Tax benefits on home loans

Food, clothing, shelter -- these are more than mere election promises, they are the basic needs of every individual. But to most, owning a home was just a dream.
The real estate boom and steadily rising capital values are now making it next to impossible for most people to fund their own homes.
The good news is that banks and financial institutions are offering aggressively competitive rates on home loans, making it possible for more people to own the home of their dreams. Many builders have tie-ups with banks or financial institutions so that prospective buyers are assured of housing loans without any hassles.
Taking a home loan serves two purposes. One, of course, is that you get to buy your own home and pay for it in easy instalments. The other is that you get several benefits under the Income Tax Act. And since these sops are what make a home loan different from other loan products, it makes sense to take a long, hard look at them.
About deductions
Under the IT Act, income is taxed under five different
heads, one of them being 'income from house property'. Income under this head is taxed based on the annual value of the property. This annual value is, in turn, based on the income earning capacity of the property.
If the property is actually let out, the rent received is the annual value of the property; if the property is not let out, a notional amount (being rent expected to be received) is considered the annual value. The annual value of one self-occupied house is taken as nil.
Certain deductions are available from the annual value of the property, while determining the income from house property. The housing loan can be taken from any source -- bank, financial institution, employer, relative or friend.
The deduction is available on an annual basis and is in respect of interest liability even though interest is not actually paid during the year. But interest paid or payable on unpaid interest amount is not available as a deduction. No deduction is allowed for any brokerage or commission paid for arranging the loan.
An employer paying any salary to his employee shall deduct tax from that amount on the basis of tax rates in force. An employee who has taken a housing loan can, at the beginning of the year, furnish details of interest payable during the year.
The employer should then deduct tax on the lesser amount after allowing deduction for the amount of interest payable. The employee should, at the end of the year, furnish a certificate from the lender, specifying the amount of interest paid or payable by him during the year.
Deduction on interest
Under Section 24, any interest paid on the money borrowed to purchase, construct, repair, renovate or reconstruct the property is allowed as a deduction. The entire amount of interest paid is allowed as deduction if the loan is taken to purchase, construct, repair, renovate or reconstruct a property that is let out.
A maximum deduction of Rs 30,000 is allowed to the tax payer in respect of interest paid if a self-occupied property is acquired, constructed, repaired, renovated or reconstructed with borrowed money.
If the loan is taken after 1 April 1999, to purchase or construct a self-occupied house, an enhanced deduction of Rs 1.5 lakh (Rs 150,000) is allowed, only if the purchase or construction is completed within a period of three years from the end of the year in which the loan is taken.
Why Take a Home Loan
You get to own your home and pay for it in easy and affordable instalments.
Banks and FIs are offering loans at cost-effective rates.
Tax concessions make home loans more attractive than other loan products.
You can get tax deduction on repayment of the principal amount of a loan taken to buy or construct a house.
The interest paid on a loan is deductible from 'income from property', even if it has not been paid during the year.
Interest paid on a new loan taken to repay the original housing loan is also allowed as deduction.
However, the enhanced deduction is available only if the loan is taken to purchase or construct a self-occupied property. If a loan is taken (even after 1 April 1999) to repair, renovate or reconstruct a self-occupied house, the maximum deduction available is Rs 30,000. Also, the enhanced deduction is allowed only if the borrower furnishes a certificate from the lender every year specifying the amount of interest payable.
The interest paid on a new loan taken to repay the original housing loan is also allowed as deduction. So, if you have a loan that was taken before 1 April 1999, it will work to your advantage to take a new loan after 1 April 1999, to repay the original loan. In this case, you can claim a tax deduction of Rs 1.5 lakh in respect of the interest paid on this new loan.
Pre-construction period
The time between the date on which loan is taken and 31 March of the year immediately before which the property is acquired or construction completed is called the pre-construction period. If the loan is repaid before the acquisition or construction is completed, then the pre-construction period ends on the date of repayment of loan.
So, if you take a loan on 1 July 2000, and construction of the house is complete by 30 January 2005, the pre-construction period is 1 July 2000 to 31 March 2004. If the loan is fully repaid on 20 December 2003, the pre-construction period is 1 July 2000, to 20 December 2003.
The interest paid or payable in the pre-construction period is not available as a deduction in the year of payment of interest but it is available as deduction in five equal instalments.
The first instalment is allowed as a deduction in the year in which construction or acquisition of the property is completed. Interest for that year and the subsequent four years plus one-fifth of the interest of the pre-construction period will be allowed as deduction.
Even in such a situation, however, the aggregate deduction for the year in case of self-occupied property cannot exceed Rs 30,000 or Rs 1.5 lakh as the case may be.
If the loan is taken by two or more persons, the deduction for interest paid is available to each co-borrower, based on the amount of loan he actually repays or is liable to repay. The same deduction limits (Rs 30,000 and Rs 1.5 lakh) apply to each co-borrower, though the aggregate deduction available to all co-borrowers can exceed Rs 30,000 or Rs 1.5 lakh as the case may be.
