Should You Invest in Gold Today on Akshay Tritiya?

Today is Akshay Tritiya (or Akha Teej / Akshay Teej) – a day which is considered auspicious to donate to the needy or to present something to dear ones or to start a new trade/venture. It is also considered a good day for weddings. The savvy marketers of modern times have made this day auspicious solely for buying Gold. So you see hoarding, advertisements, surrogate advertisements and advisories extolling you to buy Gold today. For the believers and non-believers alike, the main question is – Is Gold a good buy as an investment? If yes, in what form should it be bought?

Gold as an Investment

Gold has a unique position as an investment. It thrives on economic volatility and chaos in the world – a throwback to the days of Gold Standard instead of the current Dollar Standard. That’s why, various financial crises – sub-prime crisis, dollar meltdown, Eurozone problems etc – in the recent past have seen Gold going through one of the most spectacular rallies ever. Consider the chart below:-

Last Akshay Tritiya Date	Price that day (Rs, 10 gms)	Annualised Returns till today
Today (24 Apr)	28803	31.48%
06 May 11	21906	24.91%
17 May 10	18548	24.61%
27 April 09	14885	24.67%
08 May 08	11922	-

As you can see, returns have been far better than what any other investment has given. But will it continue its dream run? May or may not. If the world’s economy stabilises, if no new crisis takes place, it may not. If world continues in a flux, it may continue to appreciate depending on how deep is the crisis. How do we see it today? We feel that the world is turbulent enough (and the crises are not going away anywhere too soon) for Gold to offer a good value for at least one more year. Nobody knows beyond that.

How to Buy Gold for Investment

Primarily Six ways in which you can invest in Gold:-

1.    Jewellery - Good for personal use but not good as an investment. Problems – difficult to be sure of purity (unless you pay huge charges for Hallmarking), coloured stones embedded in jewellery sold by Gold rate but rejected while selling back, storage and carriage problems, high making charges which are lost the moment you buy the jewellery piece, no standardisation of prices amongst jewellers and the Indian mindset of never selling Family Jewellery (thus it does not serve the purpose of an investment).

2.    Coins/Bars - Easy to buy but very expensive. Today’s 24-carat Gold rate (9.15 AM, 24 April 2012) in Mumbai Bullion market is Rs 28803 per 10 gms. Of the banks selling it, cheapest is SBI at Rs 30,519 (6% mark-up), PNB is giving at Rs 31,888 (10.7% mark-up) and ICICI Bank is giving at 33,447 (16% mark-up). An investment made at such high prices may take long time just to get even. Also, as per RBI rules, Banks are not allowed to buy back any Gold, not even their own coins. That way, ‘trusted jewellers’ are a better bet as they will most likely buy back what they have sold to you when you go back to them – but finding a ‘trusted jeweller’ is an exercise by itself.

3.    Gold ETF - Gold Exchange Traded Fund. Paper Gold - it is like your money in the bank. Most efficient way to buy and sell gold. Done on stock exchanges at the price of 24 carat Gold at that moment in the bullion market – no mark-up. No problems of purity, storage/carriage and no time lag in buying or selling. Can buy or sell from 1 gm equivalent onwards. Benefits of Long Term Capital Gains available after one year itself. Problems – you don’t get to hold it in your hand, cannot buy less than 1 gm and there is no procedure of ‘Systematic’ buying automatically on a regular basis.

4.    Gold Mutual Funds – Similar to Gold ETFs with all its advantages but taken through the Mutual Funds route. Additional advantages are – do not need a demat account, can buy on a regular basis (generally once a month), and investment could be from as low as Rs 100 per month or Rs 5000 in bulk with no upper limit. Disadvantage – generally 0.5% transaction charges additional to ETFs, but that does not amount to much anyway.

5.    E-Gold – Another form of paper Gold bought on NSEL (National Spot Exchange Limited). Need a separate demat account for it. Advantages same as Gold ETF. Additionally, transaction costs and liquidity is better provided you are buying it in large quantity. It can also be converted to physical Gold at additional cost. However, it makes sense only if you are going in for large quantity of Gold. For small quantities up to 50-100 gm, it may not be beneficial.

6.    Gold Futures – These are ‘Futures Contracts’ on Commodity Exchanges such as MCX and NCDEX. These are meant for sophisticated investors who understand the associated risks since these have the potential to make or lose big money. Meant for traders and speculators with a high risk appetite.

