Ever since I posted my article on Midcap recommendations, I have been getting emails from a few readers asking for stock recommendations, mutual fund ideas, SIP investments etc. As it is practically impossible to answer all queries by email, I thought of making it simpler by publicly posting my stock portfolio in this post (which I hope to keep updating at least once in a quarter)
Note: Before attempting to invest in any of these stocks, I strongly urge you to read through the rest of this post – especially the Disclaimer section.
My Equity Portfolio
* Last updated on 2-April-2018
1. Long Term Basket (5+ Years)
* Last action: Added more ONGC
Asian Paints Ltd
Bajaj Finance Ltd
HCL Technologies Ltd
Hindustan Uniliever Ltd
*Kotak Gold ETF
2. Medium Term Basket (6 Months to 5 Years)
(# Some of these stocks may be moved to Long Term basket later) * Last action: None
3. Short Term – Swing Trade Basket (Few Days to Weeks)
* Last action: Booked profit on Tata Motors (DVR), Added ITC
My Investor profile
I am retired Software professional who took an early retirement from the IT industry to pursue a few simpler interests in life. I have been an investor in the equity market for many years but stopped the same just about an year before my retirement due to change in risk profile. However, seeing the new majority government in action at the center (and my own need to build wealth post retirement), I decided to get back to the stock market again to ride the bull run. I intent to build a portfolio of 5-10 stocks in the coming weeks with special focus on mid caps with good valuation that I intent to keep from 6 months up to 5 years. At the same time, I plan to allocate a bigger chunk towards well known large caps and blue-chip companies with very long term view (5-25 years). There’s also some swing trade or short term positions that I hold from time to time.
By the way, direct equities form only about 20% of my overall portfolio due to my investment risk profile. I also do trading in equities once in a while but that’s more for fun. I am 99% an investor (and less of a trader) with medium to long term goals. I am also invested heavily in mutual funds (~30%) and that’s what is giving me real good returns from long term point of view. Having said that, I must say that I have the knack of picking the right stocks at the right time but since I exited them too early, I ended up having limited profits from stocks as compared to my funds. I plan to rectify this with my new approach of having buy-and-forget large/mid caps stocks in one basket, medium term picks in another and swing trade/short term picks in yet another as shown in the three tables here.
The stocks listed here are actually part of my portfolio and it doesn’t necessarily mean a recommendation to your investment goals. Further, here in this forum, I will NOT be discussing why I bought certain stocks, when I bought/sold, target price etc. All financial details, disclosures, news and research reports of the stocks mentioned here are available on portals like Bombay Stock Exchange or Moneycontrol.com. Hence, you are requested to do your own research and adjudge the suitability of the stocks mentioned here for your kind of investments.
The long term portfolio mentioned here may not be of interest to many people who are in the look out of quick bucks from the stock market. However, some of the stocks mentioned in the short to medium term portfolio (second table) may interest some of you.
Further, I am not a qualified Financial Adviser or portfolio manager to help you with your investment needs. Any loss or gain that may be resulted from investing in the stocks mentioned here may not be attributed to me.
Today is my last working day in my fulltime Software career. Yes, I decided to retire at my current age of 43 years after careful deliberation and planning for retirement over the last few years. I worked for exactly 19 years in the IT Industry which thought is equivalent to some 30 years of efforts in the Indian context; that is, when you consider the first ten years of hard work and extra hours that we all had to put in during those years.
Nevertheless, I decided to call it quits mainly due to the following reasons:
I was kind of getting bored with the IT office routine – while Software still excites me, the industry quite doesn’t anymore
I thought I have planned my finances reasonably well till today after initial years of spend-thrift lifestyle. At the moment though, I have no loans, have some decent savings and fixed assets, and I have further plans to appreciate whatever little wealth I have)
I do not want to improve my lifestyle or living standards further or better than what it is now. In fact, I already froze my lifestyle some five years ago
I plan to leverage on my secondary skills and hobbies in order to earn some income from home. This, at the moment, cannot immediately match the high salaries that IT professionals command – it is more about doing what you like the most and have huge potential to outsmart the IT salaries
I see the need to spend more time with my family with my kids (a special one too) growing up – I believe that after certain age, one’s sole goal should be grooming the next generation and giving back all your learning to the society
The reasons may be reasonable but can one really retire so early without having some planning and backup? Well, that’s what we are going to discuss in this post. I am writing this post because I thought it might help a younger guy out there who wants to plan for his retirement. It is very obvious that one needs quite some money to retire and hence it needs careful planning! I shall also share here the little Excel sheet that I made sometime back to help with my retirement planning.
How to plan for your early retirement?
Disclaimer first: I am not a financial adviser nor planner myself. However, based on the personal finance articles that I got to read in newspapers and online over the past several years, I kind of figured out how much money I might need to retire early and more importantly, if that money is not sufficient, how can I supplement it further? (In fact, that’s more like my situation now). In my case, the plan was laid out almost 8 years ago and I kind of executed it more or less along the expected lines. I must however admit that I didn’t fully reach my financial goals yet, and hence it is all the more important to discuss the management of post-retirement savings as well. We will discuss both these aspects in the post.
