Hedge Funds Industries dynamics in simple language.

The hedge fund industry has grown at a ferocious pace in the last decade, from as few as 300 funds in 1990 to more than 10,000 funds today. These funds have become highly visible in markets and the press, and are estimated to manage over $1.4 trillion in assets, both through onshore and offshore funds. 

The very first hedge fund was started by Alfred W. Jones in 1949. By using leverage and short selling, he effectively "hedged" risk in the marketplace. Though his hedge fund greatly outperformed mutual funds of that time, hedge funds really didn't feign much interest until the 60's. Big names like Warren Buffet and George Soros took an interest in Jone's strategy, and over the next th years, 130 hedge funds were born. 

Hedge funds, like other alternative investments such as real estate and private equity, are thought to provide returns that are uncorrelated with traditional investments. This attracted an increasing number of individual and institutional investors. However, while Alfred Jones' strategy employed short selling and leverage, there are a multitude of different strategies used by hedge fund managers today, and the term "hedge" doesn't always apply, since many of these funds are not hedged at all. In fact, many hedge funds attempt to capture absolute returns and take positions that are often highly speculative. 

In 2008, the hedge fund industry faced one of its worse years in history as markets across the globe crumbled. Many of the best and brightest managers and investors faced losses of 30 percent or more, and assets under management decreased as investors opted into treasury bills and cash investments. Still, many of the strategies utilized by hedge fund managers capture greater returns in a volatile market, and some of the hedge funds found ways to make investors money despite the financial crisis. 

In the first half of 2009, the industry as a whole has bounced back in dramatic fashion and seen its popularity rise among many investors. What does the future hold for this often misunderstood investment class? Only time will tell. 


Employing vastly different investment strategies and approaches to risk-management, hedge funds are defined by their structural characteristics, rather than their "hedged" nature. 

Hedge funds are primarily organized as private partnerships to provide maximum flexibility in constructing a portfolio. Hedge funds can take both long and short positions, make concentrated investments, use leverage or derivatives, and invest in many markets. This is in sharp contrast to mutual funds, which are highly regulated and cannot easily take advantage the same breadth of investment instruments. While mutual funds are mainly limited to stocks and bonds, hedge funds enjoy a wide variety of investments which may include futures, PIPEs, real estate, art, even website domain names. 

Hedge funds typically use a different fee structure for investors than mutual funds as well. While both mutual funds and hedge funds charge a management fee or a fee based on a percentage of total assets under management, hedge funds typically charge a fee based on a percentage of profits, known as a performance fee. The performance fee helps to align the managers' and investors' interests. In addition, most hedge fund managers commit a portion of their wealth to the funds further aligning their interest with that of other investors. Thus, the objectives of managers and investors are the same, and the nature of the relationship is one of true partnership. 

Another feature of hedge funds is you must be an accredited investor or a qualified client in order to invest your money. This is one of the very few regulations that hedge funds must abide by and is designed to protect the average middle-class investor from getting into investments they don't fully understand.

VIJAY POPAT

MY 1ST JOB EXPERIENCE

Now this would be history for me:- 


" VIJAY POPAT
Sales Development Manager
HDFC Life Insurance Co. Ltd.
3 Red Cross Place, Menaka Estate ;
Park Circus Branch ( ROB )
Kolkata - 700001
Email:- vpopat@hdfclife.in , vijaypopat88@gmail.com
Get connected:- www.hdfclife.com "




After passing out from IIPM kolkata, me along with all my close friends from IIPM were looking forward to kick start their career with a bang after coming out of Management school. We were very optimistic and happy about finally stepping into corporate life after a fun filled learning experience from safe walls of IIPM.


                                    It took us 72 subjects to clear and become eligible wild and cruel corporate world. Me along with few of my close freinds i.e; NITA CHANGANI, ASIF ANSARI, RAHUL AGARWALLA, WASIM AHMED, RACHANA JAIN, MANINDER KARNANI , and others waited till last to get through our dream job profile which was related to " FINANCE " through campus placement. But sadly destiny had its own faith, we never got suitable opportunity from campus about pure finance profile. Most of the opportunities were marketing and sales job. After a long wait since October 2010 to January 2011, we all became frustrated with our destiny and were scared about our career path as it was really hazy and almost in darkness. 


