Tips for selecting a good stock

Cheap Stocks: companies with PE multiple of less than 20. Try to restrict list to only those stocks whose earnings (as measured by earnings per share) has grown by at least 20 per cent in both of the last two financial years

Example:

Low Beta Stocks Beta is a statistical measure that shows how sensitive a stock is to market moves. For example,if Sensex moves by 25 per cent, a stock's beta number suggests whether the stock's returns are expected to be more than this or less. The beta value for an index itself is taken as one. Stocks can have beta values, which can be above one, less than one or equal to one. A stock with a beta of more than one is expected to rise more than the market and also fall more than market. Similarly, a low-beta fund will rise less than the market on the way up and lose less on the way down. This means that high beta stocks are meant for aggressive investors who want to beat the market on the upside, but do not mind taking the risk of higher losses if the markets fall. On the other hand, for conservative investors who want higher insulation from losses, a stock with a beta of less than one is a better option.

Contrarian Bets? The idea behind the contrarian strategy is to buy into the out-of favour stocks, i.e., the stocks which have few takers at the moment, and hold them till the time they catch the fancy of the markets again and bring in handsome gains. Aim to search for such out-of favour stocks which are available quite cheap, but seem to have a reasonably strong financial position. Therefore, as and when the markets rediscover their potential, they might be in for a significant capital appreciation. The first filter is that they should have a price-earning multiple of not more than 12, which suggests that the markets does not seem to be very optimistic about them at the moment. But a high current ratio (of 2 times or higher), coupled with negligible debt on the balance sheet points towards a potentially strong financial condition. We can add another criterion that the stock should have a decent dividend yield (of at least 2.5 per cent) to ensure that at least it yields some dividend income till the time it brings in the capital appreciation.

Tax saving instruments

QUICK GUIDE TO TAX SAVING DEDUCTIONS

INCOME TAX DEDUCTION	MAXIMUM DEDUCTION ALLOWED PER YEAR
SECTION 80C
Life Insurance premium	Actual amount contributed / invested, up to Rs. 1 lakh
Contribution to Employee Provident Fund (EPF)
Contribution to Public Provident Fund (PPF)
National Savings Certificate (NSC)
Unit Linked Insurance Plans (ULIPs)
Repayment of Home Loan Principal
Equity Linked Savings Schemes (ELSS)
5 Year Bank FDs
Pension Funds
SECTION 80CCF
Long Term Infrastructure Bonds	Actual amount invested, up to Rs. 20,000
SECTION 80D
Mediclaim Premium for self and family	Actual premium paid, up to Rs. 40,000 (if both self and parents are senior citizens)
SECTION 80DD
Expense on treatment of a disabled relative, or payment of insurance premium for said relative	Rs. 50,000 or Rs. 1 lakh depending on severity of disability
SECTION 80DDB
Expenses incurred on medical treatment for yourself or for a dependent relative (not necessarily disabled)	Actual expense incurred, up to Rs. 40,000 (Up to Rs. 60,000 in case of senior citizen)
SECTION 80E
Interest of an education loan taken for yourself, your spouse or your child	Full interest amount paid during the year, for a limit of 8 years
SECTION 80G
Donation to certain charitable institutions	100% or 50% of donation given, depending on the institution, subject to limitations
SECTION 80U
Deduction in case of a disabled assessee	Rs. 50,000 or Rs. 1 lakh, depending on severity of disability

5 things to look out for in your home agreement

Original content
YOU just got news that your home loan has been approved and you are on your way to see an existing model of your future home. Your heart is pounding with excitement, but wait, the tedium of paperwork is not over yet. You need to ensure that your agreement with your builder has no unforeseen loop holes that can plunge you in a legal mess!

Here are five essential steps you need to take to avoid such situations.

Aspect 1: Cost of your dream home
There are various costs attached to the owning your home besides its cost. The cost covers basic utilities like electricity, water, parking space, various taxes and in certain instances the registration charges as well. These may come as part of the deal or may be charged under separate heads. Make sure all these costs are factored into the final price you pay.