If you ask me about early retirement planning, the following will be the logical steps involved.
Decide at what age you want to retire from your full-time job; Do that at least 10-12 years in advance so that you don’t miss any wealth creation opportunities.
Project your typical monthly expenses post retirement (without considering inflation parameters; planning tools will take care of adjusting for inflation) and hence the amount you want to retire with for a longevity of say 80 years
Execute your plans to save up that much money – The plan should include foreclosing any pending loans before retirement, a clear strategy for pre and post retirement investment, onetime big expenses etc. Also, do special planning for high-inflationary expenses such as medical (You need a good medical insurance for your family post retirement) and a term-life insurance well in advance
If the return on retiral investment do not seem sufficient, plan for a backup part-time job or go for alternate investment instruments (often high-risk, high-reward ones if you are retiring at a younger age)
Retire peacefully and enjoy those little things in life!
Now, that sounds easier said than actually done but it’s not that easy! Let’s now take a closer look at our planned steps. I shall try to explain these steps in detail using the little Excel sheet that I was talking about (download link below).
To begin with, you need to make up your mind to arrive at a reasonable retirement age. This has to be done very well in advance. For example, when you are still in your early thirties, you may plan for a retirement at 45 if you are sure of saving up enough. Be careful not to be super-confident here. In my case, I started thinking about retirement about 7-8 years back itself after seeing a few ups and downs in the industry as well as the financial markets. More often than not, people won’t take a retirement call out of fear or social reasons – because it may be seen as a sin by old thinkers!
Your readiness for retirement again can be checked using my sheet. If you are not ready yet, use the sheet again to decide how can you accelerate your investments towards achieving your retiral goals (i.e. the money with which you can retire. Remember to add additional investments for special needs such as kids education or marriage, if such events are likely to happen post your retirement. You may use the third sheet in the workbook for such goals and add up to your systematic investment goals)
Step 2. Project your monthly expenses
This is reasonably easy if you have the habit of tracking your monthly expenses. If not, do the following:
– From all your bank statements, find out your annual account outflow (withdrawals, bills payments,credit card payments)
– Deduct the expense types that won’t happen post retirement (e.g. kids schooling expenses – not always though, fuel adjustments when you don’t commute that often, shopping budget as applicable etc)
– Add any additional expense that might recur after retirement (e.g. medical insurance)
– If there are things that repeat every couple or few years, add those expenses on an annualized basis as well (e.g. family vacation abroad once in two years)
– The resultant value divided by 12 would be roughly your monthly expenditure.
– If you want, more accurate values (advisable) please track your expenses from today itself.
Now, this monthly expenses should be on as-is basis. i.e. if you decide to retire today, how much you will need after cutting anything that’s not applicable in retirement life is this monthly figure we are talking about. Don’t worry about any inflation parameters at this moment.
Step 3. Execute your plan based on your particular sheet
Now, it’s time to take a closer look at your sheet. After entering the mandatory fields of your current age, retirement age and expected monthly expenses, you may adjust the inflation parameter and the expected returns on your savings after retirement. The inflation parameter in Indian conditions can be anywhere between 6 to 10 percent over a long period of time. The rate of returns on your investment can be as low as 3% for savings banks, 7 to 10 percent in long term deposits and 8 to 12 percent typically in equities (and as high as 15-20 percent in certain time horizons in the bull market).
I suggest to leave the longevity at 80 years as that’s typical life expectancy number that one should plan for. The life expectancy in India is slowly going up thanks to advancement in medical facilities and health standards.
With that plan in the sheet, you now know how much you need to save up. You need to document that somewhere and not keep it transient in the sheet (and you forget your planned numbers later).
Now, the preparation steps start. Some of the activities you need to undertake during this 8, 10 or 15 year period is to close all your loans, take care of major one-time expenses or allocate further money for that, and take a term insurance policy at a good age (typically before 40 years and preferably in early 30s).
(Note: As a thumb rule, one should de-link insurance and investments. There’s no point in having an old style endowment policy like the one LIC used to offer. Instead, earmark most of that money into high-return investments and use only a fraction of the cost for a high value term deposit. These days, taking a 50L or 1 Crore term insurance policy is not a big deal!)
Living frugally and investing wisely should be the motto towards the retirement age. Especially, one should go for things that add long term value than disposable/expensive items (e.g. smartphones, electronics, changing cars frequently etc).
No matter what, your end-goal on retirement day should be having that magic figure that you want to retire with.
Some of the wise things to do on retirement is to dispose illiquid assets such as real estate, gold* etc. Also, try to invest 20-25% of your take home salary in equity market (blue chip) and mutual funds prior to your retirement. One good thing to do is to allocate 10 to 15% of your take home salary towards EPF (Pension Fund or Provident Fund) on top of the employee+employer contribution. This comes as a big savior at the end because it’s all tax-free amount that returns at an average of 8.5% over the past several years. It’s as good as getting 12% annualized returns before tax. I was doing exactly the same since 2004-05 and it really helped me!
