When technical support engineer Uday Anand, 31, first began working at the age of 24, he wanted to save enough money to finance his family's future. Like many across the country, Anand began by investing small amounts in various schemes and post-office savings accounts-secure investments that provided returns of 8 per cent per annum. But the family has bigger ambitions now. Uday's wife Lakshmi, 26, and working with Gati Logistics, has now joined him in the quest to increase the family corpus. And like many other households, the Anands began by drawing up a budget and planning much in advance. "I start planning for taxes at the beginning of the financial year," he says.

Month after month Anand checks his budget for deviations and overshoots. Besides, Anand has invested in several pension schemes, which will accumulate to significant Rs 42 lakh in 20 years. Discipline and a propensity to save has enabled Anand build up a sizeable corpus.

Public relations professional Vineet Madhukar, 36, on the other hand, is walking on another road to wealth. He believes in the power of real estate. He bought a plot in Greater Noida, financed through bank loans, that have been paid off. He, now hopes to sell it around the time of the Commonwealth Games when prices are expected to appreciate substantially. Besides, he invests about Rs 50,000 a year on unit-linked insurance plans and traditional endowment schemes, and another Rs 50,000 in stocks and mutual funds. He now has a diversified equity portfolio with investments in different sectors. But he's betting big on real estate-he purchased two apartments in the last four years, one in his hometown in Ranchi and another in Chennai. Vineet feels that real estate will turn out to be his money spinner.

What do both have in common? They have plans of becoming rich, and both know that the only way to reach that goal is to invest in productive assets-assets that generate returns. Ten years back, investment options were limited. Most investors were forced to invest in the standard schemes that didn't suit their financial profiles. But that has changed, and investors now have options ranging from real estate to bullion to stocks and bonds.

Set your Target

Assess Risks

The Budget has not changed the taxation on assets such as stocks and bonds, barring an increase in the dividend distribution tax on liquid funds. An already existing investor, with a financial plan in place, does not have to change or alter his financial investment plan yet. But for a new investor, there's a need to draw and follow a defined road map. Crorepatis are not made overnight. You have to strike a balance between paying home bills, taxes, children's school and college fees, manage emergency expenses and then leave enough to reach your target.

You need to assess your financial environment to maximise gains. You also need to balance between risk and rewards. On the tax savings front, investors seem to overlook the Public Provident Fund (PPF) and instead invest in the riskier equity linked savings schemes (ELSS) and real estate. But at the time of redemptions, if the stock markets tumble and investor stands to lose out. Bear this in mind: drawing up an asset allocation plan depends on your individual risk appetite.

"It's not easy to find an optimum mix between stocks, mutual funds, debt and other instruments," says Surya Bhatia of Asset Managers, a financial advisory firm. "The mix depends on each individual's personal needs and risk-taking ability."

Besides, financial planners say that investments must be planned according to the need as well as the age of the investor. As a thumb rule, you can draw an asset mix by reducing your age from 100, and the result is the amount of exposure you can have towards equity. So if you are 30, subtract 100, and the balance 70 could be the proportion of equity in your portfolio. "A 30-year-old individual can invest up to 70 per cent in equity in comparison to a relatively older person whose financial commitments are higher," says Himanshu Kohli of Client Associates, a financial advisory firm. In fact, one needs to take a look at one's personal balance sheet before making investment allocations, asserts Kohli, adding that one should not forget the investment horizon-period of investment. Besides, aggressive 30-year-olds can even add on to equities, if they are comfortable with the risks.

Draw an Asset Plan

Different assets perform differently, at different times. Riding the liquidity boom, most assets have run up in recent times, but historically, they have responded differently. It's essential to look at the yields of different assets, with respect to inflation. Historically, equities offer yields that are 8-10 per cent higher than inflation. So if inflation stood at around 4 per cent, yields from equities ranged about 12-14 per cent. Real estate, by and large, pays back about 6-8 per cent, says Kohli. "Investing in equities is definitely a better option as yields are 10 per cent higher, but the risk liabilities on those are equally high," he asserts.

What this means is that younger investors can draw an asset accumulation plan that tilts towards equities. Since 1990, equities have returned a compounded growth rate of 18.9 per cent per annum. But the investment comes with some risks. Hence, it's prudent to invest in about 3-4 equity funds that have diversified allocations either in the large-, mid- and small-cap stocks. Start with an sip (systematic investment plan) in open-ended equity funds. Regularity and consistency of investments is the key to making long-term wealth, and sips fill that role.

