Plan your finances

"Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give."

By,William A. Ward

Banks -All set to grap the open opportuinity with Nano in tune

Banks are charging a differential rate for booking finance for the Nano with interest rates on booking finance being higher than auto loan rates for the car. The Nano, the eagerly-awaited Rs 1-lakh car from Tata Motors has become available for booking from March 23.

Bank of India — the latest lender to announce a package for funding the Nano — has already decided on booking finance rates. BoI’s normal auto loan rates, that become applicable once the car is hypothecated to the bank and delivered, would be around 10-11%. However, at the booking stage, ie, till the delivery of the vehicle, the bank will charge 12-12.5% interest.

Private banks price their loans in the range of 11.75-13% for financing of new cars.

State Bank of India and Punjab National Bank have already announced a tie-up with Tata Motors. Earlier, SBI had announced that it was freezing interest rates on loans for purchase of all new cars at 10% for the first year. PNB said it would charge between 10.50% and 11% for the Nano — 0.5% lower than its standard rates.

Many bankers, largely from the public sector, feel that the car has the capacity to open up vast new markets as it is targeted at people who never owned a car before. Since the focus is on affordability, they felt that cheaper loans will be more effective.

How Risk Free Is The Risk-Free Rate Of Return?

The risk-free rate of return is one of the most basic components of modern finance and many of its most famous theories. The capital asset pricing model (CAPM), modern portfolio theory (MPT) and the Black-Scholes model all use the risk-free rate as the primary component from which other valuations are derived. The risk-free asset only applies in theory, but its actual safety rarely comes into question until events fall far beyond the normal daily volatile markets.

An article by Michael Schmidt looks at the risk-free security in theory and in reality (as a government security), evaluating how truly risk free it is. The model assumes that investors are risk averse and will expect a certain rate of return for excess risk extending from the intercept, which is the risk-free rate of return. Find details...

MFs slowly emerging from FII dominance

If FII selling is blamed for the carnage in the last one year, increased buying by domestic mutual fund houses has seen the Indian equity market bounce back recently. Between March 12 and 23, mutual fund houses net bought equities worth Rs 1319 crore against Rs 1093 crore by foreign institutional investors. In the same period, the Sensex has risen to 9424 from 8343.

However, the MFs may be trying to shore up their balance sheet for year end consideration, and so the increased buying. This is also because they had been sitting on cash for too long. But does this suggest that MFs are gaining prominence in driving the indices? Domestic institutional investors have already started showing their dominance.

Given the expansion of mutual fund industry, domestic fund houses can play a vital role in driving the market in the next five years, experts feel. For the month of February, the AUM for mutual fund industry stood at Rs 5,00,973 crore.

Source:ET

What's your habit?

"It's not your salary that makes you rich, it's your spending habits. "

By, Charles A. Jaffe

Find out the most trustworthy Indian company

Ratan Tata’s Tata Group is the most trustworthy business house in India.This was found in a poll conducted among domestic investors. The trustworthiness is for financial reporting. This survey is in line with the previous survey conducted by Mint. Only difference is the Tata group companies were listed separately. In this case they were clubbed together .Because, in the group companies the DNA is already set. There won’t be much of a difference between Tata Chemicals and TCS in the way they operate.
10 Most trustworthy companies in India :

• Tata group
• Infosys
• HDFC Group
• L&T
• Aditya Birla Group
• Bharti Airtel
• Sundaram/TVS Group
• ICICI Bank
• Mukesh Ambani Group
• Anil Ambani group

However, the poll found that many companies may have resorted to window dressing their accounts, but on a smaller scale, others were of the opinion that the financial statements presented were of quality and are not necessarily tainted because of Satyam fiasco. (source) Satyam scam has not given one but two phrases so far. First one is the Hyderabadi discount and now window dressing.

PS : Hyderabadi discount is the discount that should be given by Hyderabad based companies to factor in the cooking. Read this ..

What best should be done

Mr.Jhunjhunwala- the Pied Piper of Indian bourses

Rakesh Jhunjhunwala is a Chartered Accountant by qualification but an investor / trader by profession. He is one of the most famous and respected equity investors in India and manages his own portfolio as a partner in his asset management firm, Rare Enterprises. He is tagged by the media as 'India's Warren Buffet' .For a man who purchased Tata Tea for Rs 5000 when he was only fifteen years old, Rakesh Jhunjhunwala has a total networth of ap-proximately Rs 6000 crore along with his wife Rekha Jhunjhunwala.

