Tuesday, October 24, 2017

Arbitrage Fund..

Betaal the little ghost was watching Vikram cross the jungle path and finding an opportune moment he flew and perched upon his broad shoulders.  Explain Arbitrage Fund, “he said”. “Explain the concept of “Arbitrage” in as simple a manner as possible so that I have no doubts after listening to you. If you can’t explain it simply enough and if I am still troubled by “Arbitrage” concept, I’ll smash your head.”
Vikram remained unfazed as ever. Never to be troubled by such empty threats but always open to challenges. 
Ok Betaal. Let me explain the arbitrage concept to you with an example
Let us say  tea is sold at the tea stall on the roadside for Rs 10 but for Rs 15 on the 10th floor canteen.
This means a price differential exists between these two markets ( roadside and 10th floor)
This price difference is an arbitrage opportunity.
Now a smart fellow can buy tea on the road for Rs 10 and sell it at 15 and make a clean profit of Rs 5.
But as customers come to know about this price difference they will start going to road side stall
if the tea vendor comes to know about the price of tea on the 15th floor he too will be tempted to raise his price.
So over a period of time this price differential can reduce or disappear. 
Now let us see how Arbitrage is played out in the stock markets.
You must know that there are two markets. One is the spot market and the other is the futures market.
A difference in prices exist between these two markets as well.
The same stock will have a one price in the spot market and a different one in the futures market.
Let’s say the price is Rs 100 in spot market and Rs 11o in futures market.
Now let us assume I buy in spot market for Rs 100 and I sell in the futures market for Rs 110.
We must also know that towards the end of every month the prices of spot market and futures  market will become equal.
On the expiry date all deals are “squared off” or “reconciled” or “hisab kitab” is done
Let us say the spot price rose from 100 to 105  on the date of expiry.
Therefore the futures price would come down from 11o to 105  
(Since at expiry the common price was 105)
Clearly in spot market I made a Rs 5 profit (since I had bought at Rs 100)
And in the futures also I made a profit of Rs 5 (since I had sold at Rs 110 and now I can buy at 105 while squaring off)
Thus the total profit is Rs 5 + Rs 5 = Rs 10 ( the same difference that existed between spot and futures on the day I had done the arbitrage transaction)
This is the concept on which the Arbitrage Fund operates
Arbitrage Funds have given returns which would be around the returns of  liquid fund.
But one needs to note that Arbitrage Funds are treated as Equity Funds and not taxed like debt funds.
This means like other Equity Funds,  all dividends are tax-free and any capital gains is taxed at only 15% within the first year and is tax free thereafter.
If you are looking at a short term investment of less than one year, invest in the dividend re-investment option. so that the NAV does not rise much which makes capital gains miniscule. 
So for a short-term investment of say 7 months, this is a good fund and even better than liquid fund because of the tax treatment.”
Vikramaditya finished and looked at Betaal.
“Now little ghost, hope you are clear about the concept of “Arbitrage” and the “Arbitrage fund”.
Betaal smiled at Vikramaditya and said,”nobody other than you could have explained this in a more lucid manner. So I am sparing again  but will meet you another day with another query”
Saying this the Betaal took flight and disappeared into the thick forest as Vikramaditya continued his walk nonchalantly.

Sunday, October 15, 2017

Festivals brings families together....

Diwali is approaching.

The mood is festive. The families are coming together.

Friendship and love pervades the atmosphere.

This is the season of fun, enjoyment and frolic.

Have a great festive season with your near and dear ones.

May you be blessed with good health, happiness and wealth.

God Bless.

Friday, October 13, 2017

Kinds of Risk...

Financial Five Series 3

1. Financial Planning isn’t about money and let’s be clear about it. It’s about life & living a respectable life

2. Success happens in uncomfortable zones. If the market makes you uncomfortable, it’s a sign of future success

3. SIP is a tiny window into a large, growing and prosperous economy

4.You neither make good ‘returns’ by churning players in cricket nor by churning funds in your portfolio basket

5.If you want the best computer then keep waiting. If you want the best mutual fund then don’t even waste your time waiting


Sunday, October 1, 2017

Financial Five Series

1. Accumulation of money is like accumulation of crowd. It is vital to provide direction to the money

2. “Showing off” your wealth isn’t a financial goal

3. “Living within your means” is like driving within speed limits.

4. Zero debt life is like zero calorie diet. One looks after your wealth while the other looks after your health

5. “Debt” is for storing wealth. “Equities” is for creating wealth

Saturday, June 17, 2017

EMI Jhatka...

A man chooses to buy a house for investment.

House value 1.25 cr

Loan amount 1 cr

Interest rare 10%

After 5 years the value of the house is say 1.6 cr based on 5% compounding

He decides to sell it.

