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7 investment risks and how to overcome them !! A strategy

Investment and Risk !!! tow sides of a Coin

The fact is that you cannot get rich without taking risks. Risks and rewards go hand in hand; and, typically, higher the risk you take, higher the returns you can expect. In fact, the first major Zurich Axiom on risk says: "Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough". Then the minor axiom says: "Always play for meaningful stakes".

The secret, in other words, is to take calculated risks, not reckless risks.

In financial terms, among other things, it implies the possibility of receiving lower than expected return, or not receiving any return at all, or even not getting your principal amount back.

Every investment opportunity carries some risks or the other. In some investments, a certain type of risk may be predominant, and others not so significant. A full understanding of the various important risks is essential for taking calculated risks and making sensible investment decisions.

Seven major risks are present in varying degrees in different types of investments.

Default risk

This is the most frightening of all investment risks. The risk of non-payment refers to both the principal and the interest. For all unsecured loans, e.g. loans based on promissory notes, company deposits, etc., this risk is very high. Since there is no security attached, you can do nothing except, of course, go to a court when there is a default in refund of capital or payment of accrued interest.

Given the present circumstances of enormous delays in our legal systems, even if you do go to court and even win the case, you will still be left wondering who ended up being better off - you, the borrower, or your lawyer!

So, do look at the CRISIL / ICRA credit ratings for the company before you invest in company deposits or debentures.

Business risk

The market value of your investment in equity shares depends upon the performance of the company you invest in. If a company's business suffers and the company does not perform well, the market value of your share can go down sharply.

This invariably happens in the case of shares of companies which hit the IPO market with issues at high premiums when the economy is in a good condition and the stock markets are bullish. Then if these companies could not deliver upon their promises, their share prices fall drastically.

When you invest money in commercial, industrial and business enterprises, there is always the possibility of failure of that business; and you may then get nothing, or very little, on a pro-rata basis in case of the firm's bankruptcy.

A recent example of a banking company where investors were exposed to business risk was of Global Trust Bank. Global Trust Bank, promoted by Ramesh Gelli, slipped into serious problems towards the end of 2003 due to NPA-related issues.

However, the Reserve Bank of India's [Get Quote] decision to merge it with Oriental Bank of Commerce [Get Quote] was timely. While this protected the interests of stakeholders such as depositors, employees, creditors and borrowers was protected, interests of investors, especially small investors were ignored and they lost their money.

The greatest risk of buying shares in many budding enterprises is the promoter himself, who by overstretching or swindling may ruin the business.

Liquidity risk

Money has only a limited value if it is not readily available to you as and when you need it. In financial jargon, the ready availability of money is called liquidity. An investment should not only be safe and profitable, but also reasonably liquid.

An asset or investment is said to be liquid if it can be converted into cash quickly, and with little loss in value. Liquidity risk refers to the possibility of the investor not being able to realize its value when required. This may happen either because the security cannot be sold in the market or prematurely terminated, or because the resultant loss in value may be unrealistically high.

Current and savings accounts in a bank, National Savings Certificates, actively traded equity shares and debentures, etc. are fairly liquid investments. In the case of a bank fixed deposit, you can raise loans up to 75% to 90% of the value of the deposit; and to that extent, it is a liquid investment.

Some banks offer attractive loan schemes against security of approved investments, like selected company shares, debentures, National Savings Certificates, Units, etc. Such options add to the liquidity of investments.


The relative liquidity of different investments is highlighted in Table 1.



Table 1

Liquidity of Various Investments

Liquidity
Some Examples

Very high
Cash, gold, silver, savings and current accounts in banks, G-Secs

High
Fixed deposits with banks, shares of listed companies that are actively traded, units, mutual fund shares

Medium
Fixed deposits with companies enjoying high credit rating, debentures of good companies that are actively traded

Low and very low
Deposits and debentures of loss-making and cash-strapped companies, inactively traded shares, unlisted shares and debentures, real estate




Don't, however, be under the impression that all listed shares and debentures are equally liquid assets. Out of the 8,000-plus listed stocks, active trading is limited to only around 1,000 stocks. A-group shares are more liquid than B-group shares. The secondary market for debentures is not very liquid in India. Several mutual funds are stuck with PSU stocks and PSU bonds due to lack of liquidity.

