Archive for May, 2007

New Income Tax Return Forms

41 comments Written on May 30th, 2007 by
Categories: IncomeTax
From Assessment Year 2007-08, tax filing for year 2006-07, you will need to use new IT return forms. These are downloadable from the Income Tax Department web site.

No more "saral" business - the number of forms have increased somewhat and things may be confusing.

The forms are numbered ITR1 to ITR8 and if you choose to file electronically (discussed later) you can use ITR V. FLet me do some basic fundas of tax filing with these new forms.

No more Form 16 and Form 16 A attachments
Salaried persons usually get a Form 16 from their employer. From now on, the Form 16 needn't be submitted with the IT Return. You need to fill in the relevant details in the tax form itself.

What forms do I use?
There are a number of forms, arranged as subsets.

ITR 1 is for people with salaried income, Income from interest (FDs, NSCs etc.), Pension and/or Agricultural income. This form has Version 1 and Version 2, both are the same except the latter is more broadly laid out. (Instructions)

If you have Income from capital gains (short or long term, even if it's not taxable) you must use ITR 2. This form is also used if you have rented out a house and have rental income. If you own a house and live in it, and want to claim deduction of Rs. 150,000 on the interest on the housing loan, you must use this form. It's a superset of ITR 1, meaning that if you have salary and income from house property, you can use this form. (Form, Instructions)

For those of you who are partners in partnership firms, use Form ITR 3. This is a superset of ITR 2, and contains fields for income from all your firms where you are a partner (regardless of whether this is taxable or not). (Form, Instructions)

And for owners of proprietorships, there is ITR 4. (Form, Instructions)

Annual Information Return (AIR)
Section 24 in ITR 1 and Schedule AIR in the others is a section you must fill up if you have:

  1. Cash deposits aggregating to Rs. 10 lakh or more in a year in any savings account in any bank
  2. Credit card payments aggregating to Rs. 2 lakh or more in the year.
  3. Purchase of mutual fund units of more than Rs. 2 lakh in the year (not clear whether it is for one fund or across all funds)
  4. Purchase of Rs. 5 lakh or more worth of bonds or debentures.
  5. Payment of Rs. 1 lakh or more towards purchase of shares of a company
  6. Purchase or sale by you of any immovable property valued at Rs. 30 lakh or more. (This includes houses, apartments etc)
  7. Payment of Rs. 5 lakh or more towards RBI bonds.
You have to fill the aggregate amounts under each of the above (each of which has a code) All authorities of the above (banks, registrars, RBI, Mutual funds etc) are supposed to provide an AIR of all those people who qualify under the above. The IT department will match their returns with yours and I think they intend to find those who don't declare such investments and assess them closely.

No more duplicates
You do not have to submit two copies of the forms. There is an "acknowledgement" which is enough to state you have made the return. But for your own sake maintain copies of what is filed.

Due Date: July 31, 2007
You should submit returns by the due date, otherwise strange things will happen. And you'll have to pay interest at 1% per month (non compounded).

If enough people want detailed instructions I will give it a shot.

Posted in IncomeTax

BHEL spikes up to 2850: Ride your profits

20 comments Written on May 29th, 2007 by
Categories: BHEL, Stocks
BHEL is now at Rs. 2,850, up Rs. 600 from April 3, 2007 when it first announced its results (and when I had said it was a good time to buy).

The stock will get a 1:1 bonus on June 1, 2007, so for every share you own, you will get one "free" share. I had said that just before the bonus there will be a temporary price hike to make for lower capital gains tax - and this is what seems to be happening. In my opinion, there's no need to exit this stock just yet - ride your profits and get the bonus shares.

I had targeted a price band 2700 to 2970 within a year, and 5720 in the long term. Looks like my one year target is here already - within two months!

Stick with the stock - I would typically wait for a 50% gain before booking partial profits - so let this stock go where it's going. Fundamentally the news has gotten better: It has announced a 3200 cr. capex plan to expand capacity to 15,000 MW (from 6,000 MW). Given the huge impetus for power projects, BHEL stands to gain immensely.

With fundamentals looking good and the price action responding, you might want to buy more. But wait - post bonus there is usually a small knee-jerk downward reaction where tax arbitrageurs sell and temporarily deflate the price. That would be a better time to buy. Remember though - long term for this stock, it's a good healthy stock and you shouldn't rush to sell it. Wait till you make 50% gains, sell 1/4th your holding and wait for the rest to gain.