While closing his loan he has to pay up approx Rs 1.5 cr

So his total cost turns out to be

Rs 5 lac registration

Rent 25 lac initial amount

It all equals to Rs 1.8 cr

Against this his house fetches Rs 1.6 cr

Les capital gains would be say approx 3 lac

Add his rent income approx of Rs 15 lac

Add tax saving 3 lac

Total income is equal to 1.75 cr.

So in the end he incurs a loss of Rs 5 lac

If the house had appreciated at even 10% he would be left with a profit of Rs 20 lac

So between 5 lac loss to 20 lac profit is what he makes

On the other hand had he invested the 25 lac in an Equity mutual fund and had done a SIP of Rs 1 lac (approx EMI amt) he would have earned Rs 1.6 cr

(Assume Equity returns of just 12% in this period.)

Net profit would be 1.6 cr less

investment of 85 lac
( 25 lac + 1 lac SIP for 60 months)

= to 75 lac.

He could also earn tax rebates in ELSS schemes upto 2.5 lac taking his earning to Rs 77.5 lac

Now compare Rs 77 lac profit with Rs 2 lac loss or at best Rs 20 lac profit.

Even a bank FD would have provided a net profit of 40 odd lac

Next time think a 1000 times before saying house investment is smart thinking.

The equation will only get worse for longer periods of investing.

Without taking a loan if one were to invest in a house then at best case scenario the returns from the house may come close to that of a mutual fund.

But remember that is without taking a loan.

How many people ever buy a house without taking a loan.

Friday, June 16, 2017

Hum kaale hain toh kya hua cricketwale hain...

Hum kaale hain toh kya hua cricketwale hain
Although England invented the game of cricket they seem to have lost the plot.
They have never won the world cup or any big tournament even though they host many of these tournaments.
England has very little sunshine and mostly inclement weather throughout the year.
Cricket or for that matter any outdoor sports requires a lot of practice.
Perhaps, England had planned India as the colony with all the Sun for practicing and training.
But alas that was not to be.
They left us alone and we made a lagaan team that is now turned the tables on our erstwhile masters by taxing them on the cricket field.
No wonder all Asian teams who were their slaves are left to contest the CHAMPIONS TROPHY.
The clear message from this is the need to practice, practice and practice in a conducive environment.
Now did you get your investment lesson. If not, read on.
In investments too, wealth championship can be won by SIP, SIP, SIP in a conducive economic environment.
Yet again, India seems to be offering the environment where you can win big time by SIP, SIP and SIP.

Kal kya hoga kisko pata...

Kal kya hoga kisko pata
The Champions Trophy has some interesting lessons. When Thissara Perera dropped Sarfraz Ahmed of the bowling of Malinga,

1) He probably dropped the Champion's Trophy that Sri Lanka could have won

2) He gave Pakistan cricket a new lease of life. Winning the Champions Trophy can provide the stimulant that Pakistan cricket has been longing for years.

Any analyst would have predicted a Pakistan loss by the way the game was going.

Who could have thought that Sri Lankan would drop sitters and give away runs as overthrows.

But things don't go the way one often expects. The nature of the unpredictable beast is such.

Likewise, in an economy too unpredictable clouds can suddenly emerge, a tsunami could suddenly rear its ugly head. The best of Fund Managers too would not be able to have an intuition of such impending unpredictablity.

Donald Trump, the world's most powerful leader is so unpredictable that perhaps he also does not know what would be his next move. Who knows what will Kim Jong of North Korea will do tomorrow etc etc.

Any impact on world economy or Indian economy can either have a short term impact on the market and your returns or even a medium to long term impact.

The best of the fund managers forecast based upon realistic and scientific assumptions.

But even the best of the best can be left surprised. There are just too many moving parts.

The macro environment is 50% responsible for your future returns and if that itself is 100% unpredictable, what can the best Fund Manager say about the future.

At best he may guide you to an astrologer.

Still, I would say consult professionals be it a Fund Manager or a Financial Advisor because at least they make the best assumptions.

Kal kya hoga kisko pata

Mera ilaaj kaun karega...

Mera ilaaj kaun karega
Imagine you are a doctor. One day you wake up with a fever. You take some common stuff but the fever does not subside.
What would you do?
Keep changing the medicines and take some tests which you believe may be appropriate or would you consult a another doctor or doctor colleague and take his opinion.
While self medication seems an option it isn't one.
Even a doctor needs reassurance even though he himself has a lot of knowledge.
Bouncing off ideas, using another person as sounding board, an external opinion etc are all a necessity.
However it is an irony that most people think that they are capable of managing their money.

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