Purchasing power risk, or inflation risk

Inflation means being broke with a lot of money in your pocket. When prices shoot up, the purchasing power of your money goes down. Some economists consider inflation to be a disguised tax.


Given the present rates of inflation, it may sound surprising but among developing countries, India is often given good marks for effective management of inflation. The average rate of inflation in India has been less than 8% p.a. during the last two decades.

However, the recent trend of rising inflation across the globe is posing serious challenge to the governments and central banks. In India's case, inflation, in terms of the wholesale prices, which remained benign during the last few years, began firming up from June 2006 onwards and topped double digits in the third week of June 2008. The skyrocketing prices of crude oil in international markets as well as food items are now the two major concerns facing the global economy, including India.

Ironically, relatively "safe" fixed income investments, such as bank deposits and small savings instruments, etc., are more prone to ravages of inflation risk because rising prices erode the purchasing power of your capital. "Riskier" investments such as equity shares are more likely to preserve the value of your capital over the medium term.

Interest rate risk

In this deregulated era, interest rate fluctuation is a common phenomenon with its consequent impact on investment values and yields. Interest rate risk affects fixed income securities and refers to the risk of a change in the value of your investment as a result of movement in interest rates.

Suppose you have invested in a security yielding 8 per cent p.a. for 3 years. If the interest rates move up to 9 per cent one year down the line, a similar security can then be issued only at 9 per cent. Due to the lower yield, the value of your security gets reduced.

Political risk

The government has extraordinary powers to affect the economy; it may introduce legislation affecting some industries or companies in which you have invested, or it may introduce legislation granting debt-relief to certain sections of society, fixing ceilings of property, etc.

One government may go and another come with a totally different set of political and economic ideologies. In the process, the fortunes of many industries and companies undergo a drastic change. Change in government policies is one reason for political risk.

Whenever there is a threat of war, financial markets become panicky. Nervous selling begins. Security prices plummet. In case a war actually breaks out, it often leads to sheer pandemonium in the financial markets. Similarly, markets become hesitant whenever elections are round the corner. The market prefers to wait and watch, rather than gamble on poll predictions.


International political developments also have an impact on the domestic scene, what with markets becoming globalized. This was amply demonstrated by the aftermath of 9/11 events in the USA and in the countdown to the Iraq war early in 2003. Through increased world trade, India is likely to become much more prone to political events in its trading partner-countries.

Market risk

Market risk is the risk of movement in security prices due to factors that affect the market as a whole. Natural disasters can be one such factor. The most important of these factors is the phase (bearish or bullish) the markets are going through. Stock markets and bond markets are affected by rising and falling prices due to alternating bullish and bearish periods: Thus:

Bearish stock markets usually precede economic recessions.
Bearish bond markets result generally from high market interest rates, which, in turn, are pushed by high rates of inflation.
Bullish stock markets are witnessed during economic recovery and boom periods.
Bullish bond markets result from low interest rates and low rates of inflation.
How to manage risks

Not all the seven types of risks may be present at one time, in any single investment. Secondly, many-a-times the various kinds of risks are interlinked. Thus, investment in a company that faces high business risk automatically has a higher liquidity risk than a similar investment in other companies with a lesser degree of business risk.

It is important to carefully assess the existence of each kind of risk, and its intensity in whichever investment opportunity you may consider. However, let not the very presence of risk paralyse you into inaction. Please remember that there is always some risk or the other in every investment option; no risk, no gain!

What is important is to clearly grasp the nature and degree of risk present in a particular case � and whether it is a risk you can afford to, and are willing to, take.


Success skill in managing your investments lies in achieving the right balance between risks and returns. Where risk is high, returns can also be expected to be high, as may be seen from Figure 1.