Archives:

Posted in BHEL, Stocks

Traders vs Investors

1 Comment » Written on May 28th, 2007 by
Categories: Commentary
Brett Steenbarger talks about how the psychology of traders differs vis-a-vis investors. Investors, he says, have a different way to approach markets - a long term research based strategy rather than pattern analysis of the short term trader. One interesting thing he notes is:
To understand the psychology of investing, it's helpful to look toward other areas of life in which we invest ourselves, such as relationships and careers. Can you imagine what would happen if we were to take a "trading" perspective on relationships or careers? We would set a close "stop loss" and exit the relationship or career whenever that was hit. No doubt, we'd wind up with an impoverished love and work life as a result. To sustain a romantic relationship or a successful career, we have to be able to ride the ups and the downs and remain rooted in our commitment despite difficult times.
The more I think about it, the more I begin to realize how this differs with the world around me. People have started to "trade" jobs and careers - I routinely scan resumes that have over two jobs for every year worked. People still "seem" to be committed to relationships, yet I've seen enough "trading" psychology in that area too. I think the Indian short-term mentality has started to permeate into other things where it shouldn't, like relationships and careers.

I've often heard advice from short-term traders: "Don't get married to a position." Investors, however, do enter into a kind of marriage: a marriage with their basic approach to markets. Frequency of exposure drives the rapid pattern recognition of the scalper, but it is depth of conviction that enables investors to stay their course.
Brett refers to short term as typically a day to a month, and investing as pretty much anything longer than that, I presume. To me the concept of trading is interesting, but I'm looking at talking about investing - that is, identifying a strategy and sticking to it with discipline.

You might think this involves staying with stocks despite their worst performances. Not really. I give stocks the chance of going down 20% below my buy price; and I will buy more at lower prices if the fundamentals remain buoyant. Yet, I will do this only one or two times; if the stock slides more this is an immediate feedback that my fundamental analysis may perhaps be wrong. After all, the regulation here is lax and information is not evenly distributed, so some people may know more than the general public.

I think there is one important difference between a trader and an investor: the former expects an income, and the latter, capital appreciation. One works for cash flow, and the other looks to build assets.

Think of it as the difference between taking a job with a high salary versus one with no salary but you share profits at the end of the year (or two years, or even five years).

Posted in Commentary

HDFC Mid-Cap Opportunities fund: Read the fine print

1 Comment » Written on May 28th, 2007 by
Categories: MutualFunds
HDFC has a New Fund Offer (NFO) ongoing for it's Mid-cap opportunities fund. This is a 3 year closed ended fund that invests in midcap companies, and will convert to an open ended scheme after three years.

They have sent me a flyer giving some basic information about the fund. Among this was their own answer to a question:

Why Close-Ended Fund?
  • Mid and Small-Cap companies may take time to mature, therefore there is a need to remain invested for a longer period of time.
  • Flexibility to develop core portfolio with longer time horizon to reap full benefits of investments as there is no pressure to invest/divest in a hurry.
  • Helps take advantage of volatility.
Very noble gesture, but sorry, I don't believe any of this. A Closed ended fund is named wrongly, as I had noted. The concept behind closed ended funds is not the fact that you are locked in for three years; you are not. What happens is that FRESH investments are not possible post the NFO, until the end of the closed ended period, in this case three years.

Closed ended funds can allow early redemptions - in fact this HDFC scheme allows redemptions too, on the 15th day after the beginning of each calendar quarter. That makes it possible for you to redeem your money, although only at specific intervals. But you can NOT put more money into the fund post NFO! That's not closed ended, that's a closed entry fund.

If they really wanted to achieve their noble goal they could have structured it like an ELSS fund - locked in for three years (no redemptions possible at all), and remained open ended to allow more subscriptions later.

What happens if a new IPO comes up that is for a good midcap company? Or if a company that was previously loss making suddenly starts to show promise? This fund cannot invest in such companies at a later date, because it would have deployed most of its funds into investments, and by principle it wants to allow a long time per investment. And it cannot gather more money because the closed ended funda means no more money is allowed in!

If the fund wants to buy and hold for a long time, it must allow fresh investments to allow for new opportunities to be tapped. And the closed ended concept denies it that liberty.