Very often, the borrower includes his/her spouse's name for convenience. In such cases, deduction for interest will be allowed only to the individual who has actually repaid the loan. Since the spouse has actually not paid any amount, he/she will not be eligible to get any deduction.
If a loan is taken from a Non-Resident Indian, any interest payable outside India is subject to tax deduction at source. Any interest paid or payable outside India will not be allowed as deduction if tax is not deducted at source and there is no person in India who can be treated as an agent of the non-resident.
Deduction on principal
Under Section 80C of the IT Act, deduction is available in respect of repayment of the principal amount of a loan taken to buy or construct a residential house. Under this section, a maximum deduction of Rs 1 lakh (Rs 100,000) is allowed per year.
You can also claim deduction under Section 80C towards payment made for stamp duty, registration fee and other expenses for the purpose of transferring the property in the name of the assessee. All these deductions, however, should not exceed the overall limit of Rs 1 lakh.
However, deduction under Section 80C is not available in respect of payment made towards the cost of any addition, alteration, renovation or repair carried out after the issue of the completion certificate.
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Those of us who tried buying a home in the past 18 months can easily identify with the experience of 32-year-old Rahul Mathur. For this Gurgaon-based senior consultant with recruitment firm Ma Foi, identifying his dream home was more like aiming at a moving target.
Mathur started his search for a three-bedroom flat in Gurgaon in June 2005 with a substantial budget of Rs 25 lakh (Rs 2.5 million). However, during the course of his search in the following months, he would find the property prices going up during every visit to this Delhi suburb. He finally managed to buy a house priced at Rs 32 lakh (Rs 3.2 million) in November 2005 -- Rs 7 lakh (Rs 700,000) more than his budget -- with the help of a 20-year floating rate loan from ICICI Bank.
Of course, there was relief from the success in acquiring what probably would be his life's biggest investment. By stretching himself on home acquisition, Mathur, however, had to make a compromise somewhere else.
"I would have bought a bigger car than the one I eventually bought had the prices not moved up so drastically," says Mathur.
Mathur's predicament is shared by most other home buyers. In the past 18 months, not only have real estate prices soared but home loan interest rates have headed north too, making a substantial impact on affordability of homes. In conditions such as these, should a home buyer go on to make the purchase and stretch his finances or should he postpone his purchase?
Clearly, it is not an easy decision to take, more so if you consider the following risks emanating from rising property prices and home loan rates.
The New Risks
For the sake of convenience one can categorise the new risks according to their sources, that is rising property prices and rising home loan rates.
Risks from rising property prices: On an average, property prices have moved up by 30-50 per cent in the past one year. In some areas, notably Delhi suburbs of Gurgaon, Noida and Faridabad, prices have doubled during the same period. This has exposed the buyers to new risks.
Increased financial vulnerability: This is the one of the major risks that you could face where you, like Mathur, could end up stretching your budget. Home finance companies typically finance 85 per cent of the cost of the property. This means that you will have to arrange for the balance 15 per cent from your resources.
In the backdrop of rising property prices, you run the danger of having to cough up more for the down payment should the prices increase substantially during the period of your home search.
Depending on the state of your finances, you could go through a period of financial difficulty. While Mathur had to compromise only on the car he bought, things could get even more difficult for others. Since you tap liquid funds during your home purchase, stretching your budget might leave you with very little liquidity to address emergencies, especially non-insurable ones.
Cascading effect on associated costs: There are additional costs linked to the cost of the property. Costs such as those for stamp duty payment, registration, builder transfer charges, legal costs and maintenance charges are all linked to the price of the property. For instance, depending on the property's location, stamp duty is 6-10 per cent of the cost.
Last but not the least, when you try to catch up with increasing property prices, you mostly have no option but to take a higher-than-anticipated loan amount. This translates into higher loan-related costs such as administration and processing costs.
Lower Returns: If one of the reasons for buying a home is to have an appreciating asset, you are likely to suffer from less-than-satisfactory appreciation, since you are buying at a high price. What makes the effective cost more is the fact that you are incurring interest costs. In fact, if you compare the current yields from various asset classes such as equity and debt with real estate, you would find the yield from real estate to be the lowest. At times, it may be even less than 1 per cent and post-tax, the figure would go down even further.
Risks from rising home loan rates: The interest rate on housing loan has descended from 13-14 per cent per annum in 2000 to touch a low of 7.5 per cent in 2004. However, there was a reversal in the trend since then and, currently, the home loan rates are quoting at 9-10 per cent.
This week, the RBI has again increased the short-term rates. ICICI Bank was among the first to hike the interest rate on home loans by 50 basis points. Though still below the historical averages, home buyers face a host of risks from this development.
Increasing interest costs: As interest rates are revised upwards by home loan providers, the number of equated monthly instalments (EMIs) and the interest paid out by buyers during the tenure of the home loan increases. Of course, this will be true for home loan products that have rates that are variable, like a floating rate loan, or the ones that have variable element, like hybrid loans that have floating rates for a certain part of the loan tenure. Mumbai-based Ashish Avasthy's experience illustrates the kind of additional burden that can come from home loan rate hikes.
