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Book flights early and save a lot of money. While many of the budget airlines will fly to a regional airport, it may actually cost less to fly into an airport closer to a city center (If you are going on a city break) as you won’t have to pay for a taxi to your accommodation.
posted by eshwar @ 11:45 pm
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Only buy home appliances that have been certified as energy efficient, they may cost more to start with but you’ll save over time on running costs.
posted by eshwar @ 11:44 pm
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Don’t get too drawn into the fashion-frenzy. You’ll only end up buying an outfit, wearing it once and then dumping it because fashion has moved on. I suggest we move on and have the balls to dress whatever way we want without some French fashionista telling us what to wear.
posted by eshwar @ 11:42 pm
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You don’t need that extra coffee. In fact why bother buying a coffee from Starbucks when you can make your own at the office or home just as easily and for an awful lot less. When you think about it, that one tall latte costs about as much as a full jar of your favorite roast blend.
posted by eshwar @ 11:41 pm
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As a general rule of thumb, try and do as much of your shopping online as possible. You’ll get better prices in general and you won’t have to pay for fuel and parking in order to get to the mall.
posted by eshwar @ 11:39 pm
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The best tip for insurance in general is to be careful. The fewer claims you make, the less you will have to pay out.
posted by eshwar @ 11:38 pm
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Pay for your car in cash, up front. Let’s say you get a car loan for $15,000 at a rate of 6.80% over 10 years. You end up paying back $20,714.49, a full $5,714.49 in interest alone.
posted by eshwar @ 11:36 pm
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Don’t pay interest, get a card that offers an interest free balance transfer. As soon as the interest free period expires on the credit card, find another one and move your balance. Just watch out for the fee they charge to transfer the balance, if you have a significant balance on your credit card the charge could be quite significant.
posted by eshwar @ 11:35 pm
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The government plans to raise taxes from cross-border direct investment flows, advisor to finance minister Parthasarathi Shome indicated here on Tuesday.
Such a move means there could be an added cost to not just pure foreign direct investment (FDI), but, technically, also to mergers & acquisitions - both outbound and inbound.
The thinking in North Block is that a cost-benefit assessment weighing the effects of FDI needs to be carried out. This is because FDI yields a stream of benefits such as host country tax revenue from increased capital stock and increased employment, while at the same time it has a stream of costs such as revenue foregone from tax incentives.
As competition among countries for attracting foreign direct investment (FDI) hots up and Indian corporates go global in their acquisition spree, the government is faced with the task of ensuring that a fair share of revenue comes to the exchequer without overburdening the taxpayer, Shome told a Ficci conference on “Globalising economies: challenges to tax system”.
Shome said globalisation has led to increased opportunities for cross-border investments. This has implied unilateral scaling back of corporate rates across globalised world.
“Ultimately, we have to look at whether we are able to expand the tax base and the government is continuing its effort to expand the base,” he said.
Jeffrey Owens, the director of the OECD Centre on Tax Policy & Administration, said a major challenge before Indian corporate would be to see how Indian multinationals overseas are taxed.
posted by eshwar @ 9:10 pm
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It appears that the textile space is all set to rise to the occasion. Not only has the free-fall in prices halted, the domestic market may also see a price rise sooner-than-expected. The sector is also awaiting investments worth over Rs 100 crore towards expansion, mostly organic in nature, by next year. Of the companies that have plans to expand capacities, we have The Welspun Group, Banswara Syntex, Gujarat Ambuja Exports etc.
Moneycontrol has picked up a universe of 38 textile companies that have market capitalization of Rs 100 crore and above. And Arrow Webtex (a manufacturer of elastic and non-elastic tapes and woven and printed lables) have emerged as a company that have given maximum return in the one year period between October 28, 2005 and October 30, 2006. The stock with a market cap of over Rs 188 crore has given a return of 598% in one year.
Market capitalization wise, Aditya Birla Nuvo emerges as the biggest company clocking in a return of over 57% in one year. Banswara Syntex, which does not feature in out list of universe owing to its market cap of Rs 94 crore, deserves a mention nevertheless. The stock has given a return of 61% in one year and look promising on the back of its expansion plans.