Safety points

• Scan the agreement with great care for all these charges
• Get the agreement ratified with a real estate lawyer to see if there are any hidden or missed out charges. So, you can have an upfront discussion with the builder and have the document corrected.
• If the extra charges are for alterations made to the original plan, ask the builder for the sanction letter provided by government authorities for such alterations.
  

Aspect 2: Size of the house
Look for the specifications in the agreement that defines the size of the house. This should be clear and specific. Also, look for a clause that says ‘…the plans, designs, and specifications are tentative and the developer reserves the right to make variations and modifications….’ This might mean that you may agree for a certain size, but the builder can give a different size.

Safety points

• Do a thorough check on the builder to determine his track record in project delivery. The way the builder has handled the past projects should serve as a measure to how your project is going to turn out.
• Discuss with your lawyer and think about including another clause that provides a definite range to the maximum and minimum size beyond or below which the builder cannot venture.
  

Aspect 3: Carpet area
Carpet area is the space where it’s possible to lay the carpet. It does not take into account the area of the walls and balcony. When you include these areas as well to the carpet area you obtain the total built up area of the house or apartment. Additionally, if you include common spaces like lobby, lifts, stairs, garden, swimming pool etc., then its termed as the super built up area. The actual carpet area is bound to be around 20 to 30 per cent lesser than the super built up area.

Safety points

• Always base your purchase decision on the carpet area of the flat.
• Double check if this area is specified in the agreement.
• Discuss with your builder and the lawyer to make sure it’s possible to include a termination clause if the final construction of the house has a carpet area lesser than what is specified in the agreement.

Aspect 4: Completion of construction and date of possession
During the realty crash that occurred in the recent past, there have been several instances where projects have not been completed on time. Though agreements have a tentative date of possession it is important to for you to check this aspect of the deal.

Safety points

• Monitor the progress of the construction and keep a regular tab on it.
• Follow up with the builder if you find the progress painfully slow and request him to step it up. Keep in touch with the builder as the work progresses.
• Establishing a society with other buyers in the case of an apartment complex, will ensure that things happen at a decent pace from the builder's side.
  

Aspect 5: Completion certificate
When the project is completed and the house is delivered to you ensure that the builder provides you with a completion certificate. This certificate provided by the municipal authorities authenticates that the building complies with the approved plan and obeys all government norms and specifications. This certificate is critical for the registration of the house and to complete other legal formalities.

Safety points

• Make sure the agreement has a clause that indicates the certificate will be handed over to you on completion and hand over of the house/apartment.
• Again a society could help move things faster if the builder is laid back about this aspect.
  

Apart from the above mentioned aspects an overall quality check on the construction, society management etc. are important. Ensure these aspects are also covered in the agreement. Be aware and clued on about what you are getting into before you sign the dotted line.

Value-averaging investment plan (VIP)

http://wealth.moneycontrol.com/printpage.php?id=14602

A RELATIVELY new method of making periodic investments for regular investors has caught the interest of financial advisors and the investing public. This new method, called Value-averaging investment plan (VIP) is a close cousin of the Systematic Investment Plan (SIP).

Difference between SIP and VIP
The main difference between the approaches is that in VIP the monthly amount of money invested varies according to a formula as opposed to SIP wherein the invested amount remains constant.

Internationally, the VIP method has been implemented successfully using, primarily, mutual funds. It has out-performed comparable SIPs yielding, according to published results, 1 per cent better IRR.

We set out to test the premise of VIP out-performance in the context of Indian mutual funds. One mutual fund – Benchmark funds – has already implemented this method with one of their funds (an index fund), with promising results.

Here, we present our results with a broader set of managed equity funds and suggest a couple of ways an investor can implement the protocol themselves for their portfolio.

