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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05/07/2008
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Personal Finance

Public Provident Fund

I would say Public Provident Fund is one of the best Tax saving options that the Government provides for the citizens. The best part about PPF is that there is a deduction in income and also the interest that is earned also is tax free. Since this scheme is by the Government of India, I think it is relatively safer than any other financial investments.

The money that is invested is tax free under section 88, are eligible for 20% Tax Rebate. The maximum amount that can be invested is Rs.70,000. The returns on money invested is also pretty good. Government pays around 8% p.a. it is just a percent lesser than savings account. The best part is no tax on interest, effectively it is more than what we think that we are saving by investing in PPF. Good thing is that one can open a PPF account and invest from Rs.500 to Rs.70,000 and also the investments can be made in 12 installments in one year and the amount that is deposited need not be identical, that gives the best option. We can always invest the money whenever we have surplus. This is a great deal. The entire amount that is accumulated over in years is exempted from wealth tax.

Some negative points about PPF:
1. The investment term is very long – 15 years.
2. The interest rates varies over the period of time and you never know how much interest you might get. (Little uncertain)
3. Interest is calculated on lowest balance between 5th and last day of March.
4. Money is held and it can’t be liquidated easily.

I would strongly urge most of the individuals to have a PPF account and start depositing money in it.

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03/07/2008
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Personal Finance

Investment for Tax Benefit

I was wondering as to how to save tax and invest in Stock market. There are numerous options to save tax and was wondering why does government ever give tax breaks when they need money to run the nation effectively and efficiently. So there should be something fishy. I always believe that “There is nothing called FREE FOOD”.

So have you ever noticed or thought about in which government gives a tax break? Only for long term investments, home loans, mutual funds, Life Insurance and so on.. Why does Government gives tax break for such kind of things? I would prefer government giving me tax break on buying Stocks, personal loans, vehicle loans and so on.. but government does not even consider it. Why?? I think the government does not earn or get any money from us in any ways. If that is the case they don’t give the tax break. As simple as that.

Anyways, let us not ponder too much about that. How much ever think about it we can’t formalize a new tax rule. All that we can do is either pay tax or not pay tax. But being a responsible citizen I feel we should pay tax.

I feel Public Provident Fund (PPF) is a very good option for tax benefit. Everyone should have PPF because it is a good option with very less risk. Why I claim that very less risk is because you never know what might happen to the government and what might happen to the money you have provided them to take care of. But it is much safer in the government’s hands.

You can invest in other financial instruments also but I am not sure how much it is safe and what is sum assured. I will get into depth of these topics in the further topics.

See you around!!

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