Avasthy, a 30-year-old, who is an assistant manager, legal, at Raymond had been living in a rented apartment at Mumbai's Kandivli-East for one year. After his marriage in 2005, he finally got fed up of shifting his residence every 11 months when his leases expired.
In December 2005, he bought a flat in Wadala that cost him Rs 26 lakh (Rs 2.6 million). He took a 20-year floating loan of Rs 20 lakh (Rs 2 million) at an annual interest rate of 7.25 per cent. The interest rate on this loan has since moved up to 7.75 per cent per annum. While Avasthy's EMI amount has remained the same, the tenure for his loan has already increased to 22 years.
Deadly fine print condition: One of the risks that remain hidden from most home buyers comes from a fine print condition in most home loan agreements. This clause relates to the situation of the property price falling. While many experts rule out this possibility of a real estate price fall in the near future (See below: Bubble Trouble), you will do well to know that many home loan providers have a clause in the loan agreements, whereby they can demand you make good the fall in the value of the property.
"Any remaining balance would have to be borne by the consumer, since he or she is bound by the agreement to repay the debt. Also, if there is a guarantor or a co-applicant, the bank could make them liable," says an SBI official. Thus, more you stretch your finances for acquiring a home, more vulnerable you get to the risk from this clause.
How can buyers cope with the new risks from rising property prices and home loan rates? How does one decide what one can afford? Fortunately, the maze of options and pitfalls of buying a house can be navigated by keeping in mind three factors. We will now explain them in detail.
Strategy # 1: Check the EMI-rent gap
If you are staying in a rented house, figure out how much additional monthly outflow EMIs would entail when compared to your rent. The lesser the difference between your EMI and rent, the more sense it makes to acquire a home. From 2001 onwards, the low EMI-rental differentials were among the major factors that set off the current housing boom.
In the recent past, while property prices have breached the stratosphere, the silver lining is that the rents have not moved up. As a result, the difference between the EMI and rents too has increased. For example, the difference between the EMI outflow and the rents is as high as Rs 65,000-70,000 for some south Delhi properties.
"Such a huge difference between the EMI outflow and the rents is often an indication of a bubble in the market," says Abheek Barua, chief economist, ABN Amro Bank. Till what point is the EMI-rental differential acceptable? Experts say that the ideal difference between the rent and the EMI is not more than 30 per cent.
This is why the decision of Hemant Soreng, 33, a Bangalore-based IT professional, can be termed sensible. While living on rent, he was paying Rs 12,000 per month, while the EMI for the new house he booked in July 2004 and moved into in May 2005, is Rs 16,000. "Since the difference between the rent and the EMI was not much, I decided to buy a house of my own," says Soreng.
However, it is not always possible to conform to such thumb rules, especially when other factors come to the fore.
Avasthy paid Rs 5,250 as rent when he lived at Kandivli-East. For his house in Wadala, he is now paying an EMI of Rs 15,800. "Though the EMI is much higher than the rent, it has helped us improve the quality of our lives and gives us the time and energy to concentrate on our life and careers," justifies Avasthy.
"Staying on rent is an option if you feel that the market is overheated. Otherwise, it may be better to buy at today's prices. The reason being that once in a Bull Run, prices can rise to new highs. Thus, waiting will not solve your housing problem," says Veer Sardesai, a Pune-based financial planner.
Strategy # 2: Keep your EMI within prudential limits
Before you plan to buy a house, you need to know of the loan amount you can afford. Of course, the bank will analyse your repaying capacity. "Generally, the EMIs should be within 50 per cent of the net income of the applicant, subject to an overall limit of 85 per cent of the value of the property," says S.K. Mitter, CEO, LIC Housing Finance.
But financial planning experts suggest that you put a full stop much before that limit. "You should not exceed 30 per cent of your take home salary. In case you have other loan obligations, then your total EMI outflow should definitely not exceed this amount," says Sardesai.
However, there are other financial planners who are of the view that you can stretch the figure up to 40 per cent of your take home salary. Let's illustrate the EMI strategy with the help of an example.
If your take home salary is Rs 35,000, your EMI for the new house should not be more than Rs 10,500-14,000. Financial planners also advise to keep some funds as back up while buying a house. "You should ideally have three months of funds as a backup. This will include your EMI and other expenses," advises Rohit Sarin, partner, Client Associates. This back up helps you to meet contingency expenses.
There is another thumb rule that you need to follow for prudent borrowing. "Your total principal outstanding should not be more than 50 per cent of your assets," says Gaurav Mashruwala, Mumbai-based financial planner.
This means that if you book a property costing Rs 10 lakh (Rs 1 million), take a loan of Rs 7 lakh and you have assets worth Rs 4 lakh (Rs 400,000). You have total assets worth Rs 14 lakh (Rs 1.4 million). Under these circumstances, ideally your total principal outstanding should not be more than Rs 7 lakh.
This is so because in case of any eventuality like loss of job, it would be difficult for you to service the EMIs.You can only ignore the need for prudential borrowing at your own peril. The home buying experience of Kamaljeet Singh, 30, a Delhi-based IT professional will tell you why.
Singh, the only child of his parents, stays with them along with his working wife, who works in Jubilant Organosys. He bought a 324 sq yard plot in Mohali for Rs 37 lakh (Rs 3.7 million) in May 2006, with the help of a 15-year loan for which he pays an EMI of Rs 8,500. His next real estate investment in the same month, a Rs 20 lakh (Rs 2 million) four-bedroom society flat in Mohali, is all set to strain his finances.