About Value-averaging investment plan
This basic premise of this method - designed in 1988 by Michael Edelson, a professor at the Harvard University - is that money is invested in periodic intervals in a portfolio in such a manner that the portfolio value keeps tending towards a pre-determined value based on a target rate of return. Since a portfolio might grow in a particular month, and shrink another month, the targeted value for the portfolio might come nearer to or recede farther from the actual value. The subsequent investment tries to compensate for this movement by investing less or more in the portfolio. The idea is to keep the value of the portfolio at an average value during the tenure of the investments, and hence the name.

An example: To establish a VIP, we need to decide on a few parameters:
1. An investment vehicle, say, a mutual fund scheme
2. A starting amount to invest
3. A minimum amount for the periodic investments, could be zero
4. A maximum amount for the periodic investments
5. An expected rate of return.

Let’s assume that we choose to invest in mutual fund scheme A with a starting amount of Rs 5000. We intend to invest a minimum amount of Rs. 1000, and a maximum of Rs 10,000 every month. Let’s fix the expected rate of return is a healthy 15 per cent annually.

Now after making the first month’s investment of Rs. 5000, we wait a month and come back the next month to see how much to invest. Suppose the investment has grown by 2 per cent over the course of the last month. The value of the portfolio is now Rs. 5100. The expected value at the one-month point, however, is (given the target return of 15 per cent), Rs. 5063. Hence, the value of the investment is Rs 37 more than the targeted value. Consequently, the current month’s investment would be Rs 5000 – Rs 37 = Rs 4963.

Similarly, if the investment had decreased in value by say, 10 per cent, in the past month. The value of the portfolio is now Rs 4500. The expected value remains the same, at Rs 5063. The current month’s investment would try to compensate for the loss of value by investing Rs 5563.

We would do this continuously month after month taking into account the growth target for the portfolio, and the actual value of the portfolio at that time point. If the investment vehicle chosen for implementing this method is a well-diversified equity fund (as we do later in this article), the growth of the portfolio value will co-relate to the movement of the broader stock market. Hence, essentially, the investor ends up investing more when in a sliding market and less in a growing market. Over the long run, assuming the equity markets generally trends upwards, this process holds the promise of better return over an equivalent SIP.

Road-testing VIP: The parameters
Well, theoretical understanding of the method is one thing, However, as the saying goes, when rubber meets the road, we need to take into account a few details while we put VIP to the test of Indian market conditions. Let’s look at the parameters we used for the testing.

Most importantly, we wanted a practical test. We wanted to test VIP in a manner that would be practical and relatively simple for real investors to implement for themselves. To this end, we designed the parameters of this test as follows:

1. We used diversified equity funds for the test.
2. The testing period was the five-year period between October 2004 and October 2009. The Indian equity market saw both bull and bear runs in this period, and was interesting enough for the purposes of this test.
3. We used the growth option of these funds (avoiding dividend payouts, and the resultant portfolio value and growth calculation issues)
4. We tested with four different popular schemes from four different fund houses. We chose one index fund, and three managed funds.
5. We pegged the target returns at 15 per cent.
6. The opening investment was set at Rs 7,500
7. The maximum monthly investment was set at Rs 15,000
8. The minimum monthly investment was set at the scheme’s minimum required additional investment – typically Rs 1000.
9. The comparable SIP was set at Rs 7500 every month.
10. The monthly investment date was set at the 10th of every month. Normal holiday rules were applied.

The actual amounts used above could be varied without causing material impact to the comparisons. The schemes that were used for this back testing were HDFC Top 200, Reliance Growth (Equity), DSP BlackRock Equity and, the one index fund, Franklin Templeton Nifty Index Fund.

The results
Given that the recommended minimum holding period for an equity fund is three years, we used rolling three-year periods over the five-year period of our testing to arrive at performance results. Hence, we used the three-year periods of 2004-07, 2005-08, and 2006-09 for the four schemes using both VIP and SIP to come to comparable numbers.

Also, to remove any exit timing bias, we looked at rolling monthly returns across the three-year periods and averaged the returns. Essentially, we assumed that the investor could exit at any point in time in the three years and averaged the returns over the different exit points.