Our Recommendations

Gold is definitely investment-worthy even at current high rates but remember:-

1.    Gold ETFs / Gold Mutual Funds are the best way to buy Gold for investment.

2.    Since Gold prices are quite volatile, better to buy regularly in small lots. Gold Mutual Funds score over ETFs there.

3.    Never should Gold form more than 10% of your portfolio. If your total investments (excluding real estate) are, say Rs 10 Lakhs, Gold should be maximum Rs 1 Lakh. Similarly, if you contribute Rs 10,000 per month to savings, Gold should be Rs 1000 pm.

4.    Remember, despite its fabulous returns in the past few years, Gold, in the very long-term, tends to move just along with inflation rate. Hence, it is actually a hedge against inflation only. Do not go over-board by stocking up a major part of your savings into it. Do not forget the drastic fall it had in 1980!

You Owe it to Your Children - Part 2

In Part-1 of this article, posted 4 days back, we had dealt with planning for the children for the long term wherein general strategy and points to be kept in mind had been discussed.

As already brought out, one needs to start saving as early as possible. This has four huge advantages – you only need to save a small amount regularly, you are able to ride out the periodic ups and downs easily as there is enough time-cushion available, mid-course corrections can be easily implemented and most importantly, power of compounding works for you in an astonishing manner.

Having understood this, the most important question that faces you is how and where to invest? When the parents think about the child’s future, the primary thoughts are about their education and marriage. Most parents are aware of how expensive higher education has become today and compounded by Inflation, it would be out of reach of many if not meticulously planned for. This is the primary reason that most of them want to start saving so as to create enough resources to give their children dream education. This may even include higher education abroad. In this article, we will deal with these aspects specific to your child, taking age-wise scenarios.

Characteristics of Various Investment Products

There are a bewildering variety of products available in the market, each one of them catering for a specific need which should be carefully understood. If we use a good product for something it is not meant for, it is bound to fail us – you cannot use a gun to kill a fly or a butter-knife to cut wood! The products that can be used for planning for your child along with their general characteristics are as below:-

1.    Life Insurance – As the name suggests, it is meant for insuring life and not for saving. Generally, traditional policies, like money-back and endowment plans, give you returns in the range of only 6-7% per annum which is much less than inflation itself. One should not expect it to create wealth for you in the long-term. Unit Linked Insurance Plans (ULIPs) can be equity market-linked but their high upfront loading combined with barriers in switching out if they do not perform, make them unsuitable compared to other products for meeting long-term goals. ULIPs would give you decent returns only after about 6-7 years of continuous investment.

2.    Debt Products – These fixed-return products like Bank FDs, Recurring Deposits of Banks and Companies, Provident Funds (PPF, DSOPF, EPF etc), Bonds and Debt Mutual Funds, generally give you returns equal to inflation. This implies that it is likely to fare better than Life Insurance, but will only preserve your capital. Eg, if PF rate is 8.6% pa today, the inflation is also on the same lines. Your Rs 100 in these instruments will become Rs 108.60 next year, but then price of everything will also increase to that amount next year. Thus, the purchasing power of your money in these instruments has practically remained the same! However, the safety and security of capital provided by these instruments is a big plus. Therefore, some amount of your savings for the child should go into such safe instruments too.

3.    Gold – While Gold has had an unusually good run in the near past, it has largely been due to the unstable economic conditions in large parts of the developed world, which may or may not be sustained in future. Traditionally, Gold has at the same rate as inflation in India and thus, is considered a long-term hedge against inflation rather than a wealth builder. Also, to look at it as something which will fund a child’s education or marriage may not turn out to be so since normally Gold in Indian households does not get sold to fund goals except marriage!

4.    Real Estate – Real estate has the potential to give good long-term returns provided a good property is identified well in advance. This can be tricky but plenty of success stories abound. However, own Home and a second property to provide good rentals to take care of your Retirement Planning take priority while using this route to plan for your goals. The bulk investments required in real-estate may also be a deterrent and not be very conducive to using your small monthly savings. There is sometimes a tendency to concentrate all resources in this asset class, which is not a good long-term strategy and can bounce back.