                                   After a long struggle and wait for suitable opportunity we finally decided to jump on to sales and marketing job as well till we don't get our desired job profile. But again destiny ditched all of us... we realized this fact after almost 90% good companies have already gone from campus after their due placement visits. Companies like, ICICI DIRECT, STANDARD CHARTERED, DEUTSCHE BANK, CITI BANK, HSBC DIRECT, RBS and even many other good non financial marketing companies came and went and that opportunity was also lost from few of us unlucky people. So finally we lost hope to get good placement from campus.


                                   Here started the tough fighting journey with couple of my friends for shaping our career. Me along with NITA & ASIF, we all took the bold decision of stepping ahead and taking our biggest step towards making the choice of our career through the most adventurous path. We consulted our summer internship boss i.e; Mr. Kaushik Majumdar, the ex- Business Development Manager of MAX NEW YORK LIFE, and current Branch Manager of L & T  LIFE INSURANCE, to guide us from where to start our career at least until we get our dream job. As per his guidance all three of us joined HDFC - LIFE. Me on 17.01.2011, NITA ON 20.01.2011 and ASIF on 10.02.2011 as SALES DEVELOPMENT MANAGER.


                                     We all were very happy to get through a job because it was our self achievement without any help from college placement leg. Though you people must be thinking it was a sales job in INSURANCE industry but still it was a catalyst for us as were determined to prove a point to all of them who didn't even thought the level " A" students to get better placements. 


                                   Before i start about my 1st job experience i would like to thank MR. ZULFIKAR HOSSAIN the TERRITORY MANAGER of HDFC- LIFE for providing all the three freshers including me and my friends the golden opportunity to learn and start our career as managers in AGENCY CHANNEL. I am grateful to him not only because he gave me job, as being an CA final student and MBA with major in FINANCE AND MARKETING, this job was not that hard to crack, but i am thanking him for all his patience to tolerate us and teach us all required skills, knowledge and required technique to survive in this industry.


                                   Overall it was a short ie; (17.01.2011 to 11.05.2011) but learning and fun filled experience in HDFC. I had my summer internship from MAX NEW YORK LIFE in agency channel itself so the Job was not alien for me. My job was to identify potential Financial consultants and recruit them as advisors and get the business target done with the help of them. In this short period i recruited 8 FC, with a cumulative business of above 2 lacs. Its not a flattering figure but for a finance guy to enter into completely hardcore sales environment with the toughest financial product to sale was still satisfactory.


                                  This job has taught me a lot of things... 1st of all it boosted my communication skill and also injected immense self confidence to deal with all crisis situation and tackle tricky people. This journey won't have been fun filled and memorable if my friends NITA & ASIF were not part of it. We three were like one unit in whole of Dalhousie branch of HDFC - LIFE. I don't know from where to start about our great journey together. I still remember one of the weirdest experience of visiting HOWRAH Fish market along with ASIF  on a call with a client and staying there for more than 2 hours and even having lunch in mid of  fishy smell all around. It sounds funny but that experience opened me up to all adverse experience. I still remember the day i closed a big deal on my own, and was successful in closing the deal positively... it was a amazing experience. All small funs that we used to have like going movies in mid of official timings, going shopping malls, watching ipl matches, etc will remain with me as a lifetime experience.

                                      All of my colleagues like SARMISHTA DI, AMIT KUMAR DAS, AFROZA DI, DEBASHISH DA, RAJU, ANNUPAM, JOYONTO DA, ABHIK, SHAGUN, ZULFI SIR, NILANJANA MAM, DIBNENDU DA, ARUP DA, SAMBHU DA, ABHISHEK, RAJESH, ANIL, SANTOSH, YASH RAJ, etc.. and yes NITA & ASIF all were amazing and extremely supportive. I have learnt something or the other from everyone. 