The results are summarized in the table below:

Average out performance of VIP over SIP (CAGR)

	HDFC Top 200	FT Nifty Index	DSPBR Equity	Reliance Growth (Equity)	Avg
First 3 years	2.554%	2.004%	2.876%	1.602%	2.259%
Second 3 years	1.280%	1.314%	1.639%	1.602%	1.459%
Third 3 years	1.125%	1.266%	1.108%	1.602%	1.275%
Average	1.653%	1.528%	1.875%	1.602%	1.664%

As you can see, VIP outperforms SIP on a global average across funds and periods by 1.664 per cent CAGR.

The out-performance results are, indeed, healthy. However, we must temper our enthusiasm with a couple of caveats about these results and VIP in general:

1. The usual disclaimer – past out-performance is no guarantee of future out-performance.
2. Also, given that the VIP method invests a range of money from a minimum to a maximum every month, it is likely (as was the case in the study above) that an investor could get under exposed in the market. For example, this could happen when fewer amounts are invested in a sustained bull run in the market. In such a situation, VIP will still outperform SIP with respect to the rate of return, but the overall quantum of rupee gain might be lesser.
3. The back-testing was done with a set maximum investment amount every month. The results could differ if an investor chooses to invest without any such maximum (based purely on the value-averaging formula outcome).

Having said that, we do think that VIP is an interesting and promising method of investment that savvy investors can chose to adopt as part of a well-rounded financial plan.

Implementing VIP
How can a regular investor go about implementing VIP? Well, there are three ways to do so, each of which offers some flexibility and some convenience.

The first method is the DIY method – do it yourself. The algorithm for VIP is widely available in the Internet, and the Benchmark mutual funds site offers a handy presentation that explains the method in detail. To implement VIP on an equity fund, the investor would need to choose and set the parameters as described in the preceding section. Plugging these in to a spreadsheet with applicable NAVs of the scheme would yield, on a monthly basis, the sum of investment that needs to be made in any particular month which can be made as additional investment in the scheme. The advantage of this method is the complete flexibility offered – the investor could choose a minimum of zero rupees a month, or even withdraw funds if the target has been crossed. The disadvantage is that, well, it is a lot of work. Periodic investment plans are supposed to make life easier for investments, and not more complicated.

The second method is to subscribe to Benchmark’s VIP program. This program is offered on its Nifty index scheme, and uses a target rate of return of 15 per cent. The advantage of doing this is that it makes the life of the investor simple since all the calculations are taken care of by the fund house. The disadvantages are that the choice of schemes is limited (to one scheme) and the flexibility of customizing the investment parameters is also limited.

The third method is relatively new. Our investment platform, FundsIndia.com, has introduced VIP protocol across all the equity (growth) schemes on offer with us. It uses the target rate of return of 15 per cent as well. Once you choose a scheme, set the opening and maximum investment amount, the monthly investment work is automatically taken care of by the system. The advantage of using this method is the choice of schemes and ease of use. The disadvantage is that it offers less flexibility with the monthly investments when compared to the do-it-yourself method.

In summary, VIP is a promising new investment technique that merits broader attention from both the financial institutions and the investing public.

Additional Links:
http://www.valueaveraging.ca/links.html
http://as.wiley.com/WileyCDA/WileyTitle/productCd-0470049774,descCd-DOWNLOAD.html
http://www.sigmainvesting.com/advanced-investing-topics/value-averaging
http://www.scribd.com/doc/24114195/Value-Averaging-Investment-Plan-VIP-for-Benchmark-S-P-CNX-500-Fund
http://www.bogleheads.org/forum/viewtopic.php?t=46725&sid=1f8e9f7d88a40480ec33f5fb7691328b

Updates:
How to use VIP:
The expected fund value for a month is calculated as (monthly investment+expected fund value of previous month+(expected value of previous month * rate of growth expected/(100*12)))
Example: for a monthly investment of 500 Rupees and an expected growth rate of 15%, the expected fund value at the beginning of
month 1 = 500,
month2 = 1006.25 which is 500+500+(500*15/1200)
month3 = 1518.828 which is 500+1006.25+(1006.25*15/1200)