5.    Equity-Linked Products – It is a well-known fact that Equities (ie, stocks or shares) and equity-linked products like Equity Mutual Funds (MF) outperform all other asset classes over the long term. If you lack the expertise to invest in equities directly and/or find yourself unable to follow the turbulence of stock markets and take timely corrective actions like exit/ additional purchase/ rebalancing, take the MF route. MFs are one of the best regulated instruments in the market today, they don’t need your day-to-day involvement, offer excellent long-term returns, are very liquid and lend themselves to small regular contributions. Maximise your exposure to such instruments for achieving the education and marriage goals of your children and keep putting the excess away in them as your income increases. However, remember that you should be comfortable with the short-term volatility of such equity-linked products before you take this step.

Prescription for your Child as per the Age Bracket

The first and foremost requirement remains taking an adequate Term Insurance Cover for yourself so that your child’s future remains safe - with or without you around. The future insurance need has to be carefully calculated in terms of amount and time-period and insurance cover already taken to be subtracted from it. Remember that the tendency to look for ‘returns’ or ‘money-back’ from an insurance policy is self-defeating – you do not expect money-back from your car insurance, then why from your life-policy? Such ‘returns’ only make it unacceptably expensive.

Child 0 to 6 Years:  There is plenty of time available for saving for your child and is, in fact, the ideal time to start. Nothing will work as well as Equity-linked products here. While debt products will provide safe option, you will not be able to meet the goals as comfortably or surely by investing only in them. Depending on your risk-taking capability, you should take a mix of the two in a ratio of anything from 0:100 to 40:60 for debt:equity products to reach your goals.

Child 6+ to 12 Years: Whatever is true for above age bracket holds true here too, the only difference being that goals are closer now. The debt:equity ratio essentially remains the same. Rebalancing and constant monitoring of the equity-linked products continues to be very important here too to create the required wealth. Adequate Term Insurance, if not already taken, remains a necessity.

Child 12+ to 18 Years: Now the education goal could be very close, maybe less than 3 years away for Graduation. There is a need to consolidate and preserve the gains made in equity / equity-linked MFs now. Hence, the money earmarked for Graduation studies’ goal should be moved gradually to debt products while that for the Post-Graduation and marriage goals should continue to grow in the equity / equity-linked MFs.

Child 18+ to Pre-Earning Years: The Post-Graduation goal could also be coming closer and the money earmarked thereon should be moved to safer avenues. Marriage expenses may continue to be invested in equity-linked products if there is still adequate time available – at least more than 3 years.

Earning Child: The child should start taking the burden of his/her future expenses now, including higher studies. Since the age is young with plenty of earning years to go, the investments should primarily be in equity-related products except for some debt products like PPF, where safe tax-free returns build up gradually and counter the volatility of equity products to some extent. Systematic Investment Plans (SIPs) in equity-diversified MFs would work the best here. The child should be encouraged to start his own investments now.

The End-piece

A child brings a lot of joy and happiness to the family. But with this also comes the realization of responsibility of parents towards them. A lot of dreams emerge with the child being the centre of those dreams. From here originates the need to create a financial base that would ensure the future of the child in all respects. It is essential that investing decisions are taken with due deliberation – seeking professional help would benefit you far more than it would cost you in the long-term. Investing portfolio for the child should be diversified to accommodate the positive points of each asset-class as also to de-risk it. Equally important is its periodic review and rebalancing. Remember, there are no automatic ‘fire-and-forget’ solutions and nothing but the best should accrue to your child!!

You Owe it to your Children – Part 1

Saving for your child’s future needs is one of your most important goals in Life

 as also your Bounden Duty as a parent

Remember Farhan Qureshi in the 3 Idiots? His father planned out his education and career the day he was born. The senior Qureshi's career choice may have been out of sync with his son's passion for wildlife photography but the underlying objective — to secure the financial future of his child—was bang on target. An increasing number of Indian parents are doing that today.

According to the survey, 63% of the 1,908 respondents said they started saving for their children's education when they were born. Another 9.2% had started even before the kid was born. That's good news, because the earlier you start, the more the time available for your investments to grow, and the bigger the corpus. But are Indians choosing the right options when investing for their children? Here's the bad news. An overwhelming majority is opting for low-yield instruments. Almost 45% of the respondents in survey said they invest in the Public Provident Fund (PPF) and fixed deposits for their children. Another 38% have invested in traditional insurance policies.

"Despite the numerous options available, Indian parents continue to rely on bank fixed deposits due to lack of awareness," – laments a Financial Planner. The encouraging part is that 43% also invest in equity mutual funds and stocks for their children, while 26% have opted for child insurance plans that provide for the education of the child if the parent is no more. The skew towards low-yield products also means that many Indian parents might fall short of the targets they have set for their children's investments.

