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personal finance Near term market outlook this
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tax advice
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Don’t overestimate actual returns from real estate Harsh Roongta What a great investment it had turned out to be! “Do you know the return you have made?” was my next question. Given my tone of questioning, he suddenly became cautious. “15%” he mentioned hesitatingly. “It is lower than 11% and after taking into account capital gains tax, it is around 10%” I told him. It’s not bad at all but nothing spectacular. A simple little calculation on excel sheet convinced him that my calculations were not wrong. To put it in perspective, I told him that if his grandfather had actually put the money in an asset class that could deliver 15% pa, the sale price would have been Rs 19 crore. Just as an aside I informed him that the BSE Sensex has delivered 17% pa for a period of 34 years since its inception in 1979. And the return from the Sensex was tax-free. The point I was making was not that equity is a better investment but that he should not be swayed by the large investments that real estate entails. He is not alone in vastly overestimating the actual returns from real estate due to the long period of holdings and the huge investment values. After all, an investment that multiplied 250 times can’t be anything but spectacular. What he (and most real estate investors forget) is that over long periods of time it is not the high return but the power of compounding that is producing the huge sale price. In our workshops when we ask for examples of spectacular investments that have multiplied 100’s of times over long periods and then ask them to guess the actual rate of return, we find that most people’s guesses are way higher than the actual return. Nobody, except perhaps Shakuntala Devi, can actually work out the compounded return in their heads without the use of an excel sheet. So widespread is the belief that “real estate” gives spectacular returns that an investment expert I met extolled the virtue of investing in a plot of land on the outskirts of large cities. It is available in lakhs today and because it is illiquid you won’t be able to sell it and you will reap a sale price in crores in 20-25 years, he told me. I asked him an estimate of the sale price in 25 years and his best estimate delivered what could only be said to be a good return not a spectacular one. Add to that the very real risks of encroachments, zoning changes, compulsory acquisitions at low prices, etc and the time and effort required to manage an investment in a remotely located plot, even this good return starts looking a little inadequate. I showed him our research data on six localities in Mumbai (based on the Ready Reckoner prices from 1990-2013). It showed that the 10-year moving average return of the best performing locality was 8.96%. The best 10-year return was 15.95% before tax. I am not trying to argue that real estate is a bad investment. Just that it is like any other investment with risks that require the reasonable return that it provides. It should be a part of any portfolio that is big enough to accommodate the lumpy nature of its investment. And clearly buying a house for your own stay is not an “investment”. For most people, the psychological stability of having your own house adds tremendous value and makes this a must-do “investment”. In the end, let me return to the client with whom this article started. What did he do? I heard he had bought that shop that he had asked me about. Clearly, my client is not the only one who continues to follow this dated advice —“Buy land. They’ve stopped making it.” by Mark Twain. The author is CEO, Apnapaisa. The views expressed in this article are his own |
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Near term market outlook this
year While it is extremely difficult to judge how the market behaves in the short term, it is becoming easier to take a call on the medium term macro variables. One can expect a relatively stable currency and interest rate scenario over the next 12 months. Inflation can be expected to come off slowly. The domestic growth can be expected to improve gradually from current levels but the worst is over. The global growth is on the upswing and that is a huge tailwind for our economy which is looking for export growth to kick-start the revival. We can also expect stable crude prices with a negative bias as more supplies come on stream and the Iran deal progresses further. Fiscal deficit continues to be a worry. However, expenditure curtailment and the impending divestment and telecom spectrum auction proceeds imply that the problem is likely to be pushed to the next financial year. Any government which comes in will have a little choice but to take tough decisions on curtailment of fiscal deficit. If any such decisions are taken, these will be positive for the market. Also, investment cycle has not shown any signs of revival. Even if