Fixed income instruments such as bank fixed deposits, bonds, fixed income mutual funds and fixed maturity plans, are all instruments that yield a return of 8-10 per cent, depending on the interest rate prevalent in the economy. As of now, short-term (less than 1-year) deposits fetch a higher yield (about 9-10 per cent) than the long-term 10-year bond yield (currently 7.98 per cent). Essentially, fixed income has interest rate and default risk. But if you invest in good quality, AAA-rated paper and hold out the entire tenure, both these risks get reduced substantially. Conservative and older investors may want to invest more here, to reduce overall portfolio risks. Gold is another option. Gold Funds allow investors to hold gold in paperless form. But the yields in gold are usually close to inflation.

"The key to accumulating wealth is to start saving regularly. Start monthly investments if your cash flow permits you to do it as early as you can," Bhatia recommends. The higher your assets from the historical mean, the luckier you are. Like any other good plan, an investment plan to grow your wealth will pay off only if you are willing to put in the time, and lots of it.

The Open-Closed principle
Closed-end funds have made a comeback, alright. But how do they compare against open-end funds?
Mahesh Nayak

They were not as popular, say, two years ago, but recently they staged a comeback. Over 39 closed-end equity funds made their way to fund investors last year, overshadowing the usually more popular open-end funds-30 of them hit the market-by a distance. Why didn't open-end funds find much favour with investors and what's it about closed-end funds that investors seemed to lap up?

Among the many reasons, closed-end funds promised more rewards over the long-term as they invested in companies that could scale up over, say, a three-year or a five-year horizon. As the companies grew bigger, investors could reap the benefits of a higher return on investment. Besides, closed-end funds have the comfort of investing in companies that trade less frequently with low volumes. As these scale up, more investors participate adding to the liquidity of the counter, and providing an exit route to the fund. In short, many closed-end funds could invest in small but fast growing companies for the long haul.

Open-end funds, on the other hand, have to invest in companies that are fairly liquid and, many a time, in companies that have already been discovered by the markets. Open-end funds have to provide for redemptions that could arise in their funds, and hence are mostly invested in blue chips. Most of them, therefore, are expected to provide moderate returns, usually in line with the market, perhaps outperforming by some basis points.

How They Fared?

But have the closed-end funds lived up to their promise of better returns against their peers in the open-end category? While a year is too short a period to compare these funds, many of these funds have not performed as well as the open-end funds. Till March 7, 2007, the average one-year return for closed-end funds showed a 0.3 per cent fall, as compared to a 4.2 per cent gain in the open-end category. This clearly showed the markets favoured stronger blue chip companies, mostly in open-end funds.

Over the medium term, too, the performance of closed-end funds didn't match up with the large cap open-end funds. As against a rise of 2 per cent in a six-month period for closed-end funds, open-end funds saw a rise of 3 per cent, beating their closed-end counterparts. But in the extreme short-term, closed-end funds seemed to have outperformed by a notch. In the recent carnage that has caught the market on the backfoot, the larger companies were heavily offloaded in the market as open-end funds fell by around 11 per cent, as compared to the smaller cap dominated closed-end funds that fell by a notch lesser at 10 per cent (see Lagging Behind?). Over the longer tenure of two years, though, closed-end funds have bettered open-end funds by a 4 basis points, giving a return of 33.5 per cent as against 29.5 per cent for open-end funds.

Markets, clearly, prefer the larger, more liquid and strong companies, ignoring the smaller counters. Foreign investors invested mostly in the large-cap stocks, and therefore, the open-end funds performed better last year. Says Hemant Rustagi, CEO, Wiseinvest Advisors: "When the small caps and mid-caps are out of favour, closed-end fund managers find it difficult to outperform open-end funds." Fund houses opined that the close-ended structure gives the fund manager more flexibility to invest in non-liquid but potential stocks that can be the large caps of tomorrow. A closed-end fund ensures that a fund house can maintain a stable corpus with flexibility to the fund manager without the pressures of redemption.