Estimated that in raising a child in urban India from cradle till college costs roughly Rs 55 lakh. The calculation assumes that the child will take up a professional course costing Rs 10 lakh. This is the cost at today's prices and the amount has to be adjusted for inflation. Now comes the scariest part. Education costs, which constitute nearly 46% of the total expense on a child, are growing at a worrying pace of 20-25% per year.

Formulating a Strategy:

Fortunately for parents, there are enough investment products to help them fulfill the dreams for their children. Chosen appropriately, these options can help you save enough to send your daughter to the best medical college in the country, or book a ritzy 5-star hotel for your son's wedding. How does one choose the right product? The first thing to understand is that there is nothing to differentiate the investments made for children from the rest of your portfolio. They are exposed to the same risks, offer the same returns and are taxed at the same rate. No mutual fund will give units at a discount or offer guaranteed returns just because a parent is saving for his child. No bank will offer you a higher interest rate. No insurance company will charge a lower premium. The taxman too will not exempt any income. So, the same rules that govern your own investments should apply to those made for your children.

Your choice should depend on four basic factors: the tenure of the investment, the risk you are willing to take, the returns offered by the option and the taxability of the income. Here's how these four factors can affect your investments.

Tenure of investment: Are you saving for your daughter's education? Or for your son's marriage? Financial planners say it is best to define your goals and segregate the investment for each goal. "Since each goal has a different time frame, separating them will allow the parent to choose the most appropriate investment to reach that goal," The stock market has historically been the best place to park your money for the long term. There are enough studies to prove that equities give the highest returns in the long term.

Risk and returns: Every individual has a different risk appetite. Equities are certainly a great option for creating wealth over the long term, but what good is this money if it leaves you tossing and turning in bed, agonising over how your investments are faring. So choose an option that suits your risk tolerance. For this, first get your risk profile assessed by a financial planner. In many cases, one does not even know how much risk he can take. "Most parents adopt a very conservative approach when it comes to investing for their children. This attitude is rooted in the choices their parents had made and is difficult to shed.

Higher the risk you are willing to take, the higher your returns could be. Then again, your ability to take risks depends on the time available. As we mentioned earlier, stocks and equity funds work best for long-term goals. However, if you are saving for your son's marriage in 2013, steer clear of volatile stocks and put the money in a debt fund, or even a fixed deposit.

Taxability of income: Keep in mind the income tax rules that apply to your investments. Your child's income is actually your own. This is also the reason why PPF and insurance policies are so popular with investors. The income from these options is tax-free, but there are other tax-efficient options as well. For instance, the income from equity and equity-oriented mutual funds is tax-free after a year. Investments in other funds can help you defer tax for years, even decades.

When you take into account these factors, the investment portfolio for your child becomes a mix of short-, medium- and long-term products. Each option has something to offer, some financial goal to achieve. Fixed deposits offer safety and assured returns but won't be able to beat inflation. Mutual funds offer high growth but carry a risk and don't offer any insurance cover. Child insurance plans offer an insurance cover and help the wealth to grow but levy high charges. Gold helps fight inflation but doesn't offer diversification.

-Excerpts from an article in Economic Times, 18 April 2011

Just to substantiate the article above, a calculation primer for all:-

High Risk, High Returns – A monthly investment of Rs 10,000 will grow to:

Rate of Interest	@ 8%	@ 10%	@ 12%	@ 15%
In 5 Years	Rs 7.32 Lakh	Rs 7.76 Lakh	Rs 8.02 Lakh	Rs 8.62 Lakh
In 10 Years	Rs 18.02 Lakh	Rs 19.98 Lakh	Rs 22.02 Lakh	Rs 26.02 Lakh
In 15 Years	Rs 33.76 Lakh	Rs 39.84 Lakh	Rs 47.14 Lakh	Rs 60.92 Lakh
Equity Portion	0%	10-15%	35-50%	80-100%
Risk	Nil	Low	Moderate	High

(The next article to be posted on Wed, 18 April 2012 will give out the suggested financial instruments and planning you should do for your child(ren) depending on their present age)

How to Sell your House at a good Profit and Pay NO Tax...