If Singh hasn't faced the music so far it is because he has had to pay the deposit money of Rs 5 lakh (Rs 500,000) only. Once the construction starts, he will have to start paying an EMI of around Rs 12,000 on his 15-year loan. This means a total payout of Rs 20,500 on the two EMIs.
At that juncture, one income of either Singh or his wife would go in servicing the two home loans. Of course, Singh has a contingency plan.
"In case any problems arise in repayment of the loan, family's property investments will have to be sold," says Singh. Clearly, this is a case of going overboard. Contrast this with the case of Soreng, who has restricted his EMIs to 25 per cent of take home pay.
Strategy #3: Don't overdraw on your savings for down payment
You will need to organise at least 15 per cent of the cost of the property for down payment. This will give you an idea of how much you can spend on your property. For example, if you are planning to buy a property worth Rs 30 lakh (Rs 3 million), you will need to at least arrange for Rs 4.50 lakh (Rs 450,000). The down payment affordability varies depending on the disposable funds you have. The key lies in knowing which assets to tap for the down payment.
For starters, you can park money specifically saved for buying a house in very low-risk debt instruments like fixed deposits. "Apart from this, liquidate those investments that earn you less return than the rate at which you are borrowing," says Sarin.
This would typically be instruments like your bank FDs, under-performing debt funds, besides equity funds and stocks that have been under-performing for a very long time, with little prospect of future appreciation. Stay away from retirement funds such as your provident fund (PF) and public provident fund (PPF). "This is so, as once people take out money from these sources, they rarely replenish them," says Mashruwala.
Putting the strategies into action: To be effective, all the strategies, especially the EMI and down payment strategies, will have to work together. Let's see how. If your take home salary is Rs 35,000 per month, the EMI strategy tells you that you can have an EMI of up to Rs 14,000 or 40 per cent of your take home pay. If you are to take a 15-year loan at an annual interest rate of 9 per cent, the maximum loan affordable is Rs 14.21 lakh (Rs 1.421 million).
You can similarly arrive at an affordable loan amount from the stipulations laid down by the down payment strategy. Thus, if you can afford to make a down payment of Rs 1.5 lakh (Rs 150,000), the maximum loan possible is Rs 8.5 lakh (Rs 850,000). Clearly, the two approaches throw up two different property prices. Experts suggest that home buyers choose lower of the two figures. In this case, the figure works out to be a property of up to Rs 10 lakh and a loan of Rs 8.5 lakh.
Consider compromise options: What do you do if after adopting these strategies you find home options unaffordable? One option would be to postpone the purchase and wait for the prices to cool down. The other approach would be to buy a home that's affordable even if it means making a compromise on important parameters like the size, that is, settling for a two-bedroom flat instead of a three-bedroom. Many experts suggest that you go for this compromise option.
At a macro level, despite the rise in property prices and loan rates, homes remain affordable. In other words, home buying still makes eminent sense. The only caveat is that buyers need to tread with more caution than they did in the past. But what has not changed is the question that every buyer needs to answer: 'Can I afford this home?' Its relevance has only got heightened. Buyer would do well to remember that the pursuit of a dream home can no longer be a mindless one.
Bubble Trouble
Is there a bubble in the Indian property market? Like all other asset classes, even real estate passes through cycles, and in India, some experts believe, its having an extended run and is expected to rise further in the coming days. In the past one year alone, prices have moved up by 30-50 per cent and, in some places, prices have doubled.
Locations that witnessed unprecedented rise are Gurgaon, Faridabad, Noida and south Mumbai. Even prices of apartments in Bangalore moved up by 70 per cent in the past year.
The increase in prices is not restricted to big cities, but are also evident in Tier-2 cities. "Land prices increased by 150 per cent in some of the Tier-2 cities," says Joygopal Sanyal, business head, urban and infrastructure advisory, Trammell Crow Meghraj. These cities include Indore, Raipur, Siliguri, Bhubaneswar, Guwahati, Kochi, Coimbatore, Vishakhapatnam, Mangalore, Lucknow, Chandigarh, Ludhiana, Ahmedabad, Nagpur and Kolhapur.
There are many reasons for this upsurge. There is a shortage of more than 20 million dwelling units, both in urban as well as rural areas. Apart from this, easy availability of home loans, rising salaries, emergence of India as an outsourcing hub, companies shifting to Tier-2 cities to cut costs and the tax benefits associated with owning a house have been the major drivers.
But how long will the party last? "I think that the property market would continue to go up in the near future with a steady growth rate in almost all the markets," says Sanyal. Though not every one believes that the real estate market is a bubble waiting to burst, there are factors that can reverse the trend.
"Government intervention, rising interest rates and fluctuation in foreign investment in the sector can reverse the upward trend. Also, the last two year's boom has led to an excess of supply, which will ultimately result in stabilisation or even reduction in prices," says Major-General (Retd) Jayant Varma, executive director (North), Knight Frank India.
However, a possible correction may not lead to a crash in prices. Experts believe that it will only lead to a reduction in the rate of capital appreciation. Further, a recent Crisil report suggests that most rallies in home prices across the world end in soft landings rather than abrupt drops.
So how different is the present rally from the one that we saw in the mid-1990s? Experts believe that this rally is very different from the last one. In the '90s, an artificial demand was created and there was no supply to meet that demand -- this led to a crash in prices. In the current rally, however, the supply in new projects is aplenty as are genuine buyers.

