Finergo Episode 24 Dt 18may09

04 KALEIDOSCOPE

ERGO Monday, May 18, 2009

Ask your query I recently got a call from a bank saying that I have been approved a loan of Rs. 4 lakh because of my credit card usage track record. I never applied for a loan, so is it a hoax call? If it is true, shall I take the loan? Indu S. V, Texas Instruments

Dear Indu, What you have received is a pre-approved loan. It surely is not a hoax call. But, you need to still verify whether the person who called you belongs to a bank or not. Do not give out any personal financial documents before you confirm the antecedents of the person whom you meet or give your documents. As for whether to take a loan or no, it’s for you to decide whether you really need the money now. It makes no point taking a loan without having a requirement. This could lead to three things: You take the unnecessary burden of paying an interest for something you don’t need; Getting easy cash could lead to you spending the money on things you don’t need and you end up with the liability which drags you for the term of the loan and your credit worthiness also goes down as the next time you really need a loan. The bank looks at the EMI outflow on account of this loan and reduce your eligibility. It is better to have a debt-free lifestyle than one riddled with loans. (For queries on personal finance, mail them to [email protected] with the subject line ‘Doctor’)

Mini Quiz 1: Which company has taken over Satyam? a) TCS b) L&T c) Tech Mahindra d) Infosys 2: PPF Stands for a) Postal Provident Fund b) Private Provident Fund c) Public Provident Fund d) Personal Provident Fund Send your answers to [email protected] or SMS your answers to 92813 98889. For example if you choose a as the answer to question 1 and b as the answer to question 2 type it as 1a2b and send it. Winner will be chosen by lucky draw from all correct answers

. Answers for last week’s mini-quiz Foreign Direct Investment Foreign Institutional Investor

Word in Word Equity cap on NPS Although the New Pension Scheme seemed to be a good opportunity to plan your retirement, there seems to be a small hitch if you wanted good growth. The government has put a higher limit of 50 per cent on the amount of money that you can invest in equities as part of the NPS scheme. Of the three funds – equity, government bonds, corporate debt. One can put your 100 per cent investment into bonds or debt but only 50 per cent in the equity schemes.

Making sense of the Sensex SNEHA BAJAJ [email protected]

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he Sensex has grown from 9724 in February 09 to close to 12,272 in May 09 – a growth of over 25 per cent. But during the same period the NAV of your Mutual Fund investment has grown negative. What is the mystery or is something wrong? There is absolutely no mystery. There is this common misconception among most young investors that if the Sensex is doing well then their investments too would do well. Understanding how the Sensex is calculated will help clear the doubts. The Sensex is an indicator of the performance of 30 companies spanning various sectors, which are representative of the economy as a whole. The basic premise being that if the 30 best companies in the country do well then the economy is also doing well. How are the daily numbers calculated? The Sensex uses something called as the free-float market capitalisation (FFMC). It is the current price of each share of the company multiplied by the number of shares

freely available for transactions in the market. Freely available shares are those which can be traded with ease; thus it would exclude shares with promoters, institutions etc. which are normally not traded. In simple terms FFMC means the money that one would require to buy all the shares of a company available in the open market. The sum of the Free Float Market Capitalisations of all the 30 stocks is then divided by an “Index Divisor”. It is a constantly updated number which correlates the Index to its base of 100 (Year 1978) and also imbibes the various changes in the market place (Bonus shares, Splits etc.) which would change the FFMC. The value that is arrived at is the number which we see splashing on our news screens and newspapers. Thus we realise that if the stocks that make up the portfolio of our investment are not the same as the 30 stocks that constitute the Sensex, then there’s absolutely no guarantee that our investment will move in the same direction as the Index. The key learning here is to invest in Blue Chip funds and the best way to do that is to ape the constituents of the Index. ■