Have you sold your house and earned a hefty amount in profit but do not want to pay any income tax on this profit? Is there any legitimate way to do this? Yes, there are more than one ways. We explain below how income tax can be avoided (of course, totally legally) on Long Term Capital Gains (LTCG) earned from the sale of a house (a flat or an apartment or an independent house – any residential property) which you have held for at least 3 years.
Please Note:
1. There is no way to save income tax on the short term capital gain earned from the sale of a house, ie a house held for less than 3 years. This mail specifically deals with long term capital gain only).
2. For the sake of keeping the discussion simple, we presume that you have taken advantage of the benefit of indexation while calculating your capital gains, where the tax is 20%. If you do not take indexation into account, the rate of tax on LTCG is 10%.
3. The discussion below applies only to sale of residential house property. For sale of other assets like residential plot, commercial properties, gold etc, other Income Tax Act provisions apply.

There are two ways to save the income tax on the long term capital gain earned from the sale of a house. Let’s understand each in detail.

1. Invest in Bonds – Section 54EC of the Income Tax (IT) Act, 1961

You can save income tax on LTCG from the sale of a house, if the LTCG is invested in specified bonds issued by the National Highways Authority of India (NHAI), Rural Electrification Corporation (REC), Small Industries Development Bank of India (SIDBI), National Housing Bank (NHB) or National Bank of Agricultural and Rural Development (NABARD).
How Much is Exempt
Amount exempted under this section will be either the amount of capital gain or the amount invested in capital gains bonds, whichever is lower subject to a maximum of Rs 50Lakhs. Please note that here it is only the amount of long term capital gain, and not the entire sale proceeds that is being referred to. For example, if you sell your house for Rs 15 Lakhs, and your LTCG from this sale is Rs 10 Lakhs, you need to invest only Rs 10 Lakhs in these bonds to avoid paying any income tax on this gain! Instead, if you invest, say, Rs 6 Lakhs in these bonds, you would have to pay a long term capital gains tax on the remaining LTCG of Rs 4 Lakhs. Thus, you would pay 20% of Rs 4 Lakhs = Rs 80,000 as long term capital gains tax. Remember, LTCG Income Tax rate is 20% (if indexation benefit has been taken) and not your own Income Tax rate.
When to Invest
The investment in these bonds has to be made within 6 months of the sale of the house. The Capital Gains Bonds’ Maturity Period is 3 years. Bonds cannot be pledged, sold or transferred before completion of 3 years from purchase of bonds. In case they are transferred, then the amount of capital gain exempted on investment in these bonds will be made taxable in that year as LTCG.
Interest Rate of Capital Gains Bonds
The interest rate on these bonds varies from one agency to another and changes from time to time. Generally they carry an interest rate of 6% per annum.
Should you invest in Sec 54EC LTCG tax saving bonds or Elsewhere?
Let’s say your LTCG is Rs 10 Lakhs. You have two options: Saving tax by investing in Sec 54EC tax saving bonds, or paying tax and investing the amount somewhere else. Let’s find out what the financial implication of each option is, and which option proves to be better!
Option 1: Save tax by investing in Sec 54EC tax saving bonds
Entire LTCG amount of Rs 10 Lakhs invested in these bonds. The rate of return is 6%. But the interest earned on these bonds is not tax-free. If you fall in the highest tax bracket of 30%, your post-tax return would be 4.2% (6% - 30% of 6% ie (6% - 1.8%)) per year. At 4.2% interest rate, your Rs 10 Lakhs would grow to Rs 11,92,349 in 3 years.
Option 2: Pay tax, and invest in a safe high-yield avenue
On LTCG of Rs 10 Lakhs at 20%, you pay a tax of Rs 2 Lakhs, and are left with Rs 8 Lakhs for investment. If you want to invest in safe avenues, you may go in for, say a Bank FD, since currently bank FDs give interest rate as high as even 9.5%. If you fall in the highest tax slab of 30%, your post-tax return would be 6.65% per year (9.5% less 30% tax on 9.5%). Rs 8 Lakhs would grow to Rs 9,70,449 in 3 years if invested at 6.65%.
Evaluation: If you are planning to invest the proceeds in safe avenues like Bank FDs, then your returns are much lower than if you invest in these Capital appreciation bonds – in that case, investing in the Capital Gains Bonds is better. However, if you wish to go in for higher return avenues like Equity-oriented Mutual Funds, where you may get 12% per annum returns or more over a 3 year period, your post-tax returns will be higher but then you are also getting into a slightly riskier territory. A good mid-way may be to go in for Debt Mutual Funds where returns are slightly more than bank FDs, tax is much lesser and safety is almost the same. Choice finally remains yours on the end-use which will finally guide what option you need to take.