Long term investment idea : Sports Management

Sports in India has for long meant cricket. Just as sports management has largely meant sponsorships and event management for cricket. This still holds true, but change certainly in the air. Lately, India has seen some prominent names in sports management. IMG, World Sport Group, Percept D’Mark Sports Management, Nimbus Sport and Globosport have all built their presence. These firms and other smaller outfits, are expanding the market and creating unprecedented opportunities for those interested in a career in the business of sports. With sports management companies, channels, sports divisions of advertising and media buying firms and celebrity management companies, there are about 40-50 “good” employers in this industry, says Vijay Bharadwaj, lecturer at the Indian Institute of Social Welfare and Business Management (IISWBM), which offers a year-long course in the field. With sports bodies, the number of employers nears 100. With the expanding pool of employers, the profiles that young enthusiasts can hope to handle are also growing. Today, possible areas of employment include event marketing, event management, media planning, producing sports-related content for broadcasting organisations, sponsorship selling, and managing teams, among others. Industry players say that this range will increase as the market grows. But, is it still all about cricket? “With football, there has been big hype around the World Cup and people are seeing other sports,” Niranjan Shah, secretary, Board of Control for Cricket in India (BCCI), told ET. Among sports with high potential, industry players point to golf, a high-value, low-volume sport. Soccer and hockey are still finding their footing. Motor sports and tennis also have high potential. Public interest, icon potential and packaging are the three things to focus on when building an environment that will support the growth of any sport, says Anirban Blah, vice-president, Globosport. In its three years, Globosport has seen the total money in Indian tennis grow from Rs 15-20 crore to a healthier Rs 70 crore, he says. Some, however, complain of a lack of professionalism. “It is difficult to find people who have strong expertise in sports management,” said an industry source. Satish Menon, president- sponsorship, Zee Sports, however, is confident: “There is a large and growing interest, new sports are emerging, it is a young country, sports management will get more professionalised”.

Bears vs. Bulls ... the eternal battle

As the Sensex rallied from below 3,000 to over 12,500 in just about three years, you were probably pampered into believing that making money in the stock market was easy.

But the sliding market of the last six weeks and the accompanying daily swings in stock prices have made us realise that shares are risky instruments to play with.

And volatility could cut both ways—that is, if you don’t know how to ride the wave.

There’s a breed among marketmen that specialises in profiting from such volatility and also from mis-pricing in the market—when inexperienced investors fail to decide about the price of a stock in the regular segment (that is, the cash segment) and the price of the same stock in the derivatives segment.

In market parlance this breed is called the arbitragers and the process, arbitrage: buy where the price of a stock is lower and sell the same in the other segment, since there the price is higher.

The buying and selling has to be done simultaneously, and without any delay in trade. And since there’s no delay between the two trades, the risk of any loss of money is also nearly zero. But hang on! This is no more the exclusive domain of specialists.

To let retail investors profit from such specialised processes, mutual funds have started launching schemes, termed arbitrage funds. Before we explain the advantages of investing in arbitrage funds, here’s a short take on how the trades are done.

Suppose, the price of stock A in the cash segment is Rs 99 and the price of the futures on stock A in the derivatives segment is Rs 100. The fund manager would buy the stock at Rs 99 and sell the futures at Rs 100, at the same time. Thus making a profit of Re 1, without any risk. There’s no chance of capital erosion as the trades are fully hedged.

“Usually returns in arbitrage funds are higher than most fixed income investments like liquid funds, monthly income plans, 8% RBI bonds, bank fixed deposits etc.” said Biren Mehta, fund manager, JM Arbitrage Advantage Fund, that would close for subscription on Friday, June 30. “These funds do not carry any interest rate risk.

They do not carry any credit rating risk either,” Mehta said. In addition, “investors also enjoy the tax efficiency of equity funds,” said Sundeep Patel, fund manager, UTI Spread Fund, UTIMF's arbitrage fund that closed its NFO on Thursday and would open for regular transactions soon.

Despite choppy market conditions, UTIMF collected about Rs 400 crore in this fund. Fund managers admit that in a sliding market it was tougher to make money even in arbitrage funds than in a bullish market. “But then think about this: Even in a bad market we make money.