* By the way, responsible citizens should avoid gold as an investment instrument as this illiquid and stagnant wealth – while giving you good returns – will spoil the country’s economy. Our biggest curse is the trade deficit caused by Petroleum and Gold imports.
Step 4: Special risk planning
Now, what if you slogged it out till your retirement day and you still are not going to make the money you wanted as per the planning sheet? (Don’t worry, that will be the case with most people)
You have to either (1) Go with some high-risk, high-reward schemes or (2) Plan for a part time activity that earns some money to supplement your retirement savings returns with which you can make a living.
(1) is where I disagree with the old school of thought. Yes, it’s ideal to invest all your post retiral savings into risk-free and fixed return instruments AS LONG AS you retired with a handsome amount in your bank. And that’s indeed the recommendation for those who retired rich. What if you didn’t and you are still rather young?
In such cases, you need to maximize your returns from your post retirement money by investing part of it into the equity market. Why? Because it returns like 10% or 12% annually on your retirement savings and you are going to beat the inflation big time.
Also, please note that the risk scenario mentioned here is applicable ONLY when you couldn’t take that risk before retirement. It is always better to take this kind of risky investment before retiring itself, as much as possible.
Negating the bad effects of Inflation is the key to be successful in Indian conditions!
You may compare the two sample screenshots below to understand what I am talking about.
If that’s not your preferred route, you need to definitely do some kind of part time activity that earns money (in my case, that’s the plan!)
Step 5: Happily Retire!
No explanation needed here, but all that you have to do is to go for a good medical insurance coverage, bifurcate your money into the right investment instruments and enjoy life! Because you have done your planning part really well, you deserve to enjoy life to the fullest till the very end!
Early Retirement Hassles (Non-financial)
When somebody decides to retire so early in their life, the biggest worry is to manage and convince the family members. In the Indian context, you will invariably have an argument with your spouse on your decision. Even worse will be the nosy friends and the family people who will be waiting for an opportunity to prove you wrong for not thinking like the most! At any point of time when things don’t seem to go well, you have to remind yourself that your conviction is better than the conventions you see around!
Further, some people might develop boredom and depression after an early retirement decision. That’s why it is very important to find a post retirement activity to keep you occupied and happy. Retirement life is a very good time to reconnect with your family, friends and rediscover yourself. You will also find a lot of time to take care of your health.
The above are some of the non-financial aspects that you need to manage and figure out to lead a peaceful life, after having done the financial part perfectly right!
Enjoy your life!
PS: This article was written in a hurry as I really wanted to post it on my retirement day itself! Any suggestion, corrections are welcome and let me know if the Retirement planning Excel sheet that I shared has any bugs or calculation issues!
If you are into Indian stock markets, here are some stock recommendations for you. I personally hold most of these stocks and hence your risk is mine as well. I am not providing detailed analysis of these companies but that’s out there for you to explore on websites such as Moneycontrol.com
Indian Stock Recommendations
Please note that, I am not talking about ‘trading’ here but long term investment here. Long term for me is at least a 1 year term.
Here is my list with their recommended entry prices in the bracket (In some cases it is my own entry price for these scrips).
1. Shriram City Union Finance (765)
2. Kitex Garments (58)
3. SpiceJet (38)
4. DQ Entertainment (18.50)
5. Escorts (64)
6. Acrysil India (80) – After Bonus adjustment
7. Kwality Dairy (31)
8. Manappuram General Finance (35)
9. NIIT (33)
10. APM Industries (13)
I shall keep updating on what am I doing with these ‘multi-baggers’ in the next months. Currently the target for each of these stocks would vary from 75% to 300% within a 12 to 24 months investment window.
Disclosure: I hold some of these stocks and I may have vested interest in these companies. Please do your own research before investing.
(I was staying away from the stock markets for a couple of years now but made a re-entry seeing some good opportunity in the recent bull run)
Update on January 02, 2014
It has been about 15 months since I recommended the above stocks. I still hold some of them while I have recently sold most of these stocks in the current fluctuating markets. I wouldn’t be tracking most of the stocks again but would like to provide the following update on how they fared.
Stock name (Recommended price, High since)
Shriram City Union Finance (765, 1230) – Still going strong
Kitex Garments (58, 83.85) – Still going strong
SpiceJet (38, 48.30) – Bound to various government regulations and recommend to enter only at very cheap levels
DQ Entertainment (18.50, 47.95) – Still going strong
Escorts (64, 145.15) – Still going strong
Acrysil India (80, 240) – Still going strong
Kwality Dairy (31, 38.70) – Hold
Manappuram General Finance (35, 46) – No more attractive due to gold woes
NIIT (33, 33) – So so
APM Industries (13, 28.85) – Still going strong
Those stocks that are marked as ‘Still going strong’ are good for holding for long term, in my opinion
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%).
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
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.
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.
Reliance Growth Fund
HDFC Tax Saver Fund
Reliance Vision Fund
HDFC Equity Fund
SBI Magnum Global Fund
Franklin Prima Plus Fund
DSP Blackrock Focus 25 Fund
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.
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…
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.
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. As 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:
Distribution and transportation cost
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?
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.
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.