FINANCE's

BASICS

- Manish Chauhan22nd Sept , 2008

“ “ The safest wayThe safest way to double your money is to fold it to double your money is to fold it and put it in your pocket. ”and put it in your pocket. ”

Objective To get a general idea of investment options available and understand

the importance of investing early.

Understanding of terminologies.

To become more knowledgeable than 90% Indians and 70% human

beings on earth in finance and investing.

To Enjoy

To know some basics of Investing and making good use of our

money.

Why Stock market is weird ?? =>Why Stock market is weird ?? => ”Every time one guy sells, Every time one guy sells,

another one buys,and they both think they're smart. ”another one buys,and they both think they're smart. ”

Agenda Investment options under Section 80C Investment options under Section 80C

Mutual Funds and its categories Mutual Funds and its categories

Basic Terminologies Basic Terminologies

Tax Slab and Tax Refund stuffTax Slab and Tax Refund stuff

BreakBreak

Power of Compounding and Early InvestingPower of Compounding and Early Investing

InsuranceInsurance

RetirementRetirement

Home LoansHome Loans

SuggestionsSuggestions

Q & A and DoubtsQ & A and Doubts

”How to make a million in the stock market? Start with two! ” ”How to make a million in the stock market? Start with two! ”

What is Section 80C ?What is Section 80C ?

The government encourages certain types of savings – mostly, long term savings for

your retirement – and therefore, offers you tax breaks on such savings. Sec 80C of the

Income Tax Act is the section that deals with these tax breaks. It states that qualifying

investments, up to a maximum of Rs. 1 Lakh, are deductible from your income. This

means that your income gets reduced by this investment amount (up to Rs. 1 Lakh), and

you end up paying no tax on it at all!

Locking Period :

Whenever you make an investment which is under Sec 80C , that money is locked in for

a certain period of time . You can take out your money before the locking period , you

will have to pay back the money you saved because of tax exemptions. Sone of them

may allow partial withdrawal after some time.

ELSS : 3 years PPF : 15 years (partial withdrawal after 7 years)

NSC : 6 years ULIPS : 3 years

Investment Falling under Section 80C

Employee Providend Fund (company) : 8.5%

Public Providend Fund (PPF) : 8%

Life Insurance Premium (ULIPS also) : Market linked

ELSS of Mutual Funds : Market linked

NSC (National Saving Certificate) : 8%

Principle amount payment towards Home Loan

What is Mutual Fund Financial instrument allowing group of people to pool their money build

a huge corpus and then this money is invested by group of people

(refered as FUND MANAGERS) who are investment experts, have

deep understanding of investing in stock market and overall financial

markets.

ELSS : These are

tax-saving mutual funds loking moniey for 3 years.

There are primarily 3 different types of investors: 1) There are primarily 3 different types of investors: 1)

Those who don't know anything. 2) Those who know a little and 3) Those who don't Those who don't know anything. 2) Those who know a little and 3) Those who don't

realize they don't know anything! realize they don't know anything!

Advantages and Disadvantages

ELSS Pluses

- Possibility of high returns – Lock-in period of only three years

- Easy transfer

- No tax on returns because of long term capital gain

- Efficient service, especially in the case of private mutual funds

ELSS Minuses

- Difficult to choose the right fund

- High risk

______________________________________________________________

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Terminologies Entry LoadEntry Load

Exit LoadExit Load

Open Ended MFOpen Ended MF

Close Ended MFClose Ended MF

Growth option in MFGrowth option in MF

Dividend Option in MFDividend Option in MF

Equity FundEquity Fund

Debt FundDebt Fund

Fund of FundFund of Fund

MF benchmarkMF benchmark

Balanced FundBalanced Fund

NFONFO

NAVNAV

Fund HouseFund House

Term insuranceTerm insurance

Endowment PlansEndowment Plans

Sectoral FundSectoral Fund

Fund Manager

Short term capital gainShort term capital gain

Long term capital gain

Sensex and Nifty

Correction

Demat A/C

SIP

Commodities

Market capitalization

Portfolio

IPOIPO

A look into past returns

Do and Dont's of Investment

DONT'sDONT's

Investing Without a Plan

Compromise Long Term

Goals For the Short

Term Ones

Ignoring Risk and

Overestimating Returns

Getting Married To Your

Investment

DO'sDO's

Take Help From

Professionals

Don't Allow Others to

Take Decisions on Your

Behalf

Rebalance Your Portfolio

From Time to Time

Tax Slab (2008)

Exemption Limit for Men = 1.5 lacs

Exemption Limit for Women = 1.8 lacs

Exemption limit for Senior Citizens =

2.25 lacs

10% surcharge if taxable income is

above 10 Lacs.