When the market is sliding you could even get 4-6% risk-free-tax-free return while other equity funds lose money. In a good market we make 14-16%.

That too without risk and and taxes,'' a fund manager said. With an arbitrage fund, one can get 4-6% risk-free-tax-free return even when the market is sliding, while other equity funds lose money arbitrage funds take advantage of the price difference for the same stock in the cash segment and the derivatives segment.

The buying and selling has to be done simultaneously, and without any delay in trade. Since there’s no delay between the two trades, the risk of loss is nearly zero lUsually returns in arbitrage funds are higher than most fixed income investments. These funds do not carry any interest rate risk or credit rating risk either

Stocks-Sector to watch out for in the upswing

The market correction has brought a lot of companies to reasonable valuations. There are now many companies quoting at valuations where there’s less risk and a lot of value for the long-term investor. ET Big Bucks crunched numbers for BSE A and B1 group companies to find attractively-priced companies.
The steep fall in valuations now means that there are close to 300 companies in this lot of around 650 companies which have a P/E less than 12 times trailing consolidated earnings. Some of these are from the mid-cap IT space. This is an area which was expected to outperform in FY07. Let’s check some of the valuations here.
NIIT Technologies quotes at 11 times FY06, but if we adjust for cash, then it quotes at 7 times. This company also has a dividend yield of 4% at current prices. Unless future profits fall sharply, there can’t be a great downside at current prices.
Mastek quotes at around 13 times FY06 earnings. MphasiS BFL, which was acquired by US major EDS, quotes at less than 12 times FY06 earnings. 3i Infotech quotes at 13 times. Most of the software companies should grow at upwards of 20% for FY07. This suggests that there could be upsides from this lot. Even a software major like Satyam Computer quotes at 15-16 times trailing earnings.
The entire lot of shipping companies is quoting at low valuations. However, the profitability scenario in this sector is under pressure. Yet, given the low valuations, investors with a long-term view may consider some of the top companies.
PSU Shipping Corporation of India (SCI) is quoting at two times FY06 net profits. Its dividend yield is over 8%. Shipping profits can be very volatile; for example, FY03 net profit of SCI was Rs 246 crore, yet there is considerable downside support at current levels.
There are isolated cases with various businesses. Chemical company Foseco is quoting at a dividend yield of around 5%, and a discounting of around 12 times. Foseco is a zero debt, MNC company. Its performance record in the past four years is reasonably stable, though it posted losses in FY01 and FY00.
A more stable company quoting cheap is BASF. Its share price is now around Rs 170 levels, from Rs 280 levels a few days ago. BASF is now at 11 times trailing and 3.5% dividend yield. FY06 results were okay, with sales up 3.6% and net profits up 19%. Like many MNCs, this company is almost zero debt and conservatively run.
Chennai Petroleum trades at close to 7 times trailing and a dividend yield of around 10%. This is cheap by most standards. The ongoing oil price turmoil has kept prices of some of these refineries at low levels. Current price of around Rs 150 level is a one-year low, and close to levels around two years ago, when the BSE sensex was less than 6000.
Poultry company Venky’s India is now at 8 times trailing with a dividend yield of over 3.5%. The company’s profits were hit in Q4 ’06 due to the bird flu scare, and it declared a Rs 4.5-crore loss. However, that is now past; poultry prices and demand have recovered, and the company could soon return to profitability.
Lanxess ABS, another German MNC, is quoting at 10 times trailing profits, and a dividend yield of around 2.5%. This is not much, so the downside support may not be as strong as in some of the cases mentioned above, but the company has just expanded capacity and is poised for decent growth.
A whole host of auto ancillary companies became cheap in the crash from 12800 levels, though there has been some recovery over Thursday and Friday. Omax Auto, for instance, came down to a low of Rs 65 last Wednesday, but has since recovered to Rs 70 levels.
It was last seen at these levels in August ’03, when the sensex touched 3900. It also hit that level in May ’04, when the market hit lower circuit. The sensex was then at 4800 levels. Omax saw a peak share price of Rs 174 in this rally. So, it has lost most of its gains in the rally. At current price, it has close to 3% dividend yield and quotes at around 10 times earnings. Pricol’s case is similar.
It quotes at 11 times trailing, and 3.2% dividend yield. It was at these levels in December ’03, when the market was at 5600 levels. Pricol’s net profit fell 21% in FY06, but they are still twice the FY03 levels, and sales are 50% higher.
While many pharma companies have underperformed the market in the past two years, and were further battered in this fall, some of them still don’t have adequate downside protection, as they quote at more than 12-15 times and have low dividend yields.
GlaxoSmithKline Pharma appears to be an exception. At current levels, it has a dividend yield of close to 3% and quotes at around 14 times trailing.

