Money Management – Few Things To Remember

It is the most sought after thing in the universe and yet, when it comes to managing the personal money, very few of us are good at it. Everybody wants to earn more money but even before we earn it, money makes a way out through expenditures, and mostly, we are left with a very little surplus. And if ever we are left with the decent amount of surplus then very few of us know what to do with it. I myself am not good at money management but I have learnt few lessons – academically or practically- and here I share them:index

1. A dollar today is worth than a dollar tomorrow– This is the most fundamental principle to understand. Because of the inflation and the uncertainty, the value of 1 dollar today is more than what it will be tomorrow. Compare today’s income with at least the inflation adjusted income of tomorrow. Plan your purchases and savings accordingly.

2.Write down your financial goals– Very important to be clear with why do you want money, and you can then seek help of experts on how to achieve your goals. You can further divide your goals in to short term and long term.

3. Account for income only when the money reaches your safe, but count the expenditure the moment you owe someone money: You should count your money, only when it is in your control. However, expenditures should be counted the moment you owe money to someone, even if you are going to pay him tomorrow. Planning your finances using this simple principle will always help you to remain afloat and ensure liquidity.

4. Save some amount for the contingency and then spend: Make way for the savings first. Some percent of your income (10- 30%) should go into the savings – insurance, MF, Gold, FD etc. However, Do not keep on saving at the cost of today. Living a good life today is as important. Good life although is a relative term but you should spend at least some amount on the hygiene factors – Good Health, Good Food and Decent clothes. Yes, even today, cars and mobile phones should come much later.

5. Your one of the first investment should be a term insurance plan: Should I call it an investment? Term Insurance plan is the plan which cover only your life and you do not get any money if you survive the cover period (Well no body wants this money :-P). And if, God forbid, something happens to you, your family gets the money. Term Insurance is the actual insurance plan. If your aim is to secure your family, this is the plan to buy. It is cheap too. Please do not mix and confuse insurance with investment.

6. Do not invest money in the stock market by taking tips from the TV experts: This is the worst way of investing money in the stock market. Realise this, that people who make money in the market, do so because they have better knowledge or more information than the others. When the expert comes and speaks on TV, he is virtually making everyone aware about that knowledge. The actual money in the stock market is made much before the tip is released to the normal people. Making money in the stock market requires good understanding of the market.

7. Invest in Mutual Funds through SIP: If you want to invest in stock market then enter through Mutual Funds. SIP (systematic investment plan) is a way to invest money in parts, on the fixed days of the months to avoid the downside in the market. In SIP, things average out in the long run and so it is less risky for a person who has no financial background.

8. In any loan, you pay more interest in the beginning: Yes, that is the way the banks design their loans. Of course you pay equal EMI’s every month but the EMI is designed in such a manner that the banks earn the interest part in the first few years and gradually over the years they take back the principal part (The maths behind this logic is beyond the scope of explanation for this blog, you can ask any expert). So, it is better to pay off the loan as quickly as possible because paying it during the last few years of the tenure is not as advantageous for you. This is truer in the case of home loans.

9. Invest in the assets which will not depreciate: Cars and gadgets are very important but the problem is that there value decreases over the period of time and with the usage. So, any purchase you are doing of such items is not an investment, but it is an expenditure. Investment is buying Gold or any such asset, which will gain value in future.

10. Avoid Using Credit Cards: Use credit cards only when there is no other option left. Then you will be in full command of your personal finances. If you keep on spending by using your credit card, after 5 days you will lose track of your expenditures because you have not paid for them so far. Also, remember that penalty charges for the late payment are very high in the case of credit cards.

Sensing the Sensex; Significance of Sensex Crossing 30000.

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So, the sensex crossed the 30,000 mark today, thus creating the history. But what does that mean for you and me? Why it breached 30,000 mark? Is it a good omen for the Indian economy? Shall the retail investor invest more, in the hope of more upswing?

