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Investment and Speculation

Here it is important to know the definition first, understand it and then decide for yourself if you want to be an Investor or a Speculator

According to Graham

“Investment is an operation which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

Let me be very frank and say that I am strictly an Investor and have no knowledge or experience as regards speculation. I would also like to state here that I am a believer in the definition that Graham has given and very strongly feel that it is as relevant today as ever before. So if you are an investor then only you are likely to find my thoughts relevant and useful. Now let us go deeper in what Graham has to say. For investment operations to be meaningful, they have to be based on thorough analysis. This today, is easier than ever before as plenty of information and disclosures are available due to law, the regulators and tremendous progress made in information technology. What you need to know is where this information is available and how to analyze it. Analysis is a skill which requires some basic knowledge and understanding but can be acquired with practice and observation and applying own thoughts to the views of others based on the same set of information. These third party analyses are available on many web sites and news letters and can be easily accessed for free in most cases by “ Search Engines”.

As an investor your analysis has to be directed towards assuring safety of principal and adequate returns. It is important to look at what others say in the light of these two factors of safety of principal and adequate returns. Safety of principal has to be related to the calculated risk you can afford to take to suit your personal life position and situation. This also has to be related to the time frame horizon, which for an investor is generally long term. What is long or short we will now consider as it also affects your tax. Long term capital gains tax is zero presently if investements are held for over one year and 15% if held for lesser period in India.

Provident Funds


In India,these are similar to what are called as 401k funds in USA. Many other countries have such similar products.These are either Employee Provident Funds managed by Government / Corporate for the employees as per the guidelines issued by the Government or can also be simple Public Provident Fund accounts opened in individual names with various nationalized banks or post offices in the country.


Some highlights about the PPF in India are as under
• Accounts can be opened in the name of individual adults or minors by their parents or guardians.
• Rules allow withdrawals as loan and repayable after three years, but final withdrawals are allowed only after seven years.
• Minimum contribution of Rs. 1000 / year required to keep the account current.
• Maximum amount is Rs 70000/ year . This amount is eligible for tax rebates.
• Interest is tax free and is credited to the account every year on 31 Mar. making it a compound interest scheme as the interest credited to the account is eligible for the interest for next year.
• Present rate of interest for PPF accounts is 8% annually.
• Balance in PPF accounts can not be attached by any court of law.
• Balance is guaranteed by Government of India.
• Normal life of an account is 15 years but this can be extended by 5 years at a time after 15 years, for any number of such extensions.
• Amount when withdrawn, is also totally tax exempt.
*Nomination facility exists like normal accounts



Housing 


Your primary residence is not considered as an asset but is in fact considered a liability as far as your personal finances are concerned. This is so because it results in a negative cash flow due to the taxes, maintenance costs etc. All the same, it is a priority necessity and only a second house can become an asset. Housing has many tax benefits associated with it and hence is strongly recommended as a priority goal. Earlier the better, depending again on your personal life position and situation and savings.For  people who are provided with accomodation by the employer, taking a loan to buy a house and renting it out helps create an asset over long term. As a guide line,about 25-30% of income can be cosidered for repaying housing loans and interests.. 

 

 Gold and Silver


These have been considered together only because traditionally they form a pair and also have a good correlation in their price movements. Gold as an asset class is very controversial, it is because talking strictly logic, there is no reason why a metal which has very little use in life and is a dead investment in most cases be an asset at all. However, historically it has always fascinated people all over the world and is seen to hold value in times of crisis of sorts, economical or political. Besides it is an attraction as ornaments for ladies and in India it is much revered as “Stridhan” Today with the emergence of Exchange Traded Funds(ETFs) and specific gold mutual funds, there is a better choice available if you consider investing in this asset class. Better still is to explore the possibility of keeping this as a deposit with jewelers if they are reliable enough and well known to you,at a small interest rate in metal terms. In today’s world which has many complex financial instruments and given the factors of global uncertainty and volatility in equity and commodity prices, it may be a good idea to keep a small percentage of your investments in gold,( about 10-15%).


Silver unlike gold has many industrial uses and is still seen lagging behind Gold as far as its price increase is concerned. This may probably change because investment and uses together will alter the demand supply situation for silver.


Why equity- Long and short term capital gains tax


As per present laws in India, any short term capital gain is defined as such if the investments are made for duration of less than one year and the gain accrues from such investments. The tax for such gains is 15%. Long term capital gains are those which are from investments, made for more than one year; such gains are presently totally exempt for tax, tax being 0%. This alone is a reason enough for many to be investors in the true spirit and make investments for long term.
There are other reasons also why one should consider making investments in equity. Equity is the risk capital and it is one of the key resources for production which in turn generates employment and contributes to the nation’s GNP and GDP. When you own certain equity, you own a small percent of the business and participate in it and also share the risk to the extent of your share.

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