Figure 1: The Risk-Return Trade-Off


Once you understand the risks involved in different investments, you can choose your comfort zone and stay there. That's the way to wealth





30 tax smart ways plan to increase your take home pay

Internet Addiction is Bad *** STOP EMAILS***

Tomato Story

A Jobless man applied for the position of 'office boy' at Microsoft.
The HR manager interviewed him then watched him cleaning the floor as a test.

'You are employed' he said. Give me your e-mail address and I'll send you the application to fill in, as well as date when you may start.

The man replied 'But I don't have a computer, neither an email'.

'I'm sorry', said the HR manager. If you don't have an email, that means you do not exist. And who doesn't exist, cannot have the job.'

The man left with no hope at all. He didn't know what to do, with only $10 in his pocket. He then decided to go to the supermarket and buy a 10Kg tomato crate.
He then sold the tomatoes in a door to door round. In less than two hours,
he succeeded to double his capital. He repeated the operation three times,
and returned home with $60.

The man realized that he can survive by this way, and started to go everyday earlier, and return late. Thus, his money doubled or tripled everyday.

Shortly, he bought a cart, then a truck, and then he had his own fleet of delivery vehicles.

5 years later, the man is one of the biggest food retailers in the US
He started to plan his family's future, and decided to have a life insurance.

He called an insurance broker, and chose a protection plan.
When the conversation was concluded the broker asked him his email.
The man replied,'I don't have an email.'
The broker answered curiously, 'You don't have an email, and yet have succeeded to build an empire. Can you imagine what you could have been if you had an e mail?!!' The man thought for a while and replied, 'Yes, I'd be an office boy at Microsoft!'
Moral of the story

Moral 1
Internet is not the solution to your life.

Moral 2
If you don't have Internet, but work hard, you can be a millionaire.

Dont laugh it is Serious Story

30 tax-smart ways # Plan to Increase your take home Salary

Saving a rupee in tax means you have a rupee more to save, spend or invest as you wish. So, when negotiating or reviewing your salary package, you should choose perks which are both useful for you and your family, and which are also tax-smart.

This requires a basic understanding of taxes applicable to various perks. A basic rule to follow is to opt for those where the employer pays FBT (fringe benefit tax), not you. This minimizes the tax payable by both you and your employer -- what could be a better win-win than that?

Take, for instance, the case of a chauffeur with a salary of Rs 10,000 per month. If you pay the salary, you will be doing so out of your after-tax take home. This implies that ipso facto, you will be paying a tax of Rs 40,680 (= 33.9 per cent of Rs 120,000). If the employer pays the salary, the FBT works out only at Rs 7,416 ( = 30.9 per cent of 20 per cent of Rs 120,000) only!

Here is a check-list of 30 tax and perk benefits relating to salary that will help you work out a tax-smart salary package

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon.

2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house.

3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C.

4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary.

5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would pay FBT. It is @30 per cent on 20 per cent of the value thereby bringing down the effective rate to 6 per cent. Better still, the employee owns the car and the employer pays the cost of petrol and maintenance.

6. Contributions up to Rs 1 lakh (Rs 100,000) per annum to Superannuation Fund of the employee is not taxed either as fringe benefit in the hands of the employer or as perk in the hands of the employee.

7. Contributions to some specified schemes (Company PF, PPF, NSC, life insurance premia, etc.) qualify for a deduction u/s 80C from gross total income with an overall ceiling of Rs 1 lakh. PPF has a ceiling of Rs 70,000 to contributions made to the accounts of self and minor children whereas the contributions to accounts of self, wife and children (major or minor) attract the deductions.

8. Employer's contribution to Company PF in excess of 12 per cent of employee's salary is taxable. Employee contributes equal (or more) amount to his PF account. Again, any excess over 27 per cent of salary contributed by the employer to company Provident Fund and Superannuation Fund put together is to be treated as perks.

9. Any death-cum-retirement gratuity received up to Rs 3.5 lakh (Rs 350,000) -- subject to certain conditions -- is exempt.

10. Leave Travel Allowance given as reimbursement of expenses incurred by the employee and his family for traveling while on leave is exempt, once in two years.