                                      Being a management student, the three of us came with a unique idea of bring summer interns in HDFC- LIFE through B- SCHOOL to work in agency channel for sometime. We were successful to tap Scottish church college kolkata, and bring 4 interns to work for one month. I still remember the day when we went to give presentation for internship purpose in Scottish church. Parth, poonam , kashif and keerti where those four students, who were extremely dedicated and hard working. It was a very educating experience to enter in such a venture.


                                      As it was a sales line it was never smooth journey. There were many moments when we got depressed and wanted to quit the job. There was huge pressures of targets and expectations from above which during Jan, Feb and mar reached its peak. Many times we were exhausted and completely drained but at that times, because of each others support we sailed through all tough times. I would really like to thank my friends for their support and advice 


                                     But as i started earlier, that this job was never a destination for us. We entered this job because we wanted to prove that we can make our own career. Luckily i got through a decent job in HSBC as a FUND ADMINISTRATOR on 12.05.2011 and have finally moved into my desired profile of " FINANCE " after many struggle, wait and extremely patience since Oct 2010 to may 2011. Finally i am into a job through which i can at least try to shape my future accordingly. I just hope with all good wishes of my friends and blessings of my elders i will make something better out of my career. I am proud because i have achieved a good job alone without any help from the people who thought we all don't deserve a better job or we cant get one. 


Now currently i am ;


 "VIJAY POPAT
HEDGE FUND ADMINISTRATOR;
HSS - A & V ASIA;
HSBC- HDPI
KOLKATA "


I hope things develop for better from now on. I wish and pray that my friends NITA & ASIF both get through a better job as fast as possible... because i know they are made for something big  in their respective careers rather than just selling INSURANCE. And i am 100% sure that in next two months they would be also writing similar memory blog and missing our struggle period in INSURANCE INDUSTRY.


GOD BLESS all my friends for their prosperous future. Before ending i would like to add that  "  "never say die ".... there are many hurdles and many people will try to stop you but fight your way and have patience because God always supports hard work and dedication.


Thanks a lot for bearing with such a long letter  


VIJAY POPAT

ULIP business down by 15% during 2010-11

NEW DELHI: Amid a row between Sebi and insurance regulator IRDA over control of unit linked products, the ULIP business declined by 15 per cent during 2010-11.

"The proportion of sale of ULIP products has certainly come down. When compared to last year, ULIP business has gone down by about 15 per cent," IRDA Chairman J Harinarayan told reporters on the sidelines of FICCI National Conference on Insurance.

ULIPs -- which are hybrid insurance products in which a portion of the investor's premium is invested in equity -- became a subject of controversy after market regulator Sebi in April last year banned private life insurance companies from issuing such schemes. Soon after, IRDA issued a order asking insurers to ignore Sebi order.

After the government directed that IRDA would have jurisdiction over ULIPs, the insurance regulator came out with new guidelines for such equity-linked products in September last year.

ULIPs, which used to be around 60 per cent of life insurers business prior to the guidelines, saw a decline as agents shifted focus to traditional products.

As per the new IRDA guidelines, the commission paid to distributors and expenses charged by insurers will no longer be front-loaded and will be distributed over the lock-in period of the schemes, which has been raised to five years from three years earlier.

Though the new rules will benefit policy holders, reduce the first-year agent commission and help in curbing rampant mis-selling, insurance firms will be required to underwrite more losses, infuse more capital and cut costs to sustain ULIP sales.

Furthermore, IRDA has fixed the floor on guaranteed returns from ULIP pension plans at 4.5 per cent, which will greatly benefit policyholders saving up for retirement.

Along with these changes, the regulator has fixed stringent minimum disclosure guidelines for insurers.

Under the new disclosure norms, agents cannot take policyholders for a ride, as they can now see the financial position of the company over the website and do not need to depend on agents, said an industry expert.

The life insurance industry has grown 8-fold in the past decade--from a total premium income of Rs 34,892 crore in 2000-01 to about Rs three trillion in 2010-11. Over Rs one lakh crore of total premium is estimated to have come from ULIPs in 2010-11.