In today’s blog I will try to address these issues. But before I start, I will explain few terms:

  1. Stocks: Besides the obvious reason of meeting their operational expenses, Companies need money for multiple reasons. They can raise the money commonly by either taking loans or issuing stocks. Stocks are a share of a company held by an individual or a group. Stockowners become the partial owner of the companies. Stocks are bought and sold on an exchange. BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are the two most popular stock exchanges of India.
  2. Sensex and Nifty: How does one measure the performance of the stock market? There has to be some scale or measurement index!! In fact there are many scales, Sensex and Nifty are the two most talked about scales of BSE and NSE respectively. Sensex comprises of top 30 companies, in terms of the market capitalization, of BSE. Market Capitalization of a company is the number of free floating stocks multiplied to the price of one share. The free float market cap is then divided by a base value known as the Index divisor to arrive at the value of the sensex.
  3. Free Float and Index Divisor: Free floating stocks are those stocks which are readily available for trading among the public. This excludes stock holdings of promoters, governments etc.

There has to be a base against which the scale has to be measured (Remember that any scale will have a starting point for example a zero, which will be used as point of reference). The value of the sensex which is used as the base is known as the index divisor. In India 1978-79 is the base year for the Sensex.

Nifty is also calculated similarly but it comprises of top 50 companies in the terms of market cap. Besides Sensex and Nifty there are several other scales or indexes.

Why is the Sensex most talked about index?

Simple. The index comprises of the 30 most precious companies. So, in a way it represents the health of the top 30 companies which many people assume to be an indicator of the entire economy.

Is Sensex a true representation of the Indian Economy?

No.  Economy of a country is dependent on many factors, stock markets being just one among those.  Sensex being one of the many indexes of BSE does not even reflect the true health of the stock market.  For example, it is quite possible that the Sensex has shown growth but the shares of the manufacturing companies have performed poorly.  So, can we say that market is performing well?

So, What does the Sensex of 30000 signifies?

It certainly does not signify that India as an economy is doing well. It only signifies that the market is bullish i.e. feeling good or hopeful about its future prospect. Sensex in addition to the report card of the past work is more a report card on the future prospect.   Sensex at historical level of course gives a reason to celebrate but with every celebration one has to administer caution.

Why has it reached the historic level?
 As explained, mainly because the investors and the market have turned hopeful.

  • Ever since Narendra Modi led BJP took charge of the country, the markets have been positive and hopeful because they expect investor and market friendly policies from the government.
  • The budget announced few days back had a slew of measures and suggestions that further strengthens the hope that government intends to create an investor friendly climate (Refer: points on GAAR, MAT and corporate tax in my previous blog)
  • The final push came when RBI slashed the repo rate by .25%. The reduction in repo rate will reduce the cost of borrowing for the corporates. (More on repo rate in my next blog on finance next week)

Is the market overvalued? Will Sensex grow further?

That is the question, perhaps that is the fuel which keeps market working. Nobody knows the actual value of the Sensex at any given time. And since nobody knows the true level it becomes extremely difficult to take a stand on the future prospects.

Theoretically, it is possible to find out the true value of an asset (Sensex is an asset). Theoretically, it is impossible for anyone or for the few people to earn super normal profits in the market. But the theories discount the fact that the human beings are irrational, greedy and judgemental.  And that is why there will always be difference between the ideal theoretical value and the actual market value of an asset.  Very often those who have more information or those who have the intelligence to process the information or those who have the ability to show restrain earn more in the market.

What should a retail investor do?

He shall certainly not invest indiscriminately. The best way to realise returns from the Stock Market is to invest through SIPs (Systematic Investment Plan). SIP allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.) thus reducing the risk factor due to the volatility of the stock market.

Key Financial terms, the Budget and its Analysis

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The first full term budget of the BJP Government is rolled out. Let us try to understand –without much of the statistics – if the proposed budget harbingers Ache din for all and thus makes everyone happy.

In the article, I have first explained the key terms which will help one to understand the key announcements in the budget. Then I have analysed, the impact on the various stakeholders due to changes in the Tax structure.  I have tried to include the relevant points for a layman.

Before we go deep, let me explain few terms:

1.Fiscal Deficit: Fiscal Deficit is the difference between the annual expenditure and the annual revenue of the Government.

Government expenditures can be classified under the planned expenditure (Incurred in central development schemes) and the non planned expenditure (Interest payments, defence, subsidies etc)

Government revenues can be classified under the Revenue receipts (All direct and indirect taxes, interest receipts etc.) and the Capital receipts (Dividends from PSU shares, Disinvestment of PSUs).