According to a report by Edelweiss Research, The Welspun Group, Banswara Syntex, Gujarat Ambuja and Fab India have investment plans of Rs 3 billion, Rs 2.6 billion, Rs 3.3 billion and Rs 2.8 billion respectively in the near future.
Interestingly, both Welspun India (the terry towel company) and Welspun Syntex (the Synthetic Yarns company) have given negative returns of 16% and 7% respectively in the one year period under consideration.
posted by eshwar @ 9:08 pm
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There has been a lot of interest over the last few days in the banking space. At current valuations in this market scenario, should traders hold, sell or buy into this space.
Investment advisor PN Vijay and technical analyst Deepak Mohoni discuss their favourites in the banking space.
Vijay is positive about ICICI Bank. He says, "There is now a clear indication that they are going to unlock value. Kamath's strategy is very entrepreneurial; he builds businesses and then unlocks them. So ICICI Bank, amongst the biggies, looks interesting."
Apart from that, he says that there is a lot of interest in Centurion Bank. And he also feels that the DCB IPO will sell.
Deepak Mohoni feels that it is a bit late to buy UTI Bank right now. "UTI Bank had started to move about 4-5 days back. So the breakout really, if you want to call it that, has already happened. So it's little late to get into it now."
However, he says that UTI is worth a look after the dip. He says that Kotak is still in a pretty decent uptrend.
Moving on, neither Vijay nor Mohoni are too upbeat on banks as a sector.
Vijay advises, "When you are getting into the private bank stocks, you are already buying a bit of risk into that sector. If I see a pretty nice profit out there, I would book it."
Meanwhile Mohoni informs, "Ultimately, you have got to evaluate the move by seeing what sort of percentage gains the stock makes rather than whether it set a new high or not. And banks are not up there with the leaders."
posted by eshwar @ 9:05 pm
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Generally investors invest in equity for the potential capital gain. The increase in the value of their investments is the main motivator behind the additional risk they undertake by choosing to invest in equity rather than the less risky fixed income options.
However, apart from capital gains, equity instruments can confer certain other benefits to investors such as bonuses, stock splits and share buybacks. In this piece we examine the significance of these to investors and the tax consequences of each such corporate action.
Bonus shares
Bonus shares are free additional shares that a company may decide to issue to its existing shareholders in a certain proportion to the current holding. So, if a company comes out with a 1:1 bonus issue, an investor gets 1 additional share for every share he holds in the company.
A company has a certain amount of reserves which it has built up over the years by retaining a proportion of the profit and not giving it out as a dividend. While issuing bonus shares, the company converts a part of these reserves into shares.
Following a bonus issue, though the number of shares increases, the proportional ownership of shareholders does not change. Also, after the bonus issue, the cum-bonus share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the share holder.
However, more often that not a bonus is perceived as a strong signal by the company that the present good run is likely to continue. The management of the company would not have distributed these shares if it was not confident of distributing dividends on all the shares in the days to come.
As far as the tax implications are concerned, since no money is paid to acquire the bonus shares, these have to be valued at nil cost while calculating capital gains. The originally acquired shares will continue to be valued at the price paid at the time of acquisition. An incidental benefit is that since the market price of the original shares falls on account of the bonus, there may arise an opportunity to book a notional loss on the original shares.
Stock splits
Stock splits are a relatively new phenomenon in the Indian context. It is important that investors understand the reasons companies may split their shares and how a stock split is different from a bonus issue.
In a stock split, the capital of the company remains the same whereas, in a bonus issue, the capital increases and the reserves fall. However, in both actions (a stock split and a bonus) the net worth of the company remains unaffected.
A typical example is a 2-for-1 stock split. Say, a company announces a 2-for-1 stock split in one month. That means that one month from that date, the company’s shares will start trading at half the price from the previous day.
Consequently you will own twice the number of shares that you originally owned and the company will have twice the number of shares outstanding. Consider the following example.
If an investor held 100 shares of company X valued at Rs 3,000 each (a total value of Rs 3,00,000). After a 2-for-1 stock split, he will hold 200 shares of Rs 1,500 each. The total value, however, remains the same.