Let me tell you my opinion on why this fund is closed ended. It's because closed ended NFOs get to charge 6% as "initial expenses for NFO". This is not available to open ended NFOs. The closed ended funda is to compensate distributors and the AMC through higher upfront commissions. With your money. For every Rs. 100 you put in, only Rs. 94 is invested - the remaining Rs. 6 is charged to you over the three year closed period through adjusting the NAV daily. (This is legally allowed)

What you need to know is that you get charged this 6% amortised over three years. If you want to exit early (on the 15th day of a quarter) you get charged any unamortised costs.

For the record, I would not recommend this (or any closed ended) NFO. Stay away from them. If you want to buy mid-cap funds, buy open ended funds like SBI Magnum Global or Reliance Growth.

Note: I was not able to connect to the HDFC mutual fund website so I can't link directly to the fund offer document.

Posted in MutualFunds

Is this blog for short term investors?

12 comments Written on May 28th, 2007 by
Categories: Commentary
Prem Sagar has posted a review of my blog. His feedback is well appreciated and one thing he mentions which is interesting is that I have a shorter time frame of investing.

He's right. While I deeply respect value investing and it has in the past generated enormous returns, I think a shorter term of 1 to 3 years is more appealing to Indian investors, largely because of a mindset issue. You can gauge mindset by asking: Where will I be after five years? You must know the answer to that in terms of:

  1. Which company you'll be working for,
  2. What kind of work you will be doing
  3. Where you will be (location)
You then have a more long term mindset. Unfortunately a large percentage of people I know don't believe they can give any answer to the above. People change jobs and locations so often they don't know where they'll be the next year. Careers change often. People can just about blurt out answers for a 1 year timeframe.

The other factor is the environment. We have not had a party rule our government for more than five years, anytime since 1996. State governments get overthrown, voted out or otherwise affected every few years. Our tax rules morph themselves every five years: Five years ago, Long term capital gains were taxed, dividends were not, tax rates were higher, stock options were considered taxable as bonuses and so on. Divident reinvestment was attractive tax-wise, and now it is not.

Thirdly, the rapid growth has changed the face of the nation. With rapid growth, certain things that were "hot" are now invisible, and certain other things have become "hot". Mobile phones, just ten years ago, were exclusively for the rich. TVs were a hot industry in the 90s. When things change rapidly, it produces a short term vision because we'd like to "strike the iron when it's hot".

All these factors add up to provide short term views of 1 to 5 years. Some people have even shorter time frames.

At one time I thought I could change this mindset. But I have realised that I cannot. It is beyond one man's control, plus, I think I am as guilty as the rest - even I personally like to book profits in a year or so.

And I have come to the conclusion that buying purely based on value or "fundamentals" is a "buy and pray" approach - meaning, you buy and pray that the price will appreciate. What we should be doing, as retail investors, is buying good stocks when the market STARTS to recognise them. Not earlier.

This means timing the market - and there are ways to time buying and selling stocks, which are very simple techniques that you and I can follow. Secondly it means discipline - selling stocks when they make you lose so much money (or fall so much from their peaks). Thirdly it means monitoring the market every week or so.

Given that, I would say my aim is not to pick the exact top or bottom of the market - but to time a buy or sell so that we ride the momentum, but don't get stuck with a stock forever. I would typically expect to get a good return in a one year timeframe, and only choose opportunities where returns are trackable and visible. This is why I don't do real estate, and I don't like long lock in periods or exit loads.

Therefore, my blog will most likely talk about opportunities that are attractive in a 1 to 3 year time frame. Nothing wrong with other approaches, just that I want to make my approach clear. Let me know what you think.

Posted in Commentary

CNX Junior and CNX 100 futures launched

2 comments Written on May 26th, 2007 by
Categories: Commentary, Stocks
NSE has announced the starting of derivatives on the CNX 100 and CNX Nifty Junior from June 1. Symbols are CNX100 and JRNIFTY respectively.

What does this mean for you? Any index that is traded on derivatives (futures and options) brings remarkable stability to the underlying stocks. The idea being, since futures and options are traded, people will buy stocks which go down severely because they are long on the index.

My theory is that this is the biggest reason that actively managed mutual funds perform poorly compared to indices. When indices have futures on them, buyers who don't care about individual stocks will still buy them to hedge against an index derivative. Funds which bet on all sorts of stocks will not perform as well because people who buy their stocks have to have a good reason to do so - and more likely than not, that knowledge is not widespread, or consistent enough for the market to recognise.