11. Transport allowance for commuting between residence and place of duty is exempt up to Rs 800 per month.

12. Reimbursement, not exceeding Rs 15,000 in a year, for medical treatment from any doctor for himself and his family members is deductible.

13. Under section 80D, deduction up to Rs 15,000 paid as medical insurance premiums on the health of assessee himself, his spouse, parents (dependent or not) and dependent children is allowed. Where an individual has insured a senior citizen (parent or himself) a higher ceiling of Rs 20,000 is available. Additional deduction up to Rs 15,000 on premiums paid for parent/s of the assessee has been made available w.e.f. 1.4.08.

14. Professional tax paid by an employee is deductible u/s 16(iii).

15. ESOP was brought under the purview of FBT by Finance Act 07. The employer has a right to collect the FBT tax paid by him on ESOP from the employee. In that case, it will be treated as tax paid by the employee.

16. In respect of HRA, the least of the following is exempt from tax u/s 10(13A):

(a) 40 per cent of salary (50 per cent for Mumbai, Kolkata, Delhi and Chennai).
(b) HRA for the period the house is occupied by the employee.
(c) The excess of rent paid over 10 per cent of salary.
An employee living in his own house or where he does not pay any rent is not eligible for this exemption. If you are staying in a house belonging to your family members (preferably not your wife), start paying rent to the owner and ask for HRA from the employer.
17. A helper engaged for the performance of the duties of an office or employment of profit is not considered as a perk.

18. If the employer employs a gardener for the building premises belonging to the employer, it would not be treated as a perk. The possibility of it being extrapolated to other servants is logical.

19. Perk value of concessional loan to the employee for purchase of house or motor cars shall be the difference between the interest payable calculated at the rate of interest for similar loans, charged by SBI and the actual interest charged.

20. Loan for medical treatment specified in Rule-3A is exempt, provided it is not reimbursed under any medical insurance scheme. Where it is reimbursed, the perquisite value shall be charged from the date of reimbursement on the amount reimbursed but not repaid against the outstanding loan taken specifically for this purpose.

21. Small loans up to Rs 20,000 in the aggregate are exempt.

22. Expenses on meals provided to the employee during his hours of duty are not treated as perks. FA 08 has declared that expenditure on non-transferable pre-paid electronic meal cards is not a perk.

23. FA 08 has also declared that provision of creche facility for children of the employee and sponsoring of an employee sportsman is not a perk.

24. Employer pays FBT on the value of the gifts. Gifts up to Rs 50,000 received without consideration by an individual from any person are tax-free in the hands of the donee. However, the Department may claim that such gifts are in lieu of salary.

25. Employer pays FBT on the value of the facility of credit cards and expenses for the club.

26. Where a movable asset is transferred by an employer to his employee directly or indirectly, the perquisite value shall be the actual cost to the employer minus the cost of normal wear and tear @10 per cent for each completed year during which such asset was put to use. In the case of motor cars the normal wear and tear would be @20 per cent whereas in the case of computers, data storage and handling devices, digital diaries, printers, etc., it would be @60 per cent. These do not include household appliances (i.e., white goods) like washing machines, microwave ovens, mixers, hot plates, ovens etc.

27. Uniform allowance to meet the expenditure incurred on the purchase or maintenance of uniform for wear during the performance of the duties of an office or employment of profit is exempt.

28. Expenses for soft furnishings (table cloths, curtains, etc.) including maintenance at the residence for those officers entertaining guests at home for official purpose are also exempt.

29. Goods at concessional rates, membership of professional associations, subscriptions for technical and business journals and newspapers are not considered as taxable perks.

30. Payment or reimbursement by the employer towards bills on Telephones and cellular is not a perk.

Caution: If employer is exempt from FBT, employee pays the tax

Fringe Benefit Tax is not applicable to an employer who is an individual, HUF, any fund or trust or institution eligible for exemption u/s 10(23C), or registered u/s 12AA. Rule 3 has been amended so as to include valuation of perquisite in case of benefits provided by such employers to its employees w.e.f. FY 07-08 by Notification SO 1896(E) dt 7.11.07.