Mr Jhunjhunwala is a canny stock picker for long term investment and reputed for his eye on macroeconomics. Much like Mr Warren Buffet, he buys into the business model of a company and for judging the longevity and growth potential, he gives top priority to 'competitive ability', 'scalability' and 'management quality' of the enterprise. According to Mr Jhunjhunwala, believing in the vision and the beliefs of the entrepreneur and validating the risks that may not be perceived by the entrepreneur are the key success factors for an investor. The typical traits to look for while identifying potential multi-baggers are - low institutional holding, under-researched and general pessimism about the stock.

Mr Jhunjhunwala has managed to identify numerous multi-baggers in the past decade, notable being Praj Industries, Crisil, Titan, Nagarjuna and PSUs like BEML and Bharat Electronics, among others. He says -A good time to sell a stock is not based on any 'price' targets, but when the 'earnings' expectations have peaked or the business model has peaked or the valuations appear ridiculously unreasonable.

Look out for “What is the Big Man bullish on?” at http://www.theequitydesk.com/rakesh_jhunjhunwala.asp

The Great Depression (1929)

When: October 21, 24 and 29, 1929

Where: USA

The amount the market declined from peak to bottom: A string of terrible days led to a more than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs.

Synopsis: Despite the Florida crash, Americans were as bullish as ever. The stock market was guaranteed to make everyone rich as the first world war had been won, and industrialization was resulting in previously-unimaginable luxuries.

Investment bankers, brokers, traders, and sometimes owners banded together to manipulate stock prices and get out with gains. They did this by subtly acquiring large chunks of stock between them and trading them between each other for slightly more each time. When the public noticed the progression of price on the ticker tape, everyone would buy the stock. So, the market manipulators would then sell off their overpriced shares for a healthy profit. On and on the cycle went as uneducated investors turned a profit by selling the manipulated, over-priced shares to someone who wanted to have a rising stock.

During the craze before the Great Depression (details) a number of academics were predicting a crash if things didn't “calm the hell down.” The twelve-year worldwide depression came and ended only with the declaration of war. This stands as the worst financial blow to the USA ever. The crash itself, though large in its own right, was nothing compared to the ensuing graveyard market and devastating depression.

(Source:Wikipedia & Investopedia)

On Deflation

"The basic prescription for preventing deflation is straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place."

"The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand.. a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers."

By Ben Bernanke

Pull yourself out of the confusion

With inflation slipping down to 0.44% which is a scenario of negative inflation or deflation, the investors are sweating and pulling their pants up inorder to foresee the effects of the same on the economic activities.Inflation drops because of increase in productivity but this is not the situation now.It is because of the fall in demand that prices are falling.But yes if deflation grounds in the economy, the repercussions will be low demand, lower production and weak economic growth.These prevailing conditions will discourage investments.The real interest rate difference between nominal interest rate and inflation becomes very high, making funds costlier. As demand goes down, capacity utilization of manufacturing units declines. This discourages investment in capacity expansion.

With a strong hit, the performances of the companies are surely going to be worsen so the investors need to pre plan while making investment decisions in the deflationary environment.The rule of the thumb suggest that invest in those companies whose products or services are not much affected by fall in demand. So, companies operating in health care, telecommunication and utilities like electricity distribution could be good bet to invest. Services of these companies will remain in demand even if the economy slows down.

Companies operating in sectors like snacks and beverages, health care, utilities and telecommunications can be included in the portfolio as the decline in prices lead to increase in demand in such sectors.Companies with strong balance sheets, which do not have much debt on their books, can also be considered for investment.One has to be cautious and avoid investing in companies that operate in capital goods as the performance of such firms is definitely going to dip further.The real estate companies should also be avoided. In deflation, the general perception is that the prices will further fall resulting in postponement in the purchasing decisions.This will lead to a cash starved situation for the real estate.

Read the report by ET here..

Are toxic assets really toxic?

Accountants record. They don’t analyze. There isn’t a right number and a wrong number. There are just useful numbers and useless numbers. In her book Dear Mr. Buffett, Janet Tavakoli quotes an email from Warren Buffett:

“I’ve looked at the prospectuses, and they are not easy to read. If you want to understand the deal you’d have to read around 750,000 pages of documents.”

A lot of people make the argument that these assets are not toxic at some prices. Theoretically, that’s true. If there’s value in an asset – at some deep discount to par – a high-risk asset can become a low-risk investment.These toxic assets are “meta-bets”. A low price is little help if there is inadequate cash flow or collateral built into the asset. A low price can’t fix an inherent flaw in an asset. If the cash flow generating potential of the asset is almost non-existent, the asset is essentially worthless.