3% Education cess after tax and

surcharge.

What is Taxable Income ?What is Taxable Income ?

The pay which you get has many components , like HRA , conveyance allowance and others.Out of this

income some things are deductible on your hand and after deducting you arrive at a amount called Taxable

income , on which you have to pay tax.

Taxable Income = Your Gross Salary - (HRA) - (Investments under Sec 80 C) - (Conveyance allowance) -

(Health insurance Premium , Sec 80D) and some more things which you may claim.

TAX REFUND FAQ What is a Tax Refund?

Amount, which the government gives back to a taxpayer who has paid excess taxes.

How to Claim Tax Refund?

You need to file an income tax return to claim your tax refund. The amount of refund

receivable is computed and shown in the tax return.

Am I Eligible For Interest on My Tax Refund?

If refund amount is more than 10 per cent of the total taxpayable, you get simple

interest @ 0.5 per cent per month, computed from the beginning of the next financial

year till the date of grant of the refund.

Is The Refund Taxable ?

Refund amount : TAXABLE

Interest amount : NOT TAXABLE

Let's consider an example:

For financial year 2005-2006 your total tax liability was Rs 60,000. Tax deducted at

source by the employer was Rs 70,000. Therefore, you have paid more than your tax

eligibility and can claim a refund of Rs 10,000.

Since the refund amount is

more than 10 per cent of your tax liability {10,000 > (60,000 X 10 per cent)} you

would be eligible to receive interest on your tax refund.

Let's say the refund is

issued to you in February 2007. Then the total interest on refund would be (10,000 *

0.05 per cent X 11 months) = Rs 550. Therefore, the total amount of refund including

interest would be Rs 10,550.

Which is better :Which is better : Investing for 10 yrs and then stop for 30 yrs and let

money grow OR Stop for 10 yrs and then Invest same money for 30 yrs

regularly ... this is an eye opener :) .. coming soon :)

BREAK :)BREAK :)Fact : ”You can understand Stock market if you understand Women”

Conclusion : ”You can never understand Stock market ”

Welcome to the world of Stock Markets

Investment of 2 lacs in HDFC Taxsaver

MF before 11 years has become 1.02

Crore's today ... with 43% average

return till date, since launch in Mar 96.

Rs 50,000 Invested in Ranbaxy Puts

(Derivatives in Stock markets) were

worth 25 Lacs within 36 Hrs After US

FDA filed a case against Company in

2008 .

Do you know Rs 10,000 invested in

1979 in which company is worth Rs

200 Crore today.

Ans : WIPROAns : WIPRO

Had you invested Rs 2 Lac in

”Unitech” in Nov 2004 ... Within 2

years , you could have

4 Bedroom Flat in Bangalore

1 BMW car

Might have started some business

on your own.

Go for a long vacation all around the

world.

And still left with enough money in

you bank to live for next 20-30

years ...

BREAK :)BREAK :)Fact : ”You can understand Stock market if you understand Women”

Conclusion : ”You can never understand Stock market ”

Power of Compounding and Early InvestingPower of Compounding and Early Investing

Compound Interest is the 8th Wonder! Compound Interest is the 8th Wonder!

of the World of the World

- Albert Einstein (1879– 1955)- Albert Einstein (1879– 1955)

Suppose Christopher Columbus had invested $1 (before 500+

years back) which gave 8% return, today his future generation

would have got.

- With simple interest $41

- With Compound Interest $38336110 Trillion or (60

million Bill Gates)

Power of Compounding and Early InvestingPower of Compounding and Early InvestingRobert and Ajay start career same time at age 23

Case 1 (Ajay) :Case 1 (Ajay) :

- Understand the importance of investing Early, enjoys some time and then ...

- Start investing early (at 25) and invests Rs 50,000 every year.

- Assuming 10% return every year , accumulates Rs 7.97 lakh at the end of 10th year. (This is

annuity , dont confuse with Compount interest :) )

- Stops after that and doesnt invest extra money till he is 65 , he just leaves that 8.77 lakhs in

investment and that keeps growing.

- when he is 65 , he has Rs 1 Crore 40 Lacs :)

Case 2 (Robert):Case 2 (Robert):

- Spends a lot and doesnt believe in investing early, gets married, and then when he is 35 he starts

investing for next 30 years he regularly invests 50,000 till he is 65.

- Assuming the same return of 10% per year.

- He has only 82.2 lacs :(

Even after saving for extra 20 years Robert has 43% less than AjayEven after saving for extra 20 years Robert has 43% less than Ajay .