2. Invest in another House – Section 54 (Sec 54 of the Income Tax (IT) Act, 1961)

You can save income tax on the LTCG from the sale of a house, if the long term capital gain is invested in another house.
How much is Exempt
The amount of LTCG exempt from income tax is equal to the amount invested in the new house. You can save the entire income tax on the LTCG from the sale of a house, if the entire LTCG is invested in another house. Again, please note that you have to consider the amount of the LTCG, and not the entire sale proceeds.
When to Invest
The investment in a new house has to be made within a time-range in order to claim exemption (or relief) under section 54EC. This time-range is: Upto 1 year before the sale of the house, or within 2 years after the sale of the house for a ready-built house/flat or within 3 years if the new house/flat is being constructed (and not ready-built). Remember that the new house/flat cannot be sold any time within 3 years after its possession – otherwise the LTCG exemption availed by you will be fully taxed.

Are you Investing and Managing your Money Rationally?

Mistakes Investors Repeatedly Make in Choice of Investments and Timings
Behavioural Finance is a very interesting field of psychology. It studies and analyses the reaction of people and their bias when faced with investment decisions. Please read the instances given below – do you relate yourself to any one or more of them?
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You have your investments in various stock-related instruments – equity and equity-diversified mutual funds. Some of these are in profit while some are in loss currently. You need some money urgently. You sell the profit making ones.
- Effectively you have sold the ones doing well since you keep hoping that you will ‘recover back your loss’! This explains why people realize the gains of winning stocks too soon. The flip side of the coin is people hold on to losing stocks for too long; unfortunately, many of the losing stocks never recover, and the losses incurred continued to mount, with often disastrous results.

You have some money to invest. You can either invest it in Real-estate where it is likely to double, or in equity-diversified mutual funds which will give you 15% returns per annum over a period of Five years. You go ahead and invest in real-estate since it looks like a better deal.
- Actually both returns are the very same – only money seen in bulk rather than in percentage terms ‘seems’ a better deal. As such, real-estate being a physical, ‘holdable’ investment, gives more comfort than a paper investment even though, compared to stocks or mutual funds, it has a lot of hassles!

Question 1 - You have Rs 1 lakhs and you must pick one of the following choices:
Choice A: You have a 50% chance of gaining Rs 1 lakhs and a 50% chance of gaining nothing.
Choice B: You have a 100% chance of gaining Rs 50,000.
Question 2 - You have Rs 2 lakhs and you must pick one of the following choices:
Choice A: You have a 50% chance of losing Rs 1 lakhs and 50% of losing nothing.
Choice B: You have a 100% chance of losing Rs 50,000.
Take your pick of the two questions above
- Majority of people choose "B" for question 1 and "A" for question 2. People are willing to settle for a reasonable level of gains (even if they have a reasonable chance of earning more), but are willing to engage in risk-seeking behaviour where they can limit their losses. In other words, losses are weighted more heavily than an equivalent amount of gains.

You’re shopping for cars and you’re down to a final choice between a Honda City and Verna. Both have distinct advantages and you finally choose one model. Next time, if you have to buy a car or to recommend one to somebody else, you recommend the same model that you have bought.
- You will remember the advantages of the alternative you selected and not the advantages of the one you didn’t choose. This bias affects future buying decisions, which is why we often get into a “rut” of buying the same product type over and over again. When we go to make a selection, it is much easier to recall the positive attributes of the product we purchased rather than the product we didn’t purchase. Same bias is reflected in investment decisions too – a person investing in Provident Fund or another one in stocks will continue to do so without doing a fresh review for every purchase.

You find that the stock of a company, which you believed to be good, has fallen considerably in a very short amount of time. You go ahead and purchase a large amount of it believing that the drop in price provides an opportunity to buy the stock at a discount, without conducting any further research.
- It is true that the fickleness of the overall market can cause some stocks to drop substantially in value, allowing people to take advantage of this short- term volatility. However, stocks quite often also decline in value due to changes in their underlying fundamentals. For instance, suppose XYZ stock had very strong revenue last year, causing its share price to shoot up from Rs 25 to Rs 80. Unfortunately, one of the company's major customers, who contributed to 50% of XYZ's revenue, decided not to renew its purchasing agreement with XYZ. This change of events causes a drop in XYZ's share price from Rs 80 to Rs 40. Investor erroneously believes that XYZ is undervalued. Keep in mind that XYZ is not being sold at a discount; instead the drop in share value is attributed to a change to XYZ's fundamentals (loss of revenue from a big customer).