However, the portfolio composition between closed-end and open-end funds is much different, barring a few smaller, less liquid counters. But over the last year, these inclusions have dragged down the performance of these funds. Additionally, closed-end funds are not able to mobilise fresh inflows, and with the markets crashing, they may have to stay invested in stocks and so many aren't able to buy them at lower prices.

The New Rules

Meanwhile, some of the market men opine that the new rules governing closed- and open-end funds have prodded many fund houses to come out with a closed-end fund. Closed-end funds are allowed to amortise the initial issue expenses-to a maximum of 6 per cent-over the tenure of the fund. This does not impact the NAV (net asset value) of the fund immediately. On the other hand, open-end funds have to immediately account for the issue expenses. This reduces the initial NAV expenses of 6 per cent. Says one market observer: "Fund houses seem to be taking advantage of the loophole in SEBI's guidelines for rationalisation of initial issue expenses."

Besides, marketing and other expenses are connected with sales and distribution of schemes from the entry load (that's 2.25 per cent) and not through the initial issue expenses. "Huge costs involved during exit has made it difficult for us to sell closed-end funds," said a distributor in Mumbai.

One can argue that equity linked saving schemes (ELSS is the most preferred among closed-end funds) give the investor the benefit of tax saving compared to open-end funds at a time when their returns are almost similar. If the investor is unwilling to lock-in his money for three-to-five years, it may certainly not be a good idea to choose closed-end funds, when investors have about 500 open-end equity funds to choose from.

Besides, for those investors who want to redeem closed-end funds before maturity, they will have to bear additional exit loads. High exit loads are a deterrent to premature withdrawals, but in a correcting market, it forces investors to stay put. Hence, financial experts suggest going slow on a closed-end fund. Says Rustagi: "Even though equity investment is for the long-term, I would not like to advocate investors to go in for closed-end funds as they aren't liquid and the costs involved for exiting before maturity is more than open-end funds."

5 Ways To Manage Your EMI
As home loan interest rates rise, monthly payments are getting costlier. How should you tackle it?
Clifford Alvares

It's more than two years since interest rates began moving upwards and home buyers began coping with the rising rates. Interest rates increased a whopping 27 per cent since the lows of October 2004, when it touched 7.5 per cent, and with some banks even lower. But now the cycle has turned a full circle. Floating rates are hovering back at 11 per cent, back to levels about four years ago, while the fixed rates have touched 12 per cent again. Everyone you know is affected by the hike. Home buyers can't afford the price tag, while sellers need to scale down their prices. But for the millions who have taken a home loan, it's time to come to terms with the new reality: learn the art of EMI management.

For starters, if you have a fixed-rate mortgage, there's nothing to worry about. As your monthly outgoing is fixed at a certain interest rate over the tenure of the loan, household budgets aren't affected. Perhaps you can invest the money that you would have otherwise paid in some financial instrument. But over the last three years, as interest rates were falling, floating rates were very popular among new home buyers-even now many borrowers are opting for the floating rate loan. Therefore, with the interest rates zooming higher, monthly outflows are skyrocketing. Let's say, for instance, you bought a home in October 2004. The monthly instalment on a Rs 50 lakh home loan at a rate of 7.5 per cent was around Rs 40,278. With the rate zooming to around 11 per cent (floating), the EMI has now shot up to Rs 51,609, an overall increase of Rs 11,331. That's a tidy dent in the household budget.

The Rate Ahead

Perhaps the big question on the borrower's mind is whether the interest rates will go up any more? With the country's biggest mortgage player-ICICI Bank-raising its rates twice in the recent past to 11 per cent (floating) and 12 per cent (fixed), it's unlikely that there will be any further rate hikes in the immediate short term. HDFC too has upped its floating rates to 10.25 per cent (floating) from April 1, 2007. In the long term, however, the rate environment remains unclear. Demand for credit is strong at 30 per cent and inflation continues to spook the macroeconomy. Until both these cool down, which seems unlikely as of now, the rates are expected to stay put at these high levels, but may flatten for now. Says Harsh Roongta of Apnaloan.com: "It's definitely not going to come down in the very near term. Interest rates move in cycles. At this point, the cycle is up, in the long term, the cycle will turn."

The EMI Strategy

Don't shift to fixed yet: If you have a floating rate loan, consider a few things. First, there's no need to panic. Says Roongta: "There's no point in panicking, or shifting to fixed-rate loans. There's a difference in spreads between fixed- and floating-rate loans, which still make floating rates attractive."