Total amount after n years with A amount every year at i return=A *[(1+i)^n-1]/i

Ref : http://en.wikipedia.org/wiki/Annuity_(finance_theory)

Power of Compounding and Early InvestingPower of Compounding and Early Investing After 100 years : Robert from UP and Ajay from Haryana , This time Robert is extra smart and ajay After 100 years : Robert from UP and Ajay from Haryana , This time Robert is extra smart and ajay

is a software engineer.is a software engineer.

Both are 25 and want to retire at 60 , both earn good money ... (both can invest 1 lac per/year) ...

assuming return at 12% per/annum ...

Case 1 : Robert starts early , invests 1 lac each year for next 10 years, In this 10 years his money

grows to good amount and he just keep that money invested till he retires ..., he can invest for

another 20 years also but now he spends all this 1 lac for travelling and enjoying his life every

year ...

Case 2: Ajay thinks Robert is an Idiot, who is not enjoying his life, what bad will happen if he starts

after 5 years .

Case 2.1 :

After 5 yrs he starts investing 1 lac every year for next 5 year ... He sees that Robert has stoped

investing now and enjoying now, so he also does same , stops investing and leaves his money

invested which is growing ...

Case 2.2 :

After 5 yrs Ajay starts investing and thinks that he will now invest for next 30 years till his retirement,

he wants to have more money than Robert at the end

Power of Compounding and Early InvestingPower of Compounding and Early Investing

Results at 12% return

Case 2.1 : Ajay get how much ??

66 lacs

Case 2.2 Ajay gets ??

1.64 crore

And what about Robert? investing 10 yrs and stoping after that

and enjoying for next 20 years

1.72 crores !!!

See compounding.xls

What Insurance is NOT?What Insurance is NOT?

Insurance is not a investment product.

Only your financial dependents can benefit from Insurance and not you ,

If that is not the case you have taken something wrong.

Endowment Policies a.k.a “LIC Policies” : Endowment Policies a.k.a “LIC Policies” : You are insured for some amount for

certain tenure , If you die during Tenure , your dependents get the money , if

you survive you get the money back + some BONUS .

You pay high premium for this .

Term Insurance :Term Insurance : This is the Best form of Insurance , you are insured for high

amount , but pay very less for premium . This is best form for Insurance .

Always take this . The premium are almost 90% cheaper compared to

Endowment Plans

Insurance

Life InsuranceLife Insurance

Why it is important?Why it is important?

- Life is uncertain, Insurance money must be - Life is uncertain, Insurance money must be

able to provide the same inflow of money as able to provide the same inflow of money as

provided by Earning member , and all future provided by Earning member , and all future

expenses.expenses.

Insurance cover = A + B + C – D Insurance cover = A + B + C – D wherewhere

A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest A is Money which can give you monthly income = Monthly expenses * 12 * 100/(interest

rate which bank gives in a year , example 9.5%)rate which bank gives in a year , example 9.5%)

B = Future Debts or Expenses.B = Future Debts or Expenses.

C = Some money for contingency or emergency .C = Some money for contingency or emergency .

D = Your investments or Assets (excluding HOME)D = Your investments or Assets (excluding HOME)

How to Calculate Insurance Cover

Can you invest Rs 5,000/month , for next 35 years in Equity Diversified Mutual Funds ? Can you invest Rs 5,000/month , for next 35 years in Equity Diversified Mutual Funds ?

Return expected = 15% CAGR Return expected = 15% CAGR

Any idea how much will it Become ? Any idea how much will it Become ?

Ans : 7.43 CroresAns : 7.43 Crores

What If you just want to invest for 10 years and then leave it for 25 yrs , but still

want to generate 7.43 Crores. ?

Ans : Rs 6240 / month (Rs 1240 more)

What if you can invest for only 2 years , but a lot of money per month , like Rs

20,000 Per month . And leave it for 33 years ? What will happen in that case ?

Ans : 9.24 Crores

Creating Wealth For Retirement

Tax Treatment Tax Treatment

- Interest : Upto 1.5 lacs under Sec 24(b) (loans taken after March 1, 1999)

- Principle : Upto 1 lacs under sec 80C

- You get 85% amount as loan. generally 15% is the down payment.

- House must be self occupied to claim tax benefit under Sec 80C.

- Spouse can be the co-applicant in the loan and both can claim tax benefits seperately

which will save a lot of tax for both.

- Fixed rate and Floating rate of payment.