For example - I could buy a basket of stocks that comprise the NIFTY and then sell the NIFTY Future (or write a call option) thus giving me a small amount of arbitrage income and hedging my risk.

For this I would most likely buy stocks I don't care about buying for their fundamentals (like IT Stocks or Tata Steel or such). But the index future offers me a lower risk hedge so I must buy them anyhow. This funda of "buy them even if I don't like them" is what introduces liquidity and the value of these stocks won't fall phenomenally. Till now we only had futures on the NIFTY, Bank Index, and IT Index, but with the inclusion of the Nifty Junior and Nifty 100, we get a wider spread to work with.

So introduction of index futures will most likely create more positions in these index stocks. Common to both new index futures are stocks like Ashok Leyland and Moser Baer which I hold, and there are some others I will now look at buying because of this new derivative, like CONCOR, Ingersoll Rand, Indian Hotels and BEL.

My feelign is that beacuse of these futures, in the long run the heavyweights in each of these indices is going to gain a lot from what the prices are today.

* Constituents of the NSE 100
* Constituents of Nifty Junior

Posted in Commentary, Stocks

Another PR post: This is a "widely read blog"

6 comments Written on May 24th, 2007 by
Categories: Commentary
I've just found out that I am one of The Most Widely Read Indian Bloggers courtesy this blog. (Read the HR, Finance, Management section)

As proud as this makes me, I completely understand that I'm one of about 500, and if ranked in order of popularity will probably be #500. I'm not being humble to impress; these are plain facts.

Let's encourage more financial bloggers and add them to this list. And guess what, you can search them too: India Blogs Directory Search.

Posted in Commentary

Naive investors get taken for a ride

1 Comment » Written on May 24th, 2007 by
Categories: Stocks
Sucheta Dalal talks about how naive investors get conned by scheming brokerages and "advisors", who call investors and lure them to sign up through promises of quick gains.
Once a person signs on, a barrage of helpful stock tips lures him/her to trade more actively earning higher brokerage commissions for the firm. Once the initial tips pan out successfully, these clients are persuaded to hand over larger sums of money or sometimes their entire investment portfolio, including long-term shareholding, to be managed by the broker.

Others ensure that they book profits on successful transactions, issue cheques and get clients to sign confirmation letters intermittently. When the going is good and stock indices are spiralling upwards, everybody is happy. The profits vanish in every bout of violent turbulence.

Within this broad framework, there are differing degrees to which investors can be short-changed. Some brokers are known to charge 10 per cent of the mark-to-market profit, claiming to offer PMS services.

The modus operandi is: Find investors who have heard that stock markets can make you quick and rich money, and get them to part with their funds. Then, use the money to do rapid trading, sometimes turning over their portfolio many times a day, and garner a lot of brokerage. They'll make small profits during a bull run, and lose a lot of money during a downturn.

Who's to blame for this? Restricting brokers and advisors is ineffective - it's better to deal with educating the people who get conned instead. Remember that if a person is naive and greedy, there will be one person who will take away his money. The lure of quick and easy money attracts fools, and fools are easily parted from their wallets.

But even these investors only complain when the going is bad. Investors are happy to accept lower-than-market returns, if the returns are positive. From an Economic Times article:

three executives working with MNC have received negative returns [compared to benchmarks] from their PMS providers (one of the Top 5) since the beginning of the current year. For the previous three months ended April 2007, PMS schemes of these executives delivered negative returns of 3%. But, they are not aware of the fact because the statement focuses on the returns generated from the time of investment, which in this case appears respectable despite the underperformance.
Surprising that investors, some of whom hold high positions in software companies, industries and even banks, don't bother to correlate returns with the market - especially those of market wide indices. And the same investors will not consider low fee index funds which are even lesser of a hassle. Again, the PMS providers latch on to the greed that these investors display.

Greed is not bad, of course - that's what runs our lives. But to entrust money to a PMS provider, well knowing that markets can go up and down, deserves that the stupidest investors lose their money. Verbal promises are not solace - if you can't get someone to sign a stamp paper guaranteeing what they say, you can't believe them, period.

If you are an investor feeling stupid that you went for such a scheme, do not despair. I have felt stupid many times; it's a part of life. What you should do is to fix the mistake - get out of this PMS immediately. Learn about investments, drawdowns and potential risks, creating a strict investing discipline and keep track of the money you make or lose. You'll be richer, both mentally and "walletally".

Posted in Stocks

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