Creating Wealth through Equities

The sensex is going up and I can see that I can make money, so I want to invest in the stock market. This is what I hear from every second person. This is a good opportunity to create wealth through equities. Is it so easy, if it was everyone would have been making money. The fact is, it is not, you need to have knowledge and time, and best part is you should also be ready to lose some money if the market falls. As mentioned you need to have knowledge, time and risk taking appetite, not having even one is a sure shot disaster. So what are the options? One option is to go for investing in Equity Mutual funds. In this you are into equities indirectly. Indirectly means you do not own the stocks directly, but you put your money into a fund, which invests into equity.

Some of the benefits of investing through mutual funds are

• Knowledge – This aspect is taken care of because of the fund employs professionals who have the knowledge.
• Time – As these professionals are employed for the fund, they have the time
• Amount – You do not have to do big investments, you can start with as little as Rs.500/-, if you go for portfolio management, the amount to be invested would be a minimum of Rs. 25 Lakhs.
• Cost – the costs of portfolio manager are much higher compared to the costs of a mutual fund, as there are limits placed by SEBI.
• Liquidity – It is easier to get you money back, with minimal paper work.
• Tax – Mutual funds are tax friendly, you do not pay tax as your portfolio is churned, based on the market situation. In case of portfolio managed funds, you have to pay tax on every sell, depending on the period the stock was held.

Looking at the advantages, one can easily say, investing in the stock market through mutual funds is comparatively less risky.

Kisan Vikas Patra – The good, the bad, the Ugly

The finance minister recently introduced the Kisan Vikas Patra in its new avatar. Let us see some of its features

Interest Rate                – 8.7%

Period                           - 8 years 4 months

Redemption                 - Can be redeemed in 6 monthly intervals after a lock-in period on 2 years 6 months

Transferability              – Can be transferred with endorsement

Loan                               - Can be used as a collateral for loan

Minimum investment – Rs. 1,000/- and thereafter in multiples of Rs. 1,000/-

Maximum Investment – No Limit

Taxability                       – Interest is fully taxable

Documents required   – Proof of identity and address

Where to Purchase     – Post Office

The Good

The best part of Kisan Vikas Patra is there is no ceiling on the amount of investment. Even those who do not have a bank account or PAN card can apply. It has high liquidity, money can be withdrawn after just two and half years and there after every 6 months. The amount you would get at the end of every period is clearly mentioned. You could even use it as a collateral to get loan and can be transferred to anyone with just an endorsement.
The Bad

The interest rate guaranteed is 8.7% which is very less compared to other instruments for similar periods. The biggest problem is, it needs to be redeemed at the post office at which it was issued only and the interest is taxable.

The Ugly

Though the government has said that there will be KYC required, the absence of PAN makes room for a lot of black money.

Final View

Kisan Vikas Patra is good for village areas where they do not have access to banks. Hopefully the Jan Dan Yojna would overcome that. But for people in areas where there are banks, it would make more sense to put their money in Fixed Deposits, as you would get better rate of interest. Of course you have the taxability factor. To overcome tax issues, a better option would be Debt Mutual Fund, after taking indexation into account the tax would almost come to nil. Even for sr. Citizens its better to put their money in Sr. Citizen scheme where one can invest upto Rs. 15 lakhs and the interest rate is 9.2%, which is much higher than Kisan Vikas Patra.