A lot of these toxic assets were similarly structured. They were built to fail.A bad house is a good value at some price. A risky mortgage is a good value at some price. But “meta-bets” are trickier. They can suffer from the same sort of problem Buffett described with the very worst junk bonds – you can actually take a good asset, with good cash flows and then put so much debt on top of it that the only way you can fix the problem is by restructuring the debt. In such cases, a low price is no longer enough. The terms are the problem.

Can debt be a solution to the crdeit crisis?

A nagging question which is haunting the government efforts to revive a dormant financial system especially in US: Can a credit crisis which was the cause of economy slowdown be solved with more debt? The economists have firmly answered a qualified NO to the situation. According to them, it will further worsen the situation and add to the deepening depression, nothing more than this. Then what should be the next move by the Govt. to recover the situation. The government should do its best to restore bank lending to prevent an even worse economic outcome.

U.S. Treasury Secretary Timothy Geithner was only the latest to proclaim what has now become an official mantra. Without credit, which he and others call the "lifeblood" of the economy, you can kiss recovery hopes goodbye. Basically the US economic system is critically dependent on the free flow of credit.

A huge part of the Treasury's economic rescue plan is based on reviving securitization. Experts widely agree that the public sector must enlarge its role during a time of crisis to ensure that the underlying momentum of the economy does not screech to an abrupt halt."In truth, not all economies run on credit. In a legitimate economy, it is not credit that fuels spending and investment, but simply income and savings," said Peter Schiff, president of Euro Pacific Capital in Darien, Connecticut. Prudent lending is a good thing. If creditors have cut back, it is because the risks associated with an environment of turbulence dictate that they should.

Sovereign Wealth Funds - Friend Or Foe?

The relative size of each circle represents the size of the fund; bigger circles for larger assets. As you can see, most of the large circles are in the upper-left corner, where transparency is lower than average and strategic focus is higher than average. It should be the goal of current and future monetary authorities to encourage sovereign wealth funds to open their books up more and promote some level of transparency.

Sovereign wealth funds create headlines as cash-rich foreign nations look to make larger and more focused investments in the modern economies of the United States and Europe. It is becoming increasingly important to understand these funds because of the increasing amount of money they hold and the power and influence this can wield.

The top five largest SWF by assets (data as of February 2008)

• Abu Dhabi Investment Authority (UAE) - $875 billion
• Norway Government Pension Fund (Global) - $380 billion
• Government of Singapore Investment Corporation - $330 billion
• Saudi Arabia 1 (no official fund name) - $300 billion
• State Administration of Foreign Exchange (China) - $300 billion

Read on to familiarize yourself with one of the largest and fastest-growing pools of capital in the world.

Rs 100 cr wiping out in every 5mins from Dalal street

ET reports:After a whopping loss of over Rs 40,00,000 crore in 2008, the stock market is continuing its free-fall and investors have lost an average Rs 100 crore in every five minutes of trade in first two months of 2009. Cumulatively, the total investors' wealth has got eroded by about Rs 2,82,000 crore so far this year. However, the meltdown has been less severe so far this year, as compared to 2008 when an average of Rs 100 crore was wiped off in just two minutes of trade, as per an analysis of stock market losses during 2008 and first two months of 2009.

Taking into account a trading session of five hours and 35 minutes every day (markets open at 0955 hours and close at 1530 hours), an average of Rs 20 crore has been lost in every minute of trade so far this year. This average was, however, more than double at Rs 50 crore in every minuter of trade in 2008.

However, if we take into account the price-earnings ratio, the Indian market seems to have become a bit more expensive in the first two months of 2009. It had become cheaper by more than half during 2008 by this measure. The price-earnings ratio of the Sensex currently stands at 12.82, which is higher than 12.16 at the beginning of the year. However, it had fallen sharply during 2008 from 26.94 at the end of the previous year.

RIL-RPL merger- India's 10th largest M&A deal ever

The all-share merger deal valued at about Rs 8,500 crore between the two Mukesh Ambani group firms, RIL and RPL, has become probably the 10th-biggest ever for the country and the first billion-dollar deal this year.The shareholders will get one RIL share for every 16 RPL shares - which will result into issuance of 6.92 crore new shares by RIL. This is the only billion-dollar M&A deal announced by an Indian entity so far this year. Prior to this, the biggest M&A deal for the year was Quippo Telecom's 49 per cent purchase in Tata Tele's telecom tower arm for 533 milllion dollar.

The biggest-ever deal involving an Indian company so far has been Tata Steel's mega takeover of European steel major Corus for $12.2 billion, followed by British telecom giant Vodafone's purchase of controlling stake in Indian mobile service provider Hutch Essar for about $10 billion. So far, M&A deals worth about four billion dollars are estimated to have been announced in 2009 so far, while in 2008 there were deals worth over 30 billion dollars.