Increase your EMI: Besides, most banks will not be upping your real monthly outgo. That's because most of them prefer to increase the tenure than make you rewrite your cheques again and do additional paperwork. If you have a substantial outstanding pending, it will increase your tenure considerably. Let's consider a home loan at 9 per cent that has an EMI of Rs 900 per lakh for a 20-year period. If the rate goes up to 10.25 per cent, and if the monthly instalment has not been changed by the bank, you will have to pay the same instalment for a whopping nine years and two months more-that almost turns your 20-year loan to a 30-year one.

Therefore, if your rate has increased and your monthly instalment is still the same, you should look at increasing your instalment than pay the same for nine more years. It will also increase your interest burden unnecessarily. If you think that interest rates are going to come down, then you may want to continue at the older instalment. But in the near future (6-12 months), rates are more likely to remain steady.

Revert to vanilla loan: For others who have taken a flexi-instalment plan or a rising EMI plan, it's best to revert to a normal home loan strategy. A rising EMI plan only tends to postpone the payments, and again, inflates the interest rate bill unnecessarily, and floating rate borrowers will be harder hit if the rates rise any further.

Make additional payments: For those who can afford to, you can make additional payments or reduce the tenure of your loan. Try to increase your monthly instalment by small amounts such as Rs 500 or Rs 1,000. For example, if you increase your monthly instalment by Rs 1,000 every month on a Rs 50 lakh loan at 10 per cent per annum, you save Rs 4,77,000 in interest costs and you will retire your loan 1 year and 2 months earlier (see Can You Afford a House?).

Reduce your tenure: For those who can afford one more step forward, try and get your home financier to reduce the home loan tenure. Most housing finance companies offer a standard 20-year loan product-you can try and get it down to, say, 15 years. For example, if you borrow Rs 1 lakh for a period of 240 months (20 years) at 10.25 per cent per annum, your EMI works out to Rs 982. But if you reduce the tenure to, say, 180 months (15 years), your EMI increases to Rs 1,090, an increase of just Rs 108. While the EMI increases marginally per lakh, it reduces the interest burden on the borrower. In the same 15-year loan, the total interest costs decrease by Rs 39,403. That may not seem like much savings, but the strategy will free you of household debt burden five years earlier.

For the millions of floating rate borrowers, there's isn't much sense to paying extra money in interest income. By using just one or two of these methods you can save thousands or even tens of thousands of rupees in the cost of your home loan.

Will The Tax Hurt?
Art prices have soared through the roof, but will the new capital gains tax stem the rise?
Amit Mukherjee

Perhaps it's got nothing to do with the aesthetics or style or the artist, but with the soaring art prices. In a move that could temper the booming art world, Finance Minister P. Chidambaram has amended the definition of 'capital asset' in the tax rules to include "paintings, drawings, works of art, archaeological collections and sculptures". Painters, art aficionados, hard-core market pundits and gallery owners are speculating about the pros and cons of the new capital gains tax. Some in the art fraternity are unfazed, and others are cringing at the new tax slapped on already rising prices.

"The art boom has reached a plateau and the recent move may just aggravate the situation," says Anoop Kamath, Publisher and Editor of Matters of Art. He says that the Indian art sector, which is pegged at Rs 5,000 crore, and much of the organised market, would get hit in a big way. The Budget says sale of art will be taxed at the marginal rate-the income tax rate applicable to the seller-if sold within three years, and at 20 per cent if held over three years. The Budget does not list all the items that make "art" but mentions drawings, paintings and sculpture. Until now, art came under personal effects and was, therefore, understood to be tax-free.

Art belonged to the private world of the rich and famous where price was meaningless compared to the inherent aesthetic beauty. Oil paintings, miniatures, abstract paintings were bought by the big corporate czars and art collectors to adorn their houses. Perhaps not any more. It seems trading in paintings and watercolours have become a lucrative business on which collectors hope to make a fast buck. With art prices soaring, some famous, and sometimes upcoming, artists fetch prices much higher than their quoted prices at auctions. "In the recent times, some of the works by artists have appreciated almost three to four times over the base price in auctions," Kamath admits.