Example :Example :

Your taxable Income: Rs 5,50,000

Principal repayment : Rs 1,10,000 and Interest payable : Rs 1,60,000

Total Deductions allowed: Rs 2,50,000 (Rs 1,50,000 towards interest payable & Rs

1,00,000 for principal repayment of the loan)

Thus, your taxable income will reduce to Rs 3,00,000 ( Rs 5,50,000 - Rs 2,50,000 ).

HOME LOANS

CASE:

Loan :Loan : 10,00,000 Tenure :Tenure : 20 years

Interest rate :Interest rate : 9% EMI per month : EMI per month : Rs 9700 (approx)

Now if interest rate goes up by 1.5% ... There are two options :

Case 1 : Pay more EMI every month, ie : 11.7% more or Rs. 1130 , total Rs. 10830 per/month... Extra

burden : 1130*12*20 = Rs. 2.71 lacs

Case 2 : Increase the tenure with same EMI . Can you guess how much more time you will have to

pay? Its 9.8 more years !!! , which will cost 9.8 * 12 * 9700 = 11.4 lacs ..

What if interest rate goes up by extra .5 % ie: 2% ...

Case 1 : you either pay more EMI per month , ie : 15.7% more or Rs 1520 .

Extra burden : 1520*12*20 = Rs 3.65 lacs

Case 2: Pay same money for extra tenure ... this time extra tenure is 22.9 years.

Extra burden : 9700*12*20 = 23.28 lacs

Learning :Learning : Take the loan for minimum tenure and maximum EMI you can afford... After some years of taking Take the loan for minimum tenure and maximum EMI you can afford... After some years of taking

Home laon , if its possible increase the EMI and decrease the tenure... Home laon , if its possible increase the EMI and decrease the tenure...

Some good Mutual fundsSome good Mutual funds ELSSELSS

Sundaram BNP Paribas Taxsaver

Prudential ICICI Tax Plan

HDFC Long Term Advantage

Franklin India Taxshield

HDFC Tax Saver

SBI Magnum TaxGain

Non-ELSSNon-ELSS

Reliance Diversified Power Sector

Magnum Taxgain

Magnum Multiplier Plus

UTI Infrastructure

Magnum Contra

Magnum Global

Sundaram BNP Paribas Select Midcap

Reliance Growth - Growth

SBI Magnum Global Fund 94 - Growth

Reliance growth fund

HDFC Top 200 Fund

Sundaram BNP Paribas Select Midcap

Suggestions Equity Exposure= 100-age % , Debt Exposure = age % (for eg , i have

76000 in MF (100-24) and rest is in PF)

Invest in ELSS and other MF's with high exposure in equity through SIP.

Invest for long term.

Invest in good IPO's and NFO's

Dont go blindly with tips and recommendations , do your research yourself.

Invest some money in equities directly

Top sectors for future are Power , Infrastructure , Energy , Real Estate (and

all of them are related to each other).

Make sure ideal cash is not in bank account, try out new things like

Commodities and Futures and Options.

Some Questions Asked ...Some Questions Asked ... I am planning to invest some money in mutual funds. Whats the best mutual fund based company to

invest in ? what are the formalities involved in that ?

what is the right time to invest in shares or mutual fund...

How are tax saving funds different from normal funds?

How difficult is it to trade directly as compared to investment in mutual funds?

Is there any tax that I hav to pay if I trade directly?

What are ULIPS?

On wat basis do u see which company to invest in or not (I mean buy shares) some key points to be

kept in mind or which areas to do research on before investing.

I am really interested in real estate/property. So can u suggest some strategic locations etc for the

same and how to go about it from process of looking for the property till we actually buy it?

And in general how to handle the money we earn , like ways to invest , put in MF etc etc in order to

have max gains.

What is Sensex and Nifty ? How is it calculated ?

TODO Read my blog : Read my blog : http://finance-and-investing.blogspot.com/

To find all the articles according to category : To find all the articles according to category :

http://finance-and-investing.blogspot.com/2008/09/blog-library-dear-readers-this-is-my.html

Read “Money Today” or/and “Outlook Money to keep yourself Read “Money Today” or/and “Outlook Money to keep yourself

updated.Read Money Today online at updated.Read Money Today online at

http://moneytoday.digitaltoday.in/index.php?latn=1

Review your investments once in a month (small review) and once Review your investments once in a month (small review) and once

in 6 months (major review).in 6 months (major review).

Plan you taxes Early , Dont be part of “March Rush” . “Good Tax Plan you taxes Early , Dont be part of “March Rush” . “Good Tax

planning happens automatically with good investment planning and planning happens automatically with good investment planning and

not vice versa”not vice versa”

Q&A