VIJAY POPAT

GST-It must be better late than never!!

How truly it has been said. The change is the need of time, change is innovation, but it becomes arduous when it is not accepted by that people for whom it was made. Whenever any change is about to come in our country it hangs in the way cause of lack of cooperation. To change the system of Indirect taxation Government brought a new system for implementation called GST-The goods and services tax. It was heard that GST will bring a drastic revolution in Indian Indirect Taxation system but the real picture shows something else as it itself become a reason of struggle between Central and states.

Need:-

Indian entrepreneurs are loaded with a number of taxes. Almost every business transaction suffers a different tax. For services, it is service tax, for manufacture it is Excise Duty, for sale within state it is VAT, for inter-state sale it is CST, for income earned it is Income Tax, for wealth created it is wealth tax, etc. These are mere examples for the consultants, but for the businessmen, they mean a lot of compliances involving a significant number of man power and money. In order to relieve the businessman from some of the taxes, government has planned to bring a composite levy – The GST which is said to bring a tax-revolution in the country. It is said that the GST will simplify the complex tax structure of the country and will replace around 16 central and state taxes including the service tax, excise duty, VAT, etc. while maintaining a collaboration between the Centre and the State.

Benefits:-

The main beneficiaries will be the business personnel. At present, there are a no. of taxes governed by different Acts and rules. The separate records are to be kept, separate returns are to be filed, different dates are there for payment of taxes and filing of returns, etc. which require a significant amount of man power and money. However, the GST, when implemented, will replace many of the taxes and will obviously reduce the paper work, man power and money. Further, there are no. of ambiguities in certain cases which makes it difficult to ascertain as to which law is applicable. For eg. software and SIM cards are service or goods? The service tax department says it is a service while the sales tax department says it is sale of goods. The GST will resolve the issue. The Government too will be benefitted. It is anticipated that the GDP of the economy will be increased by $500 billion and exports will also increase by 15%.

Beginning of GST:-

The Thirteenth Finance Commission, as constituted by the President on November 13, 2007 to give recommendations regarding the Central-State Fiscal relations during the year 2010-15. The Commission recommended a model GST structure and also recommended a grant of Rs. 50000 crores for its implementation. The recommendations were accepted in principle and discussions were carried out between the Centre and State.

The Empowered committee of state finance ministers has released the First discussion paper on GST on 10.11.2009 and it was proposed that GST is going to be implemented on 01.04.2010 with its new developments regarding unvarying tax rates all over country, removing cascading effects of Cenvat and service tax with set off by making a chain of set-off for hierarchy of Producer/manufacturer/service provider to Retailer/End user level. For this purpose GST is to be introduced at state level. But as history repeats itself Government had faced and still facing intricacy of different opinions of states in the way of implementation of GST. It is not an easy task to combine all the provisions and demands of the states having different thoughts and opinions. When everyone was waiting to greet with GST it was recommended in Report of Task Force on GST that it will be postponed till 01.10.2010 due to oppositions raised by states which is again delayed by 01.04.2011.

In the middle:-

On oppositions made by states, Government presented a revised draft bill of GST in order to arriving at consensus with the states. In the revised bill Government has provided veto power to the Union Finance Minister relating to state subjects matters on taxation issues. Then after Finance minister had offered some concessions on major demands of states relating to simplification of tax administration and replacement of multiple levies of taxes like CST, VAT, Excise, Service tax into a single tax. Government also proposed dual rate system to be included in GST system but because of this new system states may have revenue loss in initial year of implementation of GST. For this it was cleared by the government for compensation to states for switchover to the new tax regime including special incentives to those states such as Punjab and Haryana for loss out of purchase tax. The Government also agreed to exclude crude oil, petrol, diesel and ATF from the GST structure on demand raised by states.