While stock markets have tanked over the past month, the growth trajectory of corporate India seems to be on track. Leading companies in sectors like engineering, automobiles, petroleum and software are expected to bring out numbers that display strong profitability in the coming year. The earnings for the 30 stocks which comprise the sensex are expected to increase by 16-18per cent in FY07. Among the major sectors, capital goods and engineering companies are expected to account for the biggest jumps in earnings during FY07. Earnings growth estimates for power equipment companies such as Bhel range from 25-35per cent for the coming year. Engineering & construction companies are projected to record a 25-30per cent rise in earnings. Companies like Bhel and L&T have substantial order backlogs and, hence, there is a higher degree of visibility in sales and future earnings. The earnings growth is expected to be modest for oil and gas companies. While profitability of oil marketing companies has been hit by high crude oil prices, ONGC and Reliance could post a modest increase in profits during the year. Reliance may benefit from higher gross refining margins in some of its major markets, particularly the US. While Reliance is present in petrochem and petro-retail, refining continues to account for the bulk of its sales and profits. ONGC’s profitability is expected to improve on two accounts, a capped subsidy burden and improved production over the last year. In the auto sector, the commercial vehicle segment is expected to show strong performance on the back of infrastructure spending. The top auto companies, Maruti and Tata Motors, are expected to clock a jump of about 15per cent in profitability. Projections for the first quarter remain robust because the market itself is expanding. Operating margins could flatten as expenses relating to product, brand and distribution all weigh in for the quarter. While the sector has shown strong sales so far during the first quarter, further performance is tied to the monsoons. Earnings growth for the software sector is expected to be in the range of 25-30per cent. The steel sector could also spring up a surprise as prices are on the upswing and have seen a recovery of $100/tonne since the start of this year.

Stock markets are like supermarkets: Avail discount offers - MC

With market volatility increasing every day, investors need to touch base with some basic rules of investing. In a conversation with an investor, Kanu Doshi spells out these 4 gems of investing that he learnt in the book 'Rich Dad, Poor Dad'.
Advisor
I came across a book called 'Rich Dad Poor Dad' by Robert Kiyosaki. Its on the best seller list for quite some time. This book contains gems for investors like you and me and for everyone wanting to know more about 'money'.
Investor
Then let us know about making money.
Advisor
Yes. The author in this very lucidly written book says that in life, when you desire to fly an aircraft you must and therefore you do 'learn' flying aircrafts. When you wish to enjoy a bicycle ride, you must and you do 'learn' how to ride a bicycle. Maybe you will fall several times before you finally succeed.

But a lay investor who wants to make money on the stockmarket tends to just pick up the phone, speak to his stockbroker, buy a stock and starts dreaming of becoming rich. That is not the way the rich investors who become richer with every passing day go about investing into stocks.

The rich follow the same principle of 'learning' to ride a bicycle or flying an aircraft. They therefore first 'learn' to 'invest'. They learn all there is to know about the art of investing in stocks. All about the stocks they wish to buy and only then do they take the plunge.

Above all, they keep practicing what they have learnt. They keep sharpening their saw. This single factor of learning before hand separates the rich investors from the poor investors, says the author.
Investor
What is the other gem on investing you found in the book?
Advisor
There are several. The next is the author's comparison of Stock Market with the Super Market.
Investor
That's an odd one. Could you elaborate please?
Advisor
Yes. The author says that when Super Markets reduce the prices of the goods and announce a 'sale', customers flock into the stores and buy up every little item and build up at home piles of grocery, soaps, etc.

But when Stock Markets reduce the prices of shares and announce a 'crash' every investor rushes in to 'sell' and runs away from the market.

Again, conversely, when Super Markets raise their prices, customers shy away and refrain from buying till the next 'sale'; but when Stock Markets announce rising prices, every investor rushes in to 'buy'.

This is not the way, again, the rich investors behave. They follow the same principle of buying at the Super Markets. They buy stocks only when the Stock Markets crash. Ask Warren Buffet or John Templeton.
Investor
These two ideas, though simple, are no doubt educative. Do you have any other gems to share?
Advisor
Yes. As I said earlier, the author has several.

The next one, the author says, is `investing is knowing your assets'. When you move your money from your bank account in order to `invest' you are putting your money into assets like shares, real estate, deposits, etc.

The rich never keep their wealth in the form of liquid money in a bank account. They always keep acquiring assets while the poor acquire liabilities, which they mistakenly believe are their assets.

The author, citing the scene in America, says that acquiring your house through a bank loan on the mortgage of your house is acquiring a liability. The same goes for paying for groceries through credit card.
Investor
Please go on. It sounds interesting.
Advisor
In life, according to the author, what is important is not how much money you `make' but how much of that money you succeed in `keeping' and `multiplying'. The rich know how to keep it because they know how to invest it. Money well invested is money well kept. Good investing is often more rewarding than good earning.
Investor
Any more such gems.
Advisor
Yes. 'Real money is made when you `buy' an asset and not when you sell that asset' is yet another gem from the author.
Investor
This one surely needs elaboration.
Advisor
Yes. What the author conveys is that the 'price' of the asset when you buy is the sole determinant of your profit on that asset when sold. If you buy that asset cheap, your profit on sale is obviously larger.