The question that arises is: If there is no difference to the wealth of the investor, why does a company announce a stock split. Well, the primary reason is to infuse additional liquidity into the shares by making them more affordable. Here it has to be reiterated that the shares only appear to be cheaper, it makes no difference whether you buy one share for Rs 3,000 or two for Rs 1,500 each.
As far as the tax implications for stock splits are concerned, there aren’t any. A stock split, like a bonus issue, is tax neutral. However, when the shares are sold, the capital gains tax implications are different. In case of a stock split, the original cost of the shares also has to be reduced. For instance, in the above example if the cost of the 100 shares at Rs 150 per share was Rs 1,50,000, after the split the cost of 200 shares would be reduced to Rs 75 per share, thereby keeping the total cost constant at Rs 1,50,000.
Share buybacks
Share buybacks are also a comparatively new phenomenon. Reliance, Siemens and Infosys are examples of companies that have bought back their shares.
A buyback is a financial tool in the hands of a corporate that affords flexibility in the capital structure. It allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Companies buyback when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need. Stock buybacks also prevent dilution of earnings. In other words, a buyback programme enhances the earnings per share, or conversely, it can prevent an EPS dilution that may be caused by exercises of stock option grants etc. And, a buyback also serves as a substitute for dividend payments.
This brings us to the crucial issue of tax implications of a buyback. An important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If it is indeed considered to be dividend, the same will not be taxable in the hands of the investors. Also, to what extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium paid over the face value?
The case of Anarkali Sarabhai v CIT (1997) 90Taxman509 (SC) had laid down the principle that redemption of shares by the company which issued the shares (in this case preference shares) is tantamount to sale of shares by the shareholders to the company. The Finance Act 1999 has reiterated this stand to remove any confusion. Now, where any company purchases its own shares, then, the difference between the consideration received by the shareholder and the cost of acquisition will be deemed to be capital gains. Further, this will not be treated as dividend since the definition of dividend does not include payments made by company on purchase of its own shares.
posted by eshwar @ 9:03 pm
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One of the sacred cows of modern day investing is the idea of buying, and holding, and holding! Younger investors for example, are advised to invest aggressively in equities and then hold for the next 20, or 30 years. The thinking behind this is that such investors have more time over their lifetimes to recover from dips in the market. In other words, given enough time, good returns will eventually overpower bad returns. Does this always have to be true?
The answer, actually, depends on what you mean by risk. It is, for example, true that the possibility of suffering a loss on your investments actually decreases with time. In this sense, risk does indeed decrease with time. On the other hand, time also increases the possibility that you could be exposed to truly horrendous turns in the market. In the long run, you would be exposed to more outcomes which could wipe out your entire investment corpus. In this sense, risk actually increases with time.
Examining daily returns on the Bombay Stock Exchange since 1997, we see that returns have averaged about 11.5% a year, with a standard deviation of 25.6%. The standard deviation is a measure of how much your return could vary from the mean return.
So, if on average you expected to get back Rs 111.5 for every Rs 100 you invested in the stock market in a year, because the standard deviation is as high as 25.6%, your returns could vary in two out of every three times between Rs 87 and Rs 137. This is a wide of range of values, and hence the risk.
Taken to its extreme, this would also seem to imply that once in every 40 years, your portfolio could lose more than 39% of its value in a year.
To make all this a little more concrete, we used a kind of data experiment called a Monte Carlo simulation to visualise a range of possible investment outcomes over the next 20 years. It is of course highly hubristic to assume that we can put accurate numbers on what may happen in the future. However, a Monte Carlo simulation is probably one of the more modest ways of doing so, since all it does is generate thousands of new ways that previous experiences can be combined.
In any case, this is designed to merely give you a flavour of what might be, rather than a forecast of the future. The heroic assumption in this exercise, and indeed in all of investment analysis, is the idea that the future will more or less look like the past. Having done so however , it is then possible to make some probabilistic statements about relative outcomes from investing in various asset classes.