Present scenario:-

But as it was predicted this bill also comes in litigations between states and central. The Empowered Committee of State Finance Ministers on GST has rejected the constitutional amendment bill on 01.08.2010. The BJP-ruled states, including Gujarat, Madhya Pradesh, Chhattisgarh, Himachal Pradesh and few others had opposed the constitutional amendment saying that all powers of the states have been snatched through the constitutional amendment. Chairman of the Empowered Committee of State Finance Ministers commented on the constitutional amendment that states were against infringement on their financial autonomy and have certain reservation on the provision of draft bill for the GST council and the GST Disputes Authority hence this draft bill is not acceptable in this form to the states. However some states were in favour of this amendment.

On coming of oppositions from many states, Centre has given up on the matter of veto powers given to the Union Finance Minister. The veto power has been withdrawn from the constitutional amendment bill on GST with giving a statement that central FM had no any intention of becoming the Super Finance Minister to interfere with the State GST.

In the latest meeting of state finance ministers and centre for GST, held on 20.09.2010 many states has accepted the approach of new draft of GST bill except few mainly Gujarat and Madhya Pradesh who still have different viewpoint. In that meeting the Madhya Pradesh government given an idea of an alternative model of the GST and BJP rules states has supported to it. Also some other states have allotted one month time for consideration to make their opinion on revised bill. In the meeting the states has stressed on retention of their rights and wished some more changes in the proposed Act.

Next what?

Recently, while addressing an interactive session organized by the Merchants' Chamber of Commerce at Kolkata, the chairman of empowered Committee – Mr. Asim Dasgupta, who is also the finance minister of West Bengal; indicated that the ongoing conflicts between the states regarding GST are about to resolve. The matter will be on board once again on October 30, 2010; when the empowered Committee will meet again. The points of dispute – the Dispute settlement mechanism of GST and GST council constitution will be discussed therein.

Before Leaving:-

Government has to obtain categorical support of all the sates since two-third majority is required for ratification of GST. But some states ruled by BJP and other opposite parties are not happy on implementation of GST. So it becomes a necessity for both Centre and States to have consensus on GST very soon for bringing the GST in actuality in 2011. But after coming of statement of Revenue Secretary in this august that introduction of GST will miss the deadline of April, 2011 it becomes unambiguous that the matter of GST becomes political issue rather than an economical or legal one. It is ever called that “Better late than never” so we can hope that the delay in coming of GST will bring a fruitful result with it’s implication. Let we hope that GST bill will be presented in winter session and political differences will shut down.

************

VIJAY POPAT

SIMPLE TRICKS FOR PREPARING C.A. EXAMS

NOTE:- This info can be applied to any competitive examinations.  

Many  a times student ask whether 3 or 4 months will be sufficient enough for the preparation of examination like CA final, not only this ,they will put certain conditions  like they are average or dull student ,now will the time be sufficient for them to complete the syllabus. Someone will say we are smart worker , some one will say we are hard worker, now tell how much time will be sufficient for the exam preparation so that we can pass it with one go. These are the general queries come to ones mind when some one is facing the professional examination.

The solution to all the above queries will be given with the help of an algebraic equation.

Suppose for passing CA final a minimum of 10000 points is required, then this 10000 points can be achieved by multiplying two things i.e. 1.effective hours given for study and 2. points generated per hour

We can write the Points Required in the form of equation as:

Points Required(P) = effective hours given for study(H)   X  points generated per hour(G)

Assumptions behind the equation:

The views and thoughts behind the exams and the knowledge required is expressed with the help of this equation and points required is just a resemblance to the thought.

The Points Required(P) is complete in itself and it covers  all the factors necessary for clearing the examination like smart work, hard work etc

Effective hours given for study (H)  is the time when you feel that you have actually studied or learned something while studying

From the above equation following facts comes into picture

1.As we know ,points required is a constant figure ,hence if someone can generate higher points per hour ,then he/she has to contribute less effective hours of study compared to others and vice-versa

For E.g.: If “A” can generate 10 points per hour then he has to give only 10000/10 =1000 hours of effective studies. On the contrary if “B” can generate only  5 points per hour then he has to give 10000/5= 2000 hours of effective studies

