Episode 01 10nov09

04 KALEIDOSCOPE

Dear Finergo, I had brought a land in my native town two years ago (Oct 5, 2006). Now I wish to settle in Chennai and want to sell the land. What will be the amount of tax I have to pay? Jeevesh G, Chennai

Dear Jeevesh, When you sell land anytime before 36 months it will attract short-term capital gains tax. Since you have brought your land with in the past 24 months, your gain (profit) will be added to your annual income and then taxed as applicable.

The gain is calculated as follows: 1. Full sale price 2. Less expenses 3. Less cost of acquisition 4. Less cost of improvement or development during the 2 years. Please mail your queries to [email protected]. Your queries will be replied by mail as well printed in this column at the editor’s discretion. All the answers will be neutral and your personal details will be strictly kept confidential.

■ AUM: Asset under Management – Is the current value of funds that a mutual fund handles/ invests on behalf of its customers. Example: If 1000 investors each invest Rs 1000 on Oct 1, 2008 then AUM = 1000*1000 = 1000000. But say on Oct 5 the value of each Rs 1000 grows to 1010, then AUM on Oct 5 will be 1000*1010=1010000. ■ NAV (Net Asset Value): It is the worth of each unit of a mutual fund. For example, say you buy 100 units of XYZ mutual fund for Rs. 10 each. Hence you have spent Rs. 1000. The AUM will be 1000. But to run the mutual fund there will be certain expenses and liabilities like tax etc. Say it amounts to Rs. 80. Then the NAV is calculated as follows – (Value of assets – Sum of Expenses and liabilities) divided by number of units. Example: NAV= (1000-80)/100=9.2. Assuming the value of the assets (investments which the fund has done) grows to 1400 and expenses rises to 140 then the NAV will be (1400-140)/100 = 12.6 (This column will try to simplify personal finance related jargon)

ERGO Monday, November 10, 2008

Are Indian banks safe? T

The positives of our financial system he recent crash of a number of banks and financial institutions in USA (Washington Mutual, Lehman Brothers, AIG, etc.) and Europe has triggered a lot of speculation that Indian banks will also fail. This has triggered a lot of frenzy in withdrawing cash and deposits from banks particularly private banks. There are some inherent positives in our financial system and society, which prevents crashes as in the US. We will look at the societal reasons first: 1. The Indian consumers have always been pro-savings than spending. ■ Even today the national average in savings rate is close to 26 per cent. ■ The US society fades in front of this as it is predominantly spending oriented. 2. We love our homes and have strong emotional attachment to it. ■ I often hear my clients (young and old) say that their home is “actually their flesh and blood”, “benefit of sweat and tears for ……. Years”, “anchor for my life”, “my image in the society”. ■ The majority of us would probably sacrifice a 50 per cent hike in a different city to be in our own home town ■ The housing bubble as in the US would not happen in India for the above reasons. Hence the banks (lenders) are safe. 3. We pride ourselves in promptly paying off debt. ■ We are hurt when a cheque bounces ■ We pay up all our loans on time. Sometimes even borrowing more to pay of an existing loan. ■ In the U.K., the number of individuals filing for insolvency is close

to 1.65/1000 people in 2008 ■ In the U.S., the number of individual bankruptcies has nearly 3.28/ 1000 people. ■ Have you heard of anyone in your circle filing for an IP (Insolvency Petition)? Insolvency basically means that you have no means to pay your loans (debts) and you allow all your assets to be taken over by your lenders (creditors). Hence you see that as a society, we inherently are safe for the banks to operate in.

The positive points of our financial system: 1. Excellent Regulatory Mechanism

This column will list top five mutual funds based on their performance over a period of 3 years. For month ended Sep 30, 2008

■ RBI & SEBI have put in a wonderful set of rules and regulations and complimentary monitoring mechanism that ensures that banks and other financial institutions including their intermediaries have to adhere to safe practices. 2. Absence of creative and exotic financial tools ■ Again thanks to the Regulators, our financial system depends on conservative and traditional banking practices for earning their profits. This conservatism has prevented so called exotic tools from entering the system. These practices can give higher profits but carry high risks too. Our banks will continue to be safe.