For example, we can compare these outcomes to the result of investing money in a bank fixed deposit at 9 per cent per annum. Based on these numbers, our simulations indicate that there would be roughly a 40% probability that our investments would be worth less than the bank deposits in 5 years, but only a 29% probability that the stock investments would be worth less than the bank deposit in twenty years. In other words, the risk of our stock investments doing worse than our bank deposit is actually lower as more time passes. Risk in this sense, clearly does decline with the passage of time.
On the other hand, we could look at the worst 5% of the stock market outcomes in both time periods. Over a fiveyear period, at least 5% of the time, you could end up with less than 45% of what your bank deposit would be worth at the time. Over a 20-year period however, at least 5% of the time, you could expect stock market losses to be so large that you could end up with less than 25% of the money you could have had investing in a bank deposit instead.
You would see qualitatively similar results for the worst 10 or 15% of outcomes at the two time periods. In other words, you would see more of the really bad outcomes, where the bulk of your money gets wiped out, when you stay invested in the market over a longer period . Clearly, risk in this sense actually increases with time.
So is there any way in which time unambiguously diversifies risk? There is actually, but this relies on a slightly different logic. Younger people have a longer supply of human capital, which serves to diversify risk. Put slightly less elegantly , the younger the age at which you start investing, the better the chances that you can slog really hard to offset possible losses in the stock market!
However this is not meant to argue that long-term investments are not worth their price. We only mean to point out that the tradeoff between long term returns and risk does not mysteriously become as one sided as many advisors would have you believe.
posted by eshwar @ 7:49 pm
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Are you an Infosys shareholder? Then you must be aware that their buyback offer is on. Although technically it is not strictly a buyback, the process and taxation work similarly.
However, actually what Infosys is doing is sponsoring an additional ADR/GDR offering against equity shares offered by its existing shareholders. In other words, Infosys is inviting you as a selling shareholder to participate in a public offering of American Depository Shares (ADS) on the Nasdaq.
Now for the main question. Should you go for it or not? This will depend upon the following two factors:
Unfortunately, the first point cannot be answered, even by Infosys. The price at which the shares will be bought back from you depends upon how much the underwriters can get for the ADSs being sold -- which in turn depends upon the prevailing market conditions at the time of sale.
The proceeds of the ADS sale after deduction of registration and other expenses will be distributed between the selling shareholders in proportion of the shares accepted from them.
However, at this point it is pertinent to note that historically Infosys ADSs have largely been trading at a premium to the domestic share price. The historical data in this regard can give a selling shareholder a fair idea about the price appetite that the foreign market has for the offered shares.
The offer document contains data in this regard since September 2005 till October 2006 and one finds that the premium is in the range of a high of 28 per cent to a low of 14 per cent with the mean being somewhere close to 20 per cent.
This information is important as it can serve as a benchmark for your tax calculations upon accepting the offer. However, apart from the price realization, shareholders need to understand the tax impact, if any, of the above transaction since taxes will directly cut into your profits.
Readers would know that long-term capital gains (on shares held for over one year) are tax-free while short-term capital gains (on shares held for less than one year) are taxed at 10 per cent.
Now, first and foremost note that these rates will NOT be applicable to this Infosys offer. The reason for this is that the abovementioned rates of capital gains taxes are only applicable for shares sold on a recognized stock exchange where the seller pays STT (Securities Transaction Tax).
The offer doesn't meet these conditions, i.e. it does not constitute a sale on a recognised stock exchange and the seller will not be paying STT thereon. Instead, it would be construed as an off-market transaction.
Here the tax rates on long-term capital gains will be 20 per cent with indexation benefits or 10 per cent without indexation, whichever is lower.
Any short-term gains will be added to your other general income and be taxed at the slab rates applicable to you. As generally most investors would be in the 30 per cent bracket, it would be safe to say that such short-term gains would be taxed at 30 per cent.
There is yet another twist in the tale. Remember, Infosys declared a bonus in July. Since you will be offering the shares from your demat account, the FIFO (First In First Out) method will apply. In a bonus issue, the original shares are carried at the same cost (the price you paid for them) whereas the bonus shares are taken at nil value.