But Alka Raghuvanshi, an independent curator and artist, says: "I think the new move will put the trade into a more organised shape." According to her, the market at the moment is unrealistic and there is no basis for these sky-high prices and no structure to the prices. Artists that barely begun to brush a few strokes in the first year fetch Rs 90,000, and in the next year comes a big leap where the base-price jumps to Rs 4 lakh. "This defies all logic as there can be no justification to this," says Raghuvanshi.

This, together with huge demand and limited supply, has rapidly raised the price of art, giving the government strong reason to include its sale in the list of taxable income. "It is more systematic growth of the market that one can look forward to," says Raghuvanshi. But others say that it was difficult to categorise art as personal effect with the taxmen. "Most art investors could not claim the work to be personal effect. Even if someone had a genuine personal effect, it was very unlikely that the i-t department would accept it, especially given that the amount it fetches is huge," says Neville Tulli of Osian Art Gallery.

He is happy that art sale is now under the purview of capital gains and the confusion has been done away with. "The new transparency will help build a systematic industry for cultural artefacts," Tulli says. But for the artists that's not such welcome news. "Tax would discourage genuine buyers who are passionate about art but find good art unaffordable," says a young Delhi-based studio potter and sculptor. Now with the added tax and vat slapped on it, it will just take art away from the reach of the people, he adds.

Raghuvanshi admits the move might see a slide in the art market but would definitely stabilise in the long run. Contrary to the queries and apprehensions of many art collectors, there is no proposal to tax the paintings that adorn the walls of your house or other artworks. The tax kicks in only when you sell an artwork and make a profit. What the Finance Minister has proposed is to amend the definition of 'capital asset' in the tax rules to include "paintings, drawings, works of art, archaeological collections and sculptures", along with jewellery.

Even then, there are ways to reduce, and make your art sale tax-efficient. Since it is a capital asset it will attract all the benefits that go along with a capital asset. If a person sells an artwork after three years from the date of purchase, the gains will be taxed as long-term capital gains. The seller can claim the benefits of indexation (which raises the purchase price by the inflation rate), and reduce his tax incidence. Capital gains will also get the benefit of full tax exemption under Sections 54ec. If you invest your long-term capital gains in NHAI/REC bonds (54ec), you won't have to pay any tax on that part.

But for those who have been holding art for less than three years, the surplus will be treated as short-term capital gains and will be taxed at the rate of tax applicable to overall income. Whether art prices will come down remains to be seen, but the government's burgeoning tax revenues are surely headed higher.

NEWS ROUND-UP
Paul Mortimer-Lee/Global Head of Market Economics, BNP Paribas, London
"India has made great strides in recent years"

Much of the questions in today's stock market focusses on what's happening in the global markets. How much is India integrated and how its economy will fare? How will the market perform in the short-term? But Paul Mortimer-Lee, Global Head of Market Economics, BNP Paribas, London, is fairly positive about India's long-term growth. The recent wobbly market is due to unwinding of liquidity, but much of what happens next depends on data from the global economy, especially the us. In a conversation with Clifford Alvares, he outlines the risks Indian markets face. Excerpts.

On interest rates

We believe that the us Federal Reserve will start cutting interest rates aggressively starting May or June. We see that the quit rate (people quit their existing jobs, if they are confident of getting another) are falling. So it elbows down to continuing activity below potential, unemployment rising and a squeeze on profit margins. The Fed is not worried that the inflation rate will go up, but they are more worried that may be it won't come down as quickly as it had hoped. People from Washington have been talking on financial stability and that could mean that the cutting cycle will start earlier than we expect.

On implications for India

The US consumer has been the consumer of last resort. If us consumption and investments slow down, you have knock-down effects elsewhere. You have seen that the Indian stock market has reacted quite violently, it's lost more than the s&p Index and that's because we have seen an increased distaste for risk, or less appetite for risk. It will have an impact on the inflows into the foreign reserves of India. rbi is trying to moderate the appreciation of the exchange rate because of the capital flows. That has led to very fast monetary growth in India, and that's why you have had higher industrial production, faster gdp and a rising inflation rate.

If the inflows slow down, it will slow the growth in the economy. It won't do much to reign in inflation soon, but eventually it will do so. Slower growth is what you should expect because of the change in the capital markets. Risky assets will become cheaper as banks become more cautious in their attitude to lending. So, in a way, you will see a tightening of credit standards globally.