The message from the author is simple. Be careful of the price you pay when investing in an asset. Don't rush into buying any investment at any price. Wait till the prices come down the way Super Markets announce sales.
Investor
In other words, do as the shoppers do at Super Market Sales.
Advisor
Yes.

Stock review - Dabur India

Dabur India has been able to post a double digit topline as well as bottomline growth in tough environment, leveraging its age old Ayurveda platform. Also, its unique herbal platform coupled with the franchise value that the brand enjoys mitigates the risk of fierce competition from other FMCG players.
Core brands enjoy strong recall value: Dabur's portfolio of products remains relatively insulated from the ongoing price wars in the FMCG space, providing it with a sustainable competitive advantage. All its core brands, viz. Dabur, Vatika, Anmol, Real and Hajmola enjoy tremendous recall value for consumers, and provide with a platform to leverage on going forward.
Demerger of Pharma business unlocks value: Demerger of Dabur Pharma has unlocked value, with one of the biggest positives being Dabur India's working capital turned negative for the first time ever. De-merger brings to fore the core FMCG business of Dabur, which is its inherent strength. We expect the RoE to improve to 39.2% in FY05 as against 31% for FY04.
E-sourcing initiatives to enhance margins: While geographical expansion and new product initiatives to take care of topline growth for the next few years, e-sourcing initiatives coupled with higher in-house production would help enhance margins going forward. For FY04, Dabur procured 50% of its raw materials requirement through e-sourcing. We expect higher e-sourcing and in-house production to enhance EBITDA margins by 170 bps for FY05.
Healthy balance sheet to fund acquisitions: With cash & cash equivalents at Rs 115 cr, the company has built a war chest for meaningful acquisitions. We believe that there could be interesting opportunities in the herbal space, and acquisitions could open up new avenues for growth and lead to higher than expected topline growth.
Investments in excise free zones lead to tax savings: The company has earmarked a capex of Rs 50 cr for FY05 most of them being in excise free zones, which would help tax savings, providing a fillip to the bottomline. 80% of products would be manufactured in-house by FY05, which would help reduce dependence on vendors and enhance margins.
Valuations look attractive when adjusted for growthWe expect the company to grow sales at 10% CAGR and net profit to grow at 23.1% for the next two years. At the CMP of Rs 73, the stock trades at 17.2x FY05E earnings and 12.9x EV/EBITDA. Valuations on a growth adjusted basis look attractive. We recommend a buy with a target price of Rs 91, based on 17.5x FY06E earnings, at which it would trade at par with the FMCG leaders. Higher visibility of growth and predictability of earnings stream would lead to further re-rating on the stock. Sluggish pick-up in rural economy and pricing pressure in Ayurveda genre are key risks to our target.

Biz rules of Corporates.

Professional tips and life-altering words of wisdom from the patriarch have stood our head honchos in good stead throughout their illustrious careers.

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10 biggest mutual funds

Reliance Equity FundRs 5,988 crore / Rs 59.88 billion
Return: 1.97%During: March 30, 2006 – April 30, 2006Average return: 5.46%

Fidelity Equity FundRs 3,160 crore / Rs 31.60 billion
Return: 80.30%During: May 18, 2005 – April 30, 2006Average return: 79.50%

HDFC EquityRs 3,117 crore / Rs 31.17 billionReturn: 99.84%During: One year ended April 30, 2006Average return: 88.06%

SBI BluechipRs 3,062 crore / Rs 30.62 billion
Return: 10.19%During: February 17, 2006 - April 30, 2006Average return: 17.79%

Franklin India Flexi CapRs 3,045 crore / Rs 30.45 billion
Return: 104.71%During: One year ended April 30, 2006Average return: 88.06%

Reliance Growth FundRs 2,813 crore / Rs 28.13 billion
Return: 100.56%During: One year ended April 30, 2006Average return: 88.06%

Franklin India PrimaRs 2,445 crore / Rs 24.45 billion
Return: 72.31%During: One year ended April 30, 2006Average return: 88.06%

Franklin India Bluechip FundRs 2,368 crore / Rs 23.68 billion
Return: 96.88%During: One year ended April 30, 2006Average return: 88.06%

Reliance Equity Opportunities FundRs 2,258 crore / Rs 22.58 billion
Return: 100.51%During: One year ended April 30, 2006Average return: 88.06%

UTI Mastershare Unit SchemeRs 1,931 crore / Rs 19.31 billion
Return: 65.28%During: One year ended April 30, 2006Average return: 88.06%

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Incredible TIPS

The biggest mistakes investors make
Money is an integral part of our day-to-day life. From the time we start earning till we die, we are involved with money -- earning, spending, investing, managing, donating, lending and borrowing.
Strangely, when we leave school, we have a fair amount of knowledge in math, history, geography, science, languages and what not. But when it comes to money, we are left on our own. It is our family, friends, books, magazines, television channels and the Internet that contribute to our financial upbringing.
Hence, we grow up learning about money in a highly unstructured manner; the end result is generally a poor understanding of it.

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How to read a company's annual results
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