Some other documented Investor Behaviour

• People are often impatient to sell a good stock.
• People often make a distinction between money easily made from investments, savings or tax refunds and their ‘hard-earned’ salary - money ‘easily’ earned is more readily spent or wasted.
• People feel the loss of a Rupee to a far greater extent than they enjoy gaining a Rupee.
• Investment in stocks and mutual funds are often thought of as pieces of paper rather than as part ownership of a company. That’s why investments in Gold and real-estate (the physical investments) are always valued more than paper investments.
• People tend to think in extremes - the highly probable news is considered certain, while the improbable is considered impossible.
• People often take a short-term viewpoint. Recent market losses lead to suspicion and caution, while recent gains lead to action. Long-term losses or gains get forgotten, even if they are of a greater magnitude.
• Most people will avoid risk when there is the chance of a certain gain. But faced with a certain loss, they become big risk takers.
• People often assume that lack of market or price movement represents stability, while volatility represents instability.
• People follow the crowd, and are heavily influenced by other people or compelling news; they fail to check out the real facts themselves.

Taxation of House Rent Allowance (HRA)

We often come across people who consider HRA as the amount which is given in-lieu of accommodation and hence fully exempt from tax. There are an equal number of people who consider it as fully taxable – hence, if they get, say, Rs 20,000 as HRA per month, they consider that they are effectively getting only Rs 14,000 if they are in 30% tax bracket. None of the above is actually true, as explained below.
HRA is the amount paid by the employer to an employee as a part of the salary package. HRA is given to meet the cost of rented accommodation taken by the employee for his stay. A person can claim exemption on his house rent allowance (HRA) under the Income Tax Act if he stays in a rented house. The exemption of HRA is covered under Section 10 (13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.
Two conditions should be met to avail the exemption on HRA:
 The rent must actually be paid by the assessee for the rented premises which he occupies.
 The rented premises must not be owned by him.
Please do not confuse the above two conditions as ‘conditions for grant of HRA’ – it is not so. These are the conditions to be met if you wish to seek Income Tax exemption on HRA which has been granted to you by your employer.
While calculating HRA, we effectively calculate the amount that is exempt from being considered as part of the salary. This implies that complete HRA will be considered as part of the salary, except the amount as calculated below.
The amount of HRA exempt is the LEAST of these 3 conditions:
 Actual amount of HRA received by the person in the relevant period during which the rental accommodation was occupied by him.
 Amount left after deducting one-tenth (1/10th) of the person's salary for the relevant period from the actual rent paid by him (Rent paid minus 10% of salary). [Note: No deduction if rent paid does not exceed 10% of salary]
 In case the house is in Mumbai, Calcutta, Delhi or Chennai, 50% of the salary of the person in the relevant period. In case the house is in any other place, 40% of the salary of the person in the relevant period.
Example to Calculate HRA
The deduction is available only for the period during which the rented house is occupied by the employee and not for any period after that. For example, during the year 2012-13, assume an assessee resides in Pune and gets a salary of Rs 8 lakhs as basic and Rs 3 lakhs as HRA. He pays an actual rent of Rs 2.4 lakhs.
Amount of HRA exempt would be least of the following three conditions:
• Actual HRA received = Rs 3 Lakhs
• Excess of rent paid over 10% of salary, i.e., Rs 2.4 lakhs less Rs 80,000 (which is 10% of Rs 8 lakhs salary) = Rs 1.6 lakhs.
• 40% of salary (as the accommodation is in Pune), i.e., 40% of Rs 8 lakhs = Rs 3.2 lakhs.
As, out of these, Rs 1.6 lakhs is the least, it will be allowed as a deduction from salary for the year. Thus, HRA considered as part of the salary would be 3 lakhs less 1.6 Lakhs = Rs 1.4 lakhs, which will be counted as his taxable income.
Definition of salaryFor the purpose of rriving at the deduction available, salary means the basic salary and also includes the Dearness Allowance (DA), if the terms of employment provide for it, and the Commission based on a fixed percentage of turnover achieved by the employee.
When is the deduction not available
The deduction for HRA is not available in case the employee lives in his own house. The deduction is also not available in case the employee does not pay any rent for the accommodation used by him, eg, living with his parents and paying no rent to them.