a stable and decisive government comes in power, it will take some time before any positive results become evident. We are, however, much better prepared to handle the impact of taper. On the whole, the macro backdrop looks encouraging from the perspective of equity markets. As for the earnings, we have been witnessing a sequential improvement in growth rates. The earnings growth for Q2 FY14 was better than the Q1 FY14 and the trend is likely to continue to Q3 and Q4 of FY14. The market is building in 14-15% growth in earnings for FY15 which looks possible if the macro plays out as expected. Given this, the current market valuations look reasonable. If the election outcome delivers a stable and decisive government, not only will the earnings outlook improve but the market multiples are also likely to expand from current levels. Thus, one would want to remain invested in the equity markets at these levels. From a portfolio construction view, we would want to have a balanced portfolio which is well diversified with a focus on both the defensive sectors (IT and pharma) as well as more cyclical sectors (financials and capital goods) along with a judicious mix of some quality mid cap names. The key risk clearly is what happens if we get an unstable and a messy coalition at the end of elections. While this is probable, it does not look possible given the current political equations and the indications available from the recent opinion polls. Investment in equity markets always has inherent risks but what matters is the overall risk-return trade-off. The risk-return trade-off looks favourable currently from an equity exposure point of view. The author is CIO, HDFC Life. The views expressed in this article are his own |
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No rebate on tuition fee for self study SC Vasudeva My annual income is Rs 2.44 lakh. I am pursuing PhD and paying Rs 20,000 fee annually. Can I claim rebate for the same. Please advise. — Ranjit A. Section 80C of the Income-tax Act 1961 (the Act) provides for the deduction of tuition fee paid for the full-time education of any two children of an individual. The section does not provide for any deduction where a person himself is pursuing any educational course of the nature specified by the section. In my view, therefore, you are not entitled to any deduction in respect of the tuition fee paid by you. Q. I understand that a rebate of
Rs 10,000 is allowed on interest earned on savings b) That a rebate of Rs 3,500 is allowed on interest earned on savings account of post office. c) That a rebate is allowed on interest earned on deposits made of Rs 30,000 for 5 years in banks tax- saver account, SCSS 2004 or any other post office deposit. Please advise. Also clarify if there is any ceiling on amount on tax-saver accounts of bank or post office. — MP Garg A. a) Deduction in respect of interest earned on savings bank account is allowable u/s 80TTA of the Income-tax Act, 1961 (The Act). b) Interest on savings account with Post Office is exempt to the extent of Rs 3,500 u/s 10(15) of the Act. c) There is no such rebate on interest earned on deposit of Rs 30,000 made for five years in banks tax-saver account, SCSS 2004 or any other post office deposit. d) The deduction of Rs 10,000 u/s 80TTA of the Act is applicable for assessment year 2013-14 and onwards. The exemption in respect of interest to the extent of Rs 3,500 is in accordance with Section 10(15) of the Act which has been in existence for quite a few years.
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what are Options & Futures*
An option gives you the right to buy or sell the underlying asset . A call option gives you right to buy the underlying asset while a put option gives you the right to sell. An option contract specifies the strike price, that is, the price at which you can buy or sell the underlying asset. In Futures, you buy a contract which will have a specific lot size of shares. When you buy a Futures contract, you don’t pay the entire value of the contract but just the margin. Open interest is the the total number of contracts not closed or delivered on a particular day. |
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A
client recently called me to seek advice on making a real estate investment. He had recently sold some old family owned property and wanted to invest his share of the proceeds in a shop. His existing portfolio was almost completely in real estate so I reiterated my earlier advice about not putting all eggs in one basket. He repeated his ‘inherited’ piece of wisdom that since time immemorial, real estate has given great returns. “Invest in thousands and reap in lakhs” was what he had been taught. In his case the inherited property that he had just sold had been bought by his grandfather for a paltry sum of Rs 99,000 in 1959. It had been sold at a stupendous price of Rs 2.50 crore in 2013. In fact, had it not been for some legal issues about tenancy and some inter-se family issues, the sale price would have been much higher, he told me.
The