Therefore, in all probability, by selling your shares in this offer, you would book a notional capital loss. I cannot emphasise the word 'notional' enough. In other words, on your investment as a whole, there would (or more appropriately) should be a profit. It is only on account of the taxation system that a notional loss comes about.
Now, this loss (though notional) can be used for tax planning. The rule is that long-term loss can only be set-off against taxable long-term gains whereas short-term loss can be set-off against short-term gains or taxable long-term gains.
Ergo, this Infosys offer has the potential of being a win-win. On the one hand you can make some money over and above what you would have, had you sold the shares in the market and at the same time, you can save some tax on your other profits.
The following table sets out the above discussion in terms of numbers:
No. | Price (Rs) | Amount | |
Original shares purchased | 20 | 2,700 | 54,000 |
1:1 Bonus in July | 20 | --- | --- |
Shares submitted in this offer | 20 | ||
Shares accepted * | 5 | 2,600 | 13,000 |
* Number and price of shares accepted is assumed
In the above example, since only 5 shares have been accepted and 15 shares returned back, the tax impact will only be on the 5 shares. 15 shares go back in your demat account and there is no tax impact thereon.
On the accepted 5 shares, FIFO will apply and your cost per share would be Rs 2,700. You have sold these at Rs 2,600 thereby making a notional loss of Rs 100 per share. Why notional? Because your actual average cost per share is Rs 1,350 (Rs 54,000/40). So ipso facto, though you are earning a profit of Rs 1,250 per share, tax wise you are actually booking a loss.
Depending upon your period of holding, the loss is either long-term or short-term as the case maybe and the tax treatment would be as explained before in the article.
In conclusion, the offer offers the Indian shareholder to earn some arbitrage profits on account of the differential price of Infosys on the Nasdaq. You can always buy back the accepted shares in the domestic market thereby making some relatively risk-free profit.
The tax benefit is just icing on the cake. Note that the offer closes on November 17.
posted by eshwar @ 7:46 pm
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posted by eshwar @ 11:27 pm
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Post-paid customers, who make up 20 per cent of mobile users but account for 50 per cent of the revenue, are generally at sea when choosing the right cellphone plan or operator. Help is at hand.
Texas-based technology-enabled business value services provider, Trilogy, has developed a real-time solution, which has been ported on its website YourBillBuddy.com.
All that an Indian subscriber needs to do is to logon to the site and upload the latest e-bill.
The site, in a 'milli-second', will break down the bill into multiple components, compare them against the tariff plans of each mobile operator and then suggest the best plan for the subscriber's kind of usage.
"We have developed a very intelligent algorithm, which has been patented. It basically categorises all the bill plans in certain modules. With the algorithm, we feed in the latest bill plans launched by the various telecom operators. The algorithm is designed in such a way that whenever a bill is uploaded, in parses the bill into various calling categories like local voice, STD voice, ISD voice and SMS, and rates the bill across various rate plans. Then it suggests the best rate plan across all the operators for the kind of usage by a subscriber," said Virendra Gupta, director, Telecom Services, Trilogy.
The service, which is free for end-users, has been launched initially in Bangalore, Delhi and Mumbai � it covers plans available to customers in these areas. The company is planning to launch this in all other cities in a couple of weeks where Internet penetration is substantial. The company is also planning to launch the service for pre-paid mobile subscribers for which it is now busy developing a suitable platform which will not be based on the e-bills, said Gupta.
Within a month of the official launch of the service, Trilogy claims to have recorded 12,000 registered users and over 60,00 visitors. Based on user feedback, the company is planning to launch a new value-added feature wherein a user can upload his/her phonebook easily which will keep the contacts safe even with a change of handset.
The company aims to target telecom service providers for its revenue. "We believe that by providing a customer with the best plan, he will choose an operator or a plan (of the existing operator) based on fundamental value rather than perception. This will help the operator retain existing customers and also acquire high-value customers," said Gupta.
He added that customers can switch operators or plans by the click of a mouse only with operators with whom Trilogy has an agreement, that is as a result of the switch it earns a fee. The customer is of course free to take the information from the site and make the switch on his own. Ultimately, Trilogy hopes to be of help to TRAI in making life simpler and more transparent for customers and turn this into a business proposition.