For a developing country like India, the expenditures will always be more than the earnings; hence fiscal deficit becomes a necessary evil.

(More Hint:  Revenue receipts are analogous to the income of your household which are recurring in nature– monthly salary, annual receipts from invested amount etc. Capital receipts are the ones which are not recurring in nature, for example proceeds from the sale of property.  Imagine what you will do if your expenditures are more than your income. You will borrow, right? Or you will sell your property!! That is what government also do, either through borrowing or through disinvesting its stakes in PSUs. )

2. Direct Tax: The taxes in which the direct incidence of the tax falls on the person who pays the tax. Liability to pay the tax is NOT passed on to someone else. (INCOME TAX, CORPORATION TAX, WEALTH TAX, LAND REVENUE).

3. Indirect Tax: Levied on the goods and services. Traders / Producers pay it and they pass the liability on to the end customers.  (SERVICE TAX, EXCISE DUTY, SALES TAX etc)

4. GST: stands for the Goods and Services Tax. Currently, there are plethora of Indirect taxes levied on the customers at the Central and the State level.  This may result in the higher price of the goods. This also leads to a disintegrated national market as the price of the same good may vary across the different regions of the country.  GST proposes to be a uniform tax structure which shall prove antidote to the current irregularities in the Indirect Taxation.

Hint: Remember that GST is meant for Indirect Tax.

5. GAAR: stands for General Anti Avoidance Rules. GAAR was introduced in 2012 to target tax avoidance.  It gave the nation’s Tax authorities power to scrutinise deals that have been structured to mitigate or avoid taxes.  It was intended to target the tax evaders, especially the investors trying to route investments through the Tax Havens like Mauritius.

Hint: Every Individual, Investor and Company tries to minimise its tax liability.  This can be achieved by legal way of Tax Planning or illegal way of Tax evasion.

6. MAT: Minimum Alternate Tax is a way to make companies pay a minimum amount of tax if they book profit. In India, in the past there were companies making profit and also distributing dividends but were not paying taxes at all, exploiting smartly the loopholes in the system. Now under the MAT regime all the companies booking profit (exceptions are there) have to pay a minimum alternate tax. Foreign companies with income sources in India are liable to pay tax under MAT also.

7. FIIs:  Foreign Institutional Investors invest money in the market of the India. The money through FII route is unstable in nature, as the investors can overnight take back the money if they find greener pasture elsewhere in the world.

8. FDIs: Foreign Direct Investments is more stable in nature as the foreign company invests in India directly by setting up a wholly owned subsidiary or getting into a joint venture.

9. Exemptions Limits on the Income Tax: Government usually exempts from Taxes the expenditure incurred in certain avenues by the citizens – for example life and health insurance, Public provident funds, Education and home loans etc.  This is done to promote the good habit of savings or to promote the welfare in general.

THE BUDGET OF 2015-16: Key Highlights

PART A: Changes in Direct Tax: 

  • The corporate tax rate is reduced from 30% to 25%.
  • The wealth tax has been abolished but the super rich (with an income above Rs. 1cr) and the firms with the income above Rs. 10 crore will pay additional 2% surcharge on the income.

Hint: Wealth Tax is charged on the net wealth of the assessee. It is a tax on the benefits derived from the ownership of the property.

  • The tax slabs remain unchanged and there is no discount or holiday for the individual tax payer in that regard ( Hint: Currently, those earning below 2.5 lakh p.a. are exempted from paying the income tax , those earning between 2.5 lakh to 5 lakh p.a. falls in 10% tax bracket, those earning between 5 lakh to 10 lakh p.a. falls in 20% and those above 10 lakh in 30% tax bracket)
  • The tax exemption limit has been increased in retirement schemes, health insurance and transport allowance.
  • GAAR implementation has been deferred by two years
  • Foreign Investors are now exempted from MAT.

