Monthly Archives: July 2008

15/07/2008
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Personal Finance

Investing for Tax Benefit

Investing your hard earned money is most important aspect of managing your money. I always feel that without having a financial plan there is no necessity to invest for tax benefit. Since it wont be of any benefit.

I have observed the following pattern, most of the investments happen during the Jan, Feb and Mar months of the year since that is the time people start realizing that they need to have investments in order to benefit from tax. I am totally against this philosophy. It does not make any sense to me. If government gives a tax break it certainly means there is something behind it. Everyone around us don’t think in those terms. We are happy to be in debt in order to get a tax benefit. If you are that category then it would make sense to you not otherwise. I always feel that government should genuinely give tax break say for investing in stocks but it is not so.

According to me, Investment should be made as investment and not for the purpose of tax break. Generally investments are made on Mutual funds, Life-Insurance, ULIP and on similar financial instruments during the start of the year since we get tax benefit on only these financial instruments. These products sell like hot cakes during this time. Since only these products are advertised and shown to the high paid professionals, they prefer these instruments as they are very busy with their life and stick with these. Truth is that not many business man prefer these instruments since they know that it is not for them. These products are tailor made to high paid professionals. Since these professionals can’t think as they have no time to think about all these products. They assume that it is best financial instrument that anyone can get and pour the money. Truth is there are many good financial products which can be used only if planned properly else only last minute pouring of money happens and I am sure most of them would have not got the returns on investment as assured by the agents of these products.

Start planning your financial future as soon as possible. If government gives you a tax break of 1 Lakh think of all possibilities that can be there and then invest your hard earned money else it does not make any sense. You can pour money in either of the products its all the same.

Choice is yours! Either plan up or screw up!

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12/07/2008
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Personal Finance

Price Variation

Yesterday I was asked a question by Satish (my colleague) regarding inflation in a different manner. Here it is:

What if the prices increases to Rs.1200 according to your example in the next ten months?

I told him I had not thought about this scenario and today I did a research on this and thought let me post my findings for his benefit and others who might have thought about it and did not share with me. The electronic gadgets prices fall and don’t generally raise over a period of six months. Since the technology changes every six months to one year and the prices will decrease since there will no demand for old technology products. One of my friend bought a Television for Rs. 18,500 in Jun 2007 and the same Television costs now Rs. 15,400. I bought a Television for Rs. 22k in March 2003 and the same costs just Rs. 9k now. I have not come across a scenario when the prices of old technology electronic gadgets sold at a premium.

And one other colleague said “It might be necessary for now to buy, later you may not require it or it will be of little use to you, so it is better if we buy it at the right time than save up and buy later”

I don’t buy this argument. If something is required to you now and not needed later then such a thing is just a waste to you and you are buying a product that you don’t actually need it. Electronic gadgets life is just 6 months to 1 year. I feel that the computers we buy are God for the first year and then some how it becomes Dog after that. The rate at which the technology is changing I feel that it is better to save up and buy since you might get a good deal on it and a better technology product. Moreover I don’t believe in just buying stuff just cause we want it. It should serve some purpose. Just for the fact that we can buy anything, we should not buy. It does not make sense to me now ( Got some gyan 🙂 ).

I know what I have done, I have bought gadgets that I have not used more than two months. So just think over it.

I will write more about Inflation in some time.

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11/07/2008
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Personal Finance

Inflation

I hope many know what is meant by Inflation. There are always talks going on about Inflation in newspaper these days. It is right now 7% and this is the highest in the past three years.

This is the definition of inflation from wikipedia.

Whatever I understood :
The value of money decreases, i.e. Say today I can buy 10Kgs of rice with Rs. 100 and if inflation increases tomorrow I can only buy 9Kgs of rice with Rs. 100. This is very high level. With the same amount of money we will be able to get less than the previous situation. The prices of commodities increases and that is a concern, we can’t do much about it and government should take care of it.

We don’t really care about Inflation, do we? We wont bother about price raise as it is not pinching our pocket as we are all paid well but for a poor common man it is very bad thing. Inflation should be controlled.

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09/07/2008
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Personal Finance

Why should you read my blog?

I had a discussion with one of my pal whom I had asked (forced) to read my blog. He is younger to me by couple of years. He was telling me that he is gaining interest in reading it and he also wants to blog his technical ideas. I was very happy.

All that I want to achieve from my blog is people should read my blog and understand the information which I want to share. I will not advice people regarding how they should financially act, all that I want to provide is some good piece of information which I collected with difficulty and my personal experiences where I made blunders. I want readers of my blog to be financially literate.

When I spoke to my friends regarding financial literacy. I got to know that not many people have. They just earn and spend. No goals nothing. It is not a good sign going forward. People should be very clear regarding their finances otherwise it will be very difficult. I wish to provide some insight to things which we overlook otherwise.

Generally Software engineers are all same. We don’t really try to get all the relevant information regarding the financial instruments, we either go by word of mouth or by some agent who convinces us. I just want to know how many people have asked details regarding the Mutual Funds that they have invested in. Do we really know who is the fund manager? Do we know his track record? Where does he invest our money in? How can our money grow? Anything????
We know nothing and we don’t even care to know anything. All that we want is some mutual fund and tax benefit for it. This is life. I want to change this scenario. Software engineers should not be an easy target to all these people, we are just a group of people who will buy anything in market without thinking much. Software engineers should be financially literate.

Achievement:
At least 100 people have changed their financial thinking after reading my blog. This is my goal to achieve and I am sure I will do it.

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07/07/2008
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Personal Finance

Short Sell

In Stock market, short sell is practiced by Traders and not Investors. Traders try to make money when the stock prices are going down. They Sell the stocks at the market price and hope for the stock prices to go further down so that they can buy it at lesser price and keep the difference. In this way they make money.

Short selling is trading and not investing. This type of trading is suited during the bearish times i.e. when the stock market is going south. You sell it at relatively higher price and buy it back at a lower price.

How it works?
Generally the broker house or the broker helps in short selling. The trader owes the shares of short sold stock to their broker house/broker. In turn these people owe it to some other investor or some financial institution which holds these stocks for long. The broker itself seldom actually purchases the shares to lend to the short seller. The lender of the shares does not lose the right to sell the shares. In all it just runs on assumption and not actual. The stock is virtually traded.

Can we make money?
Yes, we can make money. But to make money like this, one has to be dedicated to stock market and watch it very closely. When I say closely it does not mean just sit and stare at the computer screens. It is not suitable for engineers who can’t devote dedicated time for stock market.
But this is definitely good for brokers as they make money during selling and buying. They are the ones who make more money than the trader :).

Just an hypothetical assumption.
Consider that I want to short sell XYZZ corp and I have Rs. 1k. Brokerage is 1% and XYZZ corp is trading at Rs.22 and it is falling.
Now I short sell 40 shares XYZZ corp at Rs. 22. It costs me Rs.880 + 1% brokerage = Rs. 880 + Rs. 8.8 = Rs. 888.8
I buy back 40 shares at Rs. 20. It costs me Rs. 800 + 1% brokerage = Rs.800 + Rs.8 = Rs.808

My Profit ~= Rs .64 (80-16) Risk = 100% (Since there is equal chance of making a loss)
Brokerage = Rs.16 Risk = 0%

Even if I make a loss, still I had to pay for brokerage.

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