On the yen carry trade

People borrowed in low-yielding currencies particularly the Japanese yen or in currencies which two or three weeks ago they thought could only depreciate, but now, the volatility of some of the markets, the increased risks if you like, is making people liquidate some of their assets. The availability of cheap funds has been very important to many assets and valuations, and the Bank of Japan is withdrawing some of that. And it may continue to liquidate positions.

One thing is certain: when volatility in financial markets is very low, people take more risks and borrow more in order to take that risk. Now, volatility has increased and people stand to make bigger losses on their existing positions; so the natural thing to do is to take less risks. That's why, although the markets have come off their highs, the fall is not massive. It's a scaling back of positions. Whether it will get worse is difficult to predict, but we are not finished yet. I will be pretty cautious. My attitude to the market is: I don't want to catch a falling knife.

On India's long-term future

I haven't talked to anybody who is not positive on India's long-term future. There are question marks about inflation, which may make people a little bit more risk-averse and price-earnings ratios don't make the Indian market look the cheapest in the emerging market universe. Then, you have had a Budget about which people have had mixed reactions, so I think India will continue to suffer in the short term. There may be short-term slowdown in demand from the global economy. The global economy will grow slower this year and that will affect everybody, including India. But what determines whether a country does well or badly in the longer term is the supply dynamism of the economy and there, India has made great strides in recent years. Supply is expanding India's comparative advantages in certain sectors and that will continue over time. I am positive on the longer-term.

Dividend Bonanza
The increase in dividend distribution tax means investors get an early bonanza in their hands.

Shareholders in many companies are due for a dividend bonanza. More companies are rushing to pay dividends before the financial year ends. With the Finance Minister increasing the dividend distribution tax from 12.5 per cent to 15 per cent, which is applicable from April 1, 2007, the move is expected to result in substantial savings for the companies. Already, a host of companies have announced interim dividends. Among them are blue chips like Reliance Industries, Hindustan Unilever, Mahindra & Mahindra and Grasim Industries. Other mid-sized companies like Sun Pharmaceuticals, TV 18, Colgate, too, have announced similar plans.

The move comes on the back of the government's proposal to increase dividend distribution tax (DDT). As of now, the effective DDT of 12.5 per cent works out to 14.03 per cent after surcharge and education cess is added. But with the increase in dividend distribution tax to 15 per cent, the addition of surcharge and education cess results in an effective tax rate of 17 per cent. Some of the companies that pay huge dividends to their shareholders will save a bundle by paying dividends early, as it will result in savings of the dividend distribution tax. ONGC paid the highest dividend last year of Rs 6,416.71 crore, followed by NTPC (Rs 2,308.7 crore) and Indian Oil Corporation (Rs 1,460.02 crore).

However, the dividend is tax free in the hands of shareholders. P. Chidambaram had in an earlier Budget exempted equity dividends from tax and introduced dividend distribution tax instead. For investors, it's a welcome windfall.
-Clifford Alvares

Multiple Fund Managers
Optimix launches a fund with a difference-one where other fund houses will provide advice.

Fund house optimix has launched a new multi-manager equity fund called Manage the Manager. Like every other fund, the primary objective is to provide long-term capital appreciation by investing predominantly in equity and equity-related securities. However, a panel of third party investment advisors comprising fund managers of various empanelled mutual funds or a portfolio management service will provide the investment advice.

Says Mugunthan Siva, CIO, Optimix: "Unlike the concept of star fund manager, we are trying to reach the sky by seeking advice from experts." Optimix will identify the sectors, while external fund managers will do the stock picking. If Optimix likes the construction sector, it can mandate a fund house, say, Templeton to choose construction stocks, which Optimix will buy. Optimix will build a portfolio from these recommendations. "It's basically a high volumes and low-margin fund," says Siva, adding that the mutual fund will pay the fund manager a fee for his advice, after deducting the AMC's administrative cost.

An open-ended diversified equity scheme, the fund opened for subscription on March 7, 2007 and will close on March 30, 2007. During the NFO, the units will be offered at the face value of Rs 10 per unit with minimum investment of Rs 5,000. However, the entry load will be 2.50 per cent for applications below Rs 5 crore and nil for applications of Rs 5 crore and above. The scheme doesn't levy any exit load and offers two options to the investor-dividend and growth, and its performance is benchmarked to S&P CNX Nifty.