PD's Information Centre

Thursday, November 26, 2015

What is ELSS ?

Equity Linked Saving Schemes (ELSS) are mutual funds schemes that invest 65% in equity related instruments that are notified to avail tax benefits. Investment in such ELSS Mutual Funds would provide tax benefit to investors under section 80C.

Benefits of ELSS :
1. ELSS mutual funds come with lock-in period of 3 years. You are forced to keep your investment for a minimum of 3 years. This would help you to grow your money that considers market fluctuations.

2. By investment in ELSS mutual funds, you are eligible for tax exemption up to Rs 1 Lakh under section 80C. If you have not utilized 80C fully, this is a good opportunity to invest in ELSS funds.

3. ELSS mutual funds invest in equity related instruments, these schemes would help you to grow your money when the stock market grows over a period of time.

4. There are no other investments which would save you tax other than ELSS and PPF. The other investments like Tax Saving Bank FD, Tax saving Post office TD scheme etc. All these tax saving option returns are taxable based on individual tax slab. The interest in Public Provident Fund is tax free, but that comes with a 15 year lock-in period.The only tax saving investment option that provides tax free returns for short period is ELSS Mutual funds. ELSS mutual funds invest in equity related instruments, these are classified under equity funds. Any returns received from equity funds after 1 year is tax free, hence ELSS funds which comes with a 3 year lock-in period, dividends/returns/capital gains from such funds are also tax free.

Risks in investing in ELSS
These funds invest 65% in equity, there is some element of risk. Moderate risk and High risk investors can consider this as a tax saving investment option. Also the past performance may or may not repeat in future. Hence investors should consider this risk element and consider investing in such funds.

What are Stocks ?

Stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Shares, equity, or stock, it all means the same thing.

At some point every company needs to raise money. To do this, companies can either borrow it from somebody or raise it by selling part of the company, which is known as issuing stock. Issuing stock is advantageous for the company because it does not require the company to pay back the money or make interest payments along the way. All that the shareholders get in return for their money is the hope that the shares will someday be worth more than what they paid for them. The first sale of a stock, which is issued by the private company itself, is called the initial public offering (IPO).

Holding a stock means that you are one of the many owners (shareholders) of a company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock. The importance of being a shareholder is that you are entitled to a portion of the company's profits and have a claim on assets. Profits are sometimes paid out in the form of dividends.

The more shares you own, the larger the portion of the profits you get. Your claim on assets is only relevant if a company goes bankrupt. In case of liquidation, you'll receive what's left after all the creditors have been paid.

There are no guarantees when it comes to individual stocks. Some companies pay out dividends, but many others do not. There is no obligation to pay out dividends even for those firms that have traditionally given them. Without dividends, an investor can make money on a stock only through its appreciation in the open market. On the downside, any stock may go bankrupt, in which case your investment is worth nothing.

There is also a bright side to the risk. Taking on greater risk demands a greater return on investment. This is the reason why stocks have outperformed other investments such as bonds or savings accounts. Over the long term, an investment in stocks had an average return of around 10-12%.

Basic tips to remember while buying shares ?

1. Buy the shares on the assumptions that they could close the market tomorrow and will not open for next 5 years. i.e. buy the shares for long term gains.

2. Some days you will get offered great price and other days horrible deals. Your job is to know when its bad deal ?

3. Learn the importance of patience and individuality. Anytime you find something like massive returns usually means massive risk.

4. Patience is truly virtue. Take your time, don't try to get rich overnight. Never break your rules.

5. Individuality - Think of yourself, that's what all the investors do !

6. Line by Warren Buffet - I have often found that, if I was doing what everyone else was doing ....! Then I was probably doing it wrong.

Different Investment Options to diversify your investment portfolio -

1. Stocks - buy shares
2. ELSS - Equity linked saving schemes (eligible for tax savings)
3. SIP - Systematic Investment Plans in mutual funds
4. Buy Commodities - Gold ETFs, Silver.. etc
5. Public Provident Fund
6. FD - Fixed deposits

Thursday, November 19, 2015

Most important 4 rules while buying stocks ?