2. We can say that, one   who feel him/her self more knowledgeable and Intelligent compared to others will have to give less effort compared to those who feels themselves as ordinary and average student

3. CA Curriculum has provided sufficient time for studies i.e. 2 to 3 complete years for the preparation of final exams which is sufficient from the exam coverage point of view. But still under some circumstances one can say that the time is not sufficient for the preparation

For e.g. if ”C”  can generate only 1 point per hour then he has to give 10000/1= 10000 hours of effective studies. If he manages to give on an average 8 hours of effective studies per day  for all the time period of his studies then he has give 10000/8=1250 days i.e. 1250/30=41.67 months i.e.3.47 years which is exceeding 3 years of time. Hence time became the limitation or hurdle in this situation. So in that sense can we say that this course is not meant for “C”. No, “C” can also  finish this course and its very much possible, and he can finish the same, very much within time. Now we will see how is that possible.

“C” will not take the time up to 3.47 years rather ”C” will try to generate more points per hour. Is increasing the points generation per hour possible? Yes it is very much possible. The below points are very much important for those  who feel  that they are below or average student:

1.  Do Yoga and Meditation. Concentration to a particular thing or a particular number or symbol with closed eyes increases the efficiency and thinking power

2. Solve Quiz, Sudoku etc, on a regular basis. By playing with mathematical numbers , the brain becomes sharp and intelligent, and the analytical power of the person grows.

The above two points will not give the result after one or two days but definitely in the long run this will work a lot. And the points generating power per hour can increased to 3 or 4 from 1 within a period of six  to eight months  if one will follow it properly with complete dedication.

Thus now “C” will  require only 3.47/3 i.e.  1.16 years of complete studies with 8 hours a day, which is much lower than the maximum time given  for preparation by CA curriculum

Hope the above points will be very much helpful for those students who feel that CA is not there cup of tea.

Now one more question can be raised on this equation, whether it covers the luck factor also?

My personal opinion is that, there is nothing called luck as such, if I will tell you through my example then the points required to  pass CA  was 10000 ,which was made by covering all the aspects, that  means a minimum prescribed level of knowledge is what expected by the Course Curriculum and if that level of knowledge is not there with the candidate then he/she  is not supposed to pass. And if the same happens in the examination we call it as the luck. But according to me he fails due to one of the two reasons: 1.Either his/her level of knowledge was not matching with ,what was required by the  course curriculum or 2.Though his knowledge was enough but he/she was lacking  with the presentation skills. But I will say “Luck required or not” is a very subjective thing and will vary from person to person.

If I will insert luck factor  into the equation then the new equation will look likes

Points Required(P) = effective hrs given for study(H ) X points generated per hr(G) X Luck Factor(L)

In   my previous equation  luck factor was by default 1,as L was 1 so it was not necessary to show L as the part of equation, as anything multiplied by 1 will remain that only.

Now here in the new equation , we will see how it  works:

Suppose  ”D” says he always have negative luck when he appears for  the exam. He says his luck is only 50% of others luck, means assuming other things same his chances of passing examination is half compared to others chances of passing the exams. And “D” also says that he can generate 5 points per hour then we have only G is missing in the equation:

P = H X G X  L  i.e. 10000= 5 X G X .5 i.e. G=10000/(5 x .5) i.e. G = 4000 hours.

Without considering the Luck Factor D was supposed to give only 2000 hours for studies but now as his luck is negative then he has to give 4000 hours. From this example one good point comes into picture:

1.  The luck factor can be compensated with the efficient and effective work. As the P is constant hence lower will be the L higher will be the G required

Conclusion:

This equation was there just to make you aware of your talent and potential. Nothing is impossible, and the success is achievable under worst to worst scenario.

The points generation per hour (G) is a subjective and relative term, and only one can understand his or her potential and generation capacity. After reading this article if you are going to ask me “how much points will I be able to generate per hour ,given the condition that I am average  or dull student”, then I will not be able to answer  your question, it is only you who can give answer to this question.