The company plans to launch the service in many other countries basing on its success in India. "India is our flagship country for this product and once we prove our model here, we want to expand to markets like China, Europe and the US," he added. Trilogy's development team is based out of its R&D centres in India, China and US. Bangalore houses 300 out of the company's total 500 engineers. Its revenue comes mostly from the US but it is increasingly turning to markets like India and China.
The private firm, founded by CEO Joe Liemandt in 1989, has grown within 10 years to become one of the world's largest privately-held software companies, claims the Trilogy website. Trilogy gets paid by helping firms improve their topline and bottomline by delivering business value through its value services. It has "dozens" of customers from among Fortune 1000 firms.
posted by eshwar @ 10:50 pm
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The recent surge in the Sensex has surprised most market participants. The market has been propelled by strong earnings and renewed flows from FIIs and domestic investors. FII activity has been limited to large-cap stocks. Mid caps have not performed in line with frontline indices.
Over June-October ’06, the Sensex gained 25%, while the CNX Midcap Index gained only 10%. In terms of valuations, most large caps trade at fair valuations, while several mid caps are relatively undervalued. To illustrate this point, the Sensex trades at a P/E of 21.3 times trailing earnings, while the CNX Midcap trades at 17.6 times trailing earnings.
Past experience shows that when mid-cap valuations trail those of large caps by such a large margin, the divergence indicates that mid caps will perform better than large-cap stocks over the short to medium term. We now believe that several mid caps are at levels where valuations are attractive, and valuations may catch up during the second half of the year, as the market discounts their Q3 and Q4 earnings, and future potential.
With India being among the fastest-growing economies, opening up of new export markets and booming domestic demand, coupled with focus on infrastructure spending, will ensure mid-cap companies are on the growth path. Several of them are expected to become large companies in the near future.
The growth potential is higher in mid-sized firms, compared to large companies. The true challenge in investing is to identify mid caps which have the potential to become tomorrow’s large caps. One of the issues in investing in mid caps is their poor liquidity. But recently, mid caps are seeing improved liquidity, though it is still lower than that of large caps.
The other issue is the information flow relating to smaller companies. It is imperative that retail investors have adequate information about the companies they invest in. As the number of mid-cap companies is very large, it’s tough to identify the right companies. A portfolio of carefully-handpicked stocks is an investor’s best course of action.
posted by eshwar @ 8:30 pm
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Supratik Chakraborty, received a credit card bill of about Rs 120,000, all spent on buying as many as 22 air tickets in just 30 minutes. This young IIT Powai computer science professor was billed for 21 Kingfisher Airlines tickets and a Spice Jet ticket bought on September 29, a purchase, he says, he never made. To make it worse, no one at his bank found this unusual.
A shocked Chakraborty says, "What is more suspicious is that more than a lakh worth of transactions took place within half an hour and no alert was sent from Citibank. The very next day they sent me a mail asking whether they can increase my credit limit."
But what does it take for a fraudster to commit an online fraud using a credit card? Only the sixteen digits and the Card Verification Value number on the back of the credit card, which are easily accessible. The big question is what is the need to print this CVV number on the credit card? Banks say the CVV number is needed to ensure the customer actually possesses the card while making the purchase.
In reality, anyone can quickly note the digits on your card and make it his own at least on the Internet. With online shopping sites not asking for a second factor identification, the chances of fraud are very high.
Says G Sivakumar from IIT Bombay, "The second factor identification should ask for information which is known only to the consumer. Giving all information on the card is not advisable."
Interestingly, online purchases with a debit card are much safer because transactions take place on the bank's website rather than the merchant's. Banks always ask for a customer identification number and the netbanking password, which is only known to the customer.
Chakraborty is one of four such victims from Powai alone and although his loss is protected by Citibank, cases like these are now one of the biggest headaches for credit card companies.
posted by eshwar @ 8:21 pm
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Banks have hit upon a new idea to get a larger share of your wallet -- retailing gold. While the banks claim that buying gold from them is a wise decision, we beg to differ. In fact we would go so far as to say that if you want to buy gold, don't go to your bank!