Lessons from the warren buffet, below are the 4 important rules to buy Stocks :

1. A stock must be stable and understandable. Don't get into things you don't understand, the chances of failing are large. Learn about the industry, invest time in reading then money in investing.

2. A stock must have long term prospects i.e., a company should be a long term company in the market with stable growth.

3. A stock must be managed by Vigilant Leaders. Stay away from any company having lot of Debt. Learn reading balance sheets and learn accounts, to identify the company's Assets, Liabilities and finding company's value on any particular day.

4. A stock must be undervalued. Find the intrinsic value of the stock and buy the stock at that or near to that value, at which you are comfortable buying it.
Never buy stock at its peak value, always buy stock when it is undervalued.

To learn more about stocks visit http://www.warrenbuffett.com/

Wednesday, November 18, 2015

Should I Invest in Gold ETF or Physical Gold ?

When we think of investing in Gold, we mostly go for the Physical Gold option. As, in India Physical Gold is purchased for several reasons, for marriage, for ornaments, for gift etc.

We will discuss few benefits and disadvantages of buying Physical Gold.

Benefits of buying physical gold:
1. It gives you long term returns on investment :
In the longer run, gold has proved itself as a good investment option, as the gold prices have kept increasing year on year. If we look back at last 5 years, gold has given the annualized return of 24% on investments.

2. It has 100% liquidity:
When in need, we can sell the physical gold very easily in the open market

3. Need for physical wearing:
Most of the investments done in gold are for wearing the physical ornaments, in different occasions

Disadvantages of buying physical gold:
1. Loss of gold value due to wearing the ornaments:
When we try to sell the ornaments purchased for physical wearing, the wastage of 6 to 8% is deducted from the selling amount

2. Physical gold theft possibility:
There are chances of theft of the physical gold, which increases the risk of complete loss of Gold Investment

3. Charges to keep Gold secure:
If we keep purchasing and investing in physical gold, we would not take chances to keep all gold at home. For this, we might need a security lockers in banks. For this physical lockers we will need to pay the annual charges, which will be a increased expenses every year.

So now that we know the benefits and disadvantages of owning physical Gold. We will have a look at Gold ETF's

What is Gold ETF ?
Gold ETF (Gold Exchange Traded Fund) is a method to track the Gold commodity. The price of this Gold ETF is based on the current Gold price in the market. The Gold ETF value keeps on changing with the change in physical gold value.

We will discuss few benefits and disadvantages of investing in Gold ETF.

Benefits of investing in the Gold ETF:
1. Transparency in price:
The Gold ETFs are traded in the stock exchange in electronic form, same as other stocks listed in the stock exchange. Hence we can track the prices online and sell them whenever needed.

2. Gold ETFs are traded in electronic form:
Gold ETFs are traded in the stock exchange in electronic form and to invest in gold etfs we need to have access to a demat account

3. They are Safe:
As discussed above, the investment is in electronic form and not the physical gold, there would be no loss and risk of theft in this investment.

4. We can invest small:
Gold ETFs open the doors to small investors, we can invest in Gold ETFs as small as 1grams.

5. Gold ETFs don't need any assurance for the Gold Purity:
When we purchase the physical gold, we always check for the purity of the gold. As that purity decides the value of the physical gold. While in case of Gold ETFs, as they are as good as stocks, we don't need to worry about the purity. The Gold ETFs are traded as same as stocks,

Disadvantages of investing in Gold ETFs:
1. Annual charges for account maintenance:
We need a Demat account in order to invest in Gold ETFs, we need to pay annual maintenance charges for the demat account. But if we are using the same demat account for stock trading, then it will not be a issue to pay the maintenance charges.

2. Transaction or commission charges while purchase or sell:
As mentioned above, the Gold ETFs are traded similar to other stocks on stock exchange. hence we need to pay the transaction or commission charges to the broker(your demat account service provider). The charges will be completely dependent on the broker, which are approximately 0.25% to 0.75% on the total Purchase or Sell value of the Gold ETFs.

Conclusion:
We have seen the benefits and disadvantages of both the physical gold and Gold ETFs, based on that if we are not going to use the Gold as ornaments and are looking the gold as an investment option, the best investment option would be Gold ETFs.