VIJAY POPAT

Online or offline - which tax filing process should you follow

In the digital age, its now possible for individuals to e-file their tax returns online. However, the offline option of physical filing continues to be popular. Over time, it is expected that more people will try out e-filing. Here we do a quick review of the respective processes involved in online and offline filing of tax returns.

Online – e-filing of tax returns

If you want to file your returns electronically, you have 2 options:

Option 1 – You can use online tax filing portals for preparation and filing of your tax return

Option 2 – You can e-file your tax return on Income Tax Department’s website after preparing it on your own using the software utility provided on the department’s site.

In each of the above options, your return will be electronically sent to the tax department. However, you still need to sign your tax return. If you have a digital signature, you can use this to electronically sign your return.

However, if you don’t have a digital signature, you will need to print out your ITR-V form. An ITR-V is an acknowledgement generated on filing your return. Print this document and sign it. Then send this hard copy of your ITR-V to the Central Processing Cell of Income Tax Department in Bengaluru within 120 days through ordinary post.

Offline – physical filing of tax returns

There is no danger or bias in filing online returns. However, if you are still old fashioned and slow to join the digital age, then you can choose to file your returns in physical form.

For physical filing you will have to prepare your tax return using the relevant form either on your own or through the help of a Chartered Accountant. Once your return is ready and signed by you, you will need to submit this to the local Income Tax Office.

Some things to remember

Here are some things for you to keep in mind:

• Whether it is electronic filing or physical filing, under the new procedure, individuals do not have to attach any documents or enclosures with the return of income

• The medium of filing has no bearing on whether the tax authorities will scrutinize your tax return and tax affairs. It makes no difference to the tax department whether you e-file or file physically

• If you are due a refund, you are not going to get it any faster if you file in one way or another.

VIJAY  POPAT

TAX SLAB

 

Know the new income tax slabs

The new income tax slabs for this financial year would help the common man save up to approximately Rs 50,000 per annum.

Additionally, Budget 2010 also offered an annual deduction of Rs 20,000 towards an investment in long-term infrastructure bonds, on top of whatever 80C deduction a taxpayer might have taken.

If you earn up to Rs 3 lakhs per annum, then there will be no change in your tax liability. If you earn between Rs 3 lakhs to Rs 5 lakhs, you can now save up to Rs 20,000 per annum. And, if you earn between Rs 5 lakhs to Rs 8 lakhs, you can now save between Rs 20,000 to Rs 50,000.

The above amounts are substantial enough and are expected to help promote higher consumption which will further boost our economy. Whether these savings are used to buy big-ticket items such as electronics or white goods, or spent towards daily consumption, or used for investing towards meeting financial goals, the common man will find many ways to take advantage of this tax break.

The following are the new tax slabs according to your gender and age that might be applicable to you.

For Men

Up to Rs 1,60,000 - Nil

From Rs 1,60,001 to Rs 5,00,000 - 10%

From Rs 5,00,001 to Rs 8,00,000 - 20%

Above Rs 8,00,001 - 30%

For Women

Up to Rs 1,90,000 - Nil

From Rs 1,90,001 to Rs 5,00,000 - 10%

From Rs 5,00,001 to Rs 8,00,000 - 20%

Above Rs 8,00,001 - 30%

For Senior Citizens

Up to Rs 2,40,000 - Nil

From Rs 2,40,001 to Rs 5,00,000 - 10%

From Rs 5,00,001 to Rs 8,00,000 - 20%

Above Rs 8,00,001 - 30%

VIJAY POPAT

RISK AND RETURN

What investors must understand about risk and reward

When it comes to investing your money, have the following thoughts ever come to your mind: "I want high returns but at low risk" or "I want to get 30% annualized returns, but must keep my principal safe". If so, then you are setting yourself up for disappointment.

Don’t blame the financial markets or your luck or your investment advisor. Rather take some time to understand that earning a high return at low risk is incompatible. If you want to create wealth for yourself and your family, you need to take some calculated risks and can’t be totally risk averse.

Here we will help you understand the trade-off between risk and reward, and also help you understand where on the risk-return spectrum some popular investment options fall.