 

Impact on the Stakeholders due to Direct Tax Changes

  1. On The Rich: The super rich have to shell out more money in the form of tax.  The definition itself of the wealth tax gives tremendous scope for manoeuvrability.  Wealth Tax has been abolished now and in place of that the super rich has to pay additional surcharge of 2% on the income. By the government estimates the additional surcharge will earn them Rs. 9000 cr.
  2. On The Middle Class: The middle class can save more tax by investing in the health insurance and the retirement schemes. However, the expected upper revision of the zero tax bracket limits has not been done. What it means is that those who have enough money at disposal can save more in tax by consolidating good habit of saving. For the lower bracket of the middle income group, which assumedly do not have much left as savings, there is no gain in this budget.
  3. On The Underprivileged: As far as the Direct Taxes are concerned, the underprivileged remains unimpacted. However, the intention to promote investment in infrastructure and the focus on more job creation should in the long run help the underprivileged.  It all boils down to the implementation of the schemes for the underprivileged.
  4. On the Investors: Deference of GAAR by two years and exemption of the foreign investors from MAT are the steps which should make the foreign investors happy. The result should be surge in the foreign investments.
  5. On the corporate: Needless to say that they must be the happiest bunch after reduction in the corporate tax rates. Reduction in the corporate tax rates should enable India to compete with the other economies of the world as corporates would have extra money at their disposal to improve their efficiency.  Also, a more competitive tax structure should result in more foreign investments.

PART B: Changes in The Indirect Taxes:

  • Service Tax increased by 2%, from 12% to 14%
  • Special Additional Duty has been exempted on most of the electronic goods.
  • Imported completely build commercial vehicles will be costlier.
  • Customs duty on certain inputs and raw materials has been reduced.

Impacts on Various Stakeholders due to changed in Indirect Taxes

  1. On the Domestic manufactures and the Make in India Campaign: A big boost will be provided to the Make in India campaign. Besides the measure to cut the custom duty on input materials (this will reduce the cost of manufacturing ) there are several other measures – like focus on improving the skills of rural youth, easy access to the credit and hike on import tariffs – which will help the domestic manufacturers .
  2. On the GST implementation: Finance minster has mentioned his willingness to roll out the GST by April 2016. Increase in Service Tax rate is seen as the step towards the progression of GST.  GST once implemented shall be beneficial for the consumer, in the long run.
  3. On the Consumer: Increase in service tax means consumer has to pay more to avail the services like communications, electricity, hospitality, consultancy and financial.  The burden could be quite hefty.   And yes, imported mobiles, cigarettes will also become dearer due higher excise duty.

A pure economist will argue that increase in Indirect Tax always negatively impacts the middle class and the poor and the reduction in Direct Tax helps the rich more.

PART C:  Some Other Points:

Impact on the Infrastructure sector: It will get a major boost as outlay on the roads and the railways has been increased. Budget announced the construction of 5 mega power projects.  The budget also shows the intent towards efficient operational changes with key initiative of ‘plug and play’ model for big investment projects, a model in which projects will be offered after all the clearances are in place.

Plan to Curb the Inflation:  Government and RBI will work together, in line with the international best practices, to keep inflation below 6%. A monetary policy committee will be formed with the representatives from government and RBI.

Welfare Schemes:  As always, the budget has lots of schemes but the most ambitious is housing for all by 2020.

The most critical parameter – Fiscal Deficit:   In the interim budget of July 14, FM promised to bring the fiscal deficit to 3% of GDP and set the target of fiscal deficit to 3.6% for the year 2015-16. He has now deferred the date of achieving the target of 3% by one year and also revised the fiscal deficit target of 2015-16 to 3.9%.

To fund the expenditures and narrow down the fiscal deficit, government will disinvest its holding in PSUs and realise 69,500 crore Rs.   The FM has also announced reduction in subsidies on petroleum and fertilisers (Price of petrol and diesel have increased as a result). The budget also reduces allocation to the planned expenditure.  All these three measures are aimed to control the deficit.

Part D: My final words:

  1. Over the short term, corporates seem to be the biggest gainers.
  2. The budget intends to create an investor friendly environment
  3. The middle class and the poor do not gain much over the short term. Reduction in subsidy will impact the middle class and the poor. Also, increase in the Service Tax can lead to the inflationary pressure. However, if all the polices and the yojnas are implemented and the good intention of the budget, including that to make stringent laws related to black money, is executed, the middle class and the poor will gain in the long run.
  4. Make in India campaign will get the boost due to slew of initiatives.
  5. Government wants people to save more and splurge less on unwanted items.
  6. Overall the budget is sound but to make everyone happy, execution is more important than the plan.