% of your monthly income into PF in addition to what the employer contributes. From time to time the government will announce additional interest towards PF contributions. One needs to exploit these grace periods by adding more contribution to his/her PF whenever these offers are valid (Tip 7).

Commodities

Commodity trading is the other form of strap-on boosters that one can experiment to make short term money out of price variations in the commodity market. The commodity market in India is huge now since the government allowed the trading of the same via exchanges since 2004. Earlier only bullion trading was possible. However, I do not have any tips to pass on here as I am yet to experiment trading in commodities. But I am told that it is a very good money making mechanism in India where there are predictable patterns on the price movements as we have hundreds of festivals and seasonal events.

Real estate

25 years from now, having own land on earth may become a luxury. That will be the time when part of the human crowd will be living in other planets or may be living in one of the closets in a 250 storied apartment complex. So investing in real estate (not apartments but land) is a vise choice any day. As an investment, one does not need to be in the look out of prime locations or within city limits. Grab whatever you can (Tip 8) at throw away prices in remote areas or mountains or marshy lands or wherever. The land that comes at Rs 10 per sqft in timbuktu will be fetching you Rs. 5000 per sqft in another 20 years. Also technology will be developed to convert even wastelands into attractive home or business areas. But beware, if you want to lead a very peaceful retirement life, real estate may not be the long term thing for you.

Managing and looking after real estate in itself is a physically tiring and highly demanding activity that might deny you sleep. But it will always remain an ever-appreciating asset. Lastly, if you want to accumulate assets that will appreciate, you should also cut down on your ‘early spending’. The current consumerism and youth’s lifestyle is such that they want to be the first one to buy a new model of mobile phone, mp3 player, plasma TV or a better car as soon as it hits the market. The cost of an early buying could be double compared to differing that decision by six months or an year – especially when it comes to buying electronics. The more you cut such expenses the stronger your wealth creation path is.

Happy investing!

(Personal note: With the above words on investment wisdom one would naturally think that a seasoned investor is sitting at the other end. I should apologize that I am one of the losers on the bourses thought the blame goes to Harshad Mehta, Ketan Parekh, dot com fall or World Trade Centre attack 🙂 But the good news is that I have started thinking long and the bad news, I am yet to put some of these thoughts into practice)