The trade-off between risk and reward

Many a wise person has shared their wisdom to the effect that “if you want to achieve lofty goals, you have to take some risk.” Usually, the goal is compelling and rewarding enough for us to willingly take on the risk. However, we think of ways of mitigating the risk through some kind of damage control so that we don’t end up suffering if the risks were to materialize.

For instance, lets say our team is batting second in a one-day cricket match where the opponents have set us a very demanding target of scoring 400 runs in our allotted overs. If our team just scores singles and doubles, it might be safe, but we will fall dramatically short of achieving our target.

By taking no risk, we might conserve wickets, but we are almost sure to lose. To achieve this lofty goal of scoring 400 runs, our team will have to take risks. We will have to swing for the fences. Only then can we have some hope of reaching our target. In summary, scoring 400 runs (or earning a high return) while taking no risks is going to be almost impossible.

The same is true for investing. Earning a high return but while taking on very low risk is not possible. It’s a balance that even world-class investors struggle to achieve. Investment history has shown that you just cannot have it both ways - you generally get high returns only when you take higher than usual risk.

Take calculated risks – reward must be compelling

Exposing oneself to risk is not something one should do blindly. It must be done in the context of what the expected pay-off might be. If the reward is compelling enough, then it probably makes sense to take on the risk. Otherwise, it is not worth it.

Let’s take an example from everyday life. Wearing a seatbelt while driving is compulsory. Yet, many of us choose to drive without fastening our seatbelt. This exposes us to numerous risks. However, taking on these kind of risks has very little upside or payoff, but clearly disastrous consequences if the worst were to happen. This kind of a risk, which has no upside, is not worth taking.

Contrast this with the batsman chasing 400 runs who tries to hit every other ball to the boundary, with a degree of power and placement. Sure, there is a risk of getting caught but this risk is probably one that is worth taking because the payoff of scoring a six and chasing down the target is rewarding enough.

The big takeaway here for all of us here is that risks should only be taken when there is an upside and the expected payoff is rewarding enough. This is a lesson we must remember when investing our money.

Risk across the investment spectrum

Let’s take a look at common investment options and their risk reward trade-offs. The following will help illustrate how we as investors expect higher returns as the risk associated with the investment increases.

Let’s say I have Rs. 10,000 to invest into a fixed income instrument, an instrument that will give me a fixed return that is pre-set at the time of making the investment. I am considering 3 options: investing in a fixed income security issued by the government or a government backed entity, investing in an FD issued by a bank, or investing in an FD issued by a company.

The government security will pay the least amount of return (the reward) because it is least risky. It is backed by the government, and all things being equal the government ought to be a safe party to loan money to.

The bank FD will pay a slightly higher return because the government guarantees only part of the deposit so there is the risk of the bank failing, even if it is a very small risk. However, the company FD will pay the highest return because the risk perceived in lending to the company is the highest, so we expect a slightly higher reward for it.

What we are trying to demonstrate is that as the riskiness of the investment increases, so does our expectation of return. As a corollary, if we set out to earn a high return, please recognize that this will come at the cost of taking on a higher risk.

As one moves from holding cash in a bank savings account that earns only 3.5% return towards equities that are expected to earn up to 12% in the long-term, the riskiness of these different types of investments increases.

No pain, no gain

For those who frequently go to gyms, the idiom “no pain, no gain” is probably a familiar one. In the investment world as well, if we want gains, it’s going to be possible only when one takes some risks. Almost every investment option involves taking on some risks. Taking risks, albeit in a calculated manner, is something that is advisable, depending upon one’s personal situation.

Just like not every one has the capacity to lift weights of up to 40 kilos in the gym, not every one has the capacity to take on high risks. You must take on risks according to what your risk appetite allows you to do, and what you feel you comfortable about.

So next time you are looking to invest money, do keep in mind that there will be “no gain without pain”. Be realistic and don’t expect to get high returns unless you take on some risk.

VIJAY POPAT
www.vijaypopat.blogspot.com