Why gold?
There are various reasons for which you should own gold in your portfolio. The most important of these is that gold is a real asset whose value is driven by factors (such as the amount of gold mined) that are very different from those that impact the value of financial assets. Therefore, it brings in a much needed element of diversification in your portfolio.
You can read our detailed note on the reasons for and against investing in gold. Suffice it is to say over here that you must have about 5% of your wealth in gold.
Form of gold
The next question that is often put to us is in which form should one hold gold? The one form which we all are familiar with of course is jewellery. However, from an investment perspective this is not the best option as the making charges for jewellery can be as high as 30% of the value of the gold i.e. if your jewellery has gold worth Rs 100, you are probably going to be buying it for Rs 130.
So if you wish to sell your jewellery, all you will get is the value of the gold; the making charges will be a loss to you. Not to mention that sometimes jewellery that is promised to be made of 22K gold turns out to be of a poorer quality.
The best form to hold gold, from an investment perspective, is probably, gold bars (or like they say "biscuits"!). Gold bars are standardised products whose purity is assured by the hallmark (seal of the producer) that it carries.
There are no making charges involved and as the purity and quantity is assured, on liquidation you do not have any surprises in store for you.
Where to buy gold?
In recent months, banks have become very aggressive in marketing gold bars. This pick up in tempo is not only due to the festive season; it is also due to the fact that banks have hit upon a new idea to make a "neat buck" off you. We will let the numbers speak for themselves.
On the 8th of November, 2006 we called one private sector bank and one jeweller making an enquiry to purchase gold. This is what we got as a response --
| Bank (Private) | Branded Retailer | Jeweller | |
| Purity | 0.999 | 0.999 | 0.999 |
| Price per kilo* (Rs) | 1,071,520 | 1,025,000 | 940,000 |
| % Discount to Pvt Bank Rate | NM | 4.5% | 14.0% |
Do not make a judgment as yet. The banks, as their relationship manager will definitely pitch (only if you ask though), give you a certificate assuring you of the purity of the gold. And that's why they charge a premium for the gold. So, on the one hand you get pure gold with a "certificate" and on the other you get just pure gold.
To be able to make a rational decision, let's ascertain the value of the certificate i.e. what benefit it offers you. In case of standard gold bought for the purpose of investment, the benefit which one looks for is whether the seller will buy the gold back or not and, if yes, at what price will he buy it back?
| Gold Bar | Bank (Private) | Branded Retailer | Jeweller |
| Buy back facility | No | Yes | Yes |
| Discount on buy back | NA | NIL | NIL |
Here's an eye opener for you. The bank, which pushed you into buying standard gold at a premium, will not buy the gold back from you! So, if you bought gold from a bank today for Rs 100, and you needed to sell it the same day (to a jeweller as the bank will not buy the gold back from you), all your will realise is Rs 86! Of course, you get to keep the certificate!
The jeweller on the other hand, will buy back gold from you any day at the prevailing price. Some jewellers also give you a certificate for the gold you buy, thus diluting a key selling point of the bank.
The answer to the question of where you should buy gold from is simple -- give the banks a skip in case you are looking at buying gold. Opt instead for a credible jeweller (even in the case of jewellers, we found that there is a lot of price variation with branded stores charging a premium -- do your homework well before you buy gold). And, of course always buy standard hallmarked gold.
If you do decide to go to a jeweller to buy gold in bulk, do negotiate. It is likely you will get a discount. In our conversations with a couple of brokers, we were offered a discount on bulk purchases.
Beware!
Based on our interactions with thousands of individuals every month, we find that instances of mis-selling of investment-related services and products is growing at an alarming rate.
As an individual with limited knowledge about such products and services you probably are not geared to ask your advisor the 'right' questions. The best way then to eliminate the risk of being 'cheated' is probably to spend time in selecting an honest financial planner for yourself.
Even as you take measures to protect yourself from this surge in mis-selling, maybe the banking regulator, the Reserve Bank of India will take note and come to the rescue of millions of ill-informed investors.
posted by eshwar @ 8:20 pm
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posted by eshwar @ 2:30 pm
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