Maria married Peter this day

Maria married Peter this day. At the end of the wedding party,

Maria's mother gave her a newly opened bank saving passbook.

With Rs.1000 deposit amount.

Mother: 'Maria, take this passbook. Keep it as a record of your marriage life. When there's something happy and memorable happened in your new life, put some money in. Write down what it's about next to the line. The more memorable the event is, the more money you can put in. I've done the first one for you today. Do the others with Peter. When you look back after years, you can know how much happiness you've had.'

Maria shared this with Peter when getting home. They both thought it was a great idea and were anxious to know when the second deposit can be made.

This was what they did after certain time:

- 7 Feb: Rs.100, first birthday celebration for Peter after marriage

- 1 Mar: Rs.300, salary raise for Maria

- 20 Mar: Rs.200, vacation trip to Bali

- 15 Apr: Rs.2000, Maria got pregnant

- 1 Jun: Rs.1000, Peter got promoted

...... and so on...

However, after years, they started fighting and arguing for trivial things. They didn't talk much. They regretted that they had married the nastiest people in the world.... no more love...Kind of typical nowadays, huh?

One day Maria talked to her Mother:

'Mom, we can't stand it anymore. We agree to divorce. I can't imagine how I decided to marry this guy!!!'

Mother: 'Sure, girl, that's no big deal. Just do whatever you want if you really can't stand it. But before that, do one thing first.

Remember the saving passbook I gave you on your wedding day? Take out all money and spend it first. You shouldn't keep any record of such a poor marriage.'

Maria thought it was true. So she went to the bank, waiting at the queue and planning to cancel the account.

While she was waiting, she took a look at the passbook record. She looked, and looked, and looked. Then the memory of all the previous joy and happiness just came up her mind. Her eyes were then filled with tears. She left and went home.

When she was home, she handed the passbook to Peter, asked him to spend the money before getting divorce.

The next day, Peter gave the passbook back to Maria. She found a new deposit of Rs.5000. And a line next to the record: 'this is the day I notice how much I've loved you thru out all these years. How
much happiness you've brought me.'

They hugged and cried, putting the passbook back to the safe.

Do you know how much money they had saved when they retired? I did not ask. I believe the money did not matter any more after they had gone thru all the good years in their life.

"When you fall, in any way, Don't see the place where you fell, Instead see the place from where you slipped.

Life is about correcting mistakes."
Always be happy & keep smiling

What is book building all about?

Have you applied for the shares in an Initial Public Offer (IPO) lately? Did you observe the statement that claims, 'The company plans to raise Rs 3,600 crore (Rs 36 billion) through book building method'?

Are you aware what book building is all about? No? Then, read on to know more about this new method of determining the share price of a company during IPO.

What is book building?

When companies are on the look out to raise money for their business operations, they use various means for the same.

Two of the most popular means to raise money are Initial Public Offer (IPO) and Follow on Public Offer (FPO).

During the IPO or FPO, the company offers its shares to the public either at fixed price or offers a price range, so that the investors can decide on the right price. The method of offering shares by providing a price range is called as book building method.

Book building

Book building is actually a price discovery method. In this method, the company doesn't fix up a particular price for the shares, but instead gives a price range, e.g. Rs 80-100.

When bidding for the shares, investors have to decide at which price they would like to bid for the shares, for e.g. Rs 80, Rs 90 or Rs 100. They can bid for the shares at any price within this range.

Based on the demand and supply of the shares, the final price is fixed. The lowest price (Rs 80) is known as the floor price and the highest price (Rs 100) is known as cap price.

The price at which the shares are allotted is known as cut off price. The entire process begins with the selection of the lead manager, an investment banker whose job is to bring the issue to the public.

Both the lead manager and the issuing company fix the price range and the issue size. Next syndicate members are hired to obtain bids from the investors. Normally the issue is kept open for 5 days.

Once the offer period is over, the lead manager and issuing company fix the price at which the shares are sold to the investors. If the issue price is less than the cap price, the investors who bid at the cap price will get a refund and those who bid at the floor price will end up paying the additional money.

For e.g if the cut off in the above example is fixed at Rs 90, those who bid at Rs 80, will have to pay Rs 10 per share and those who bid at Rs 100, will end up getting the refund of Rs 10 per share. Once each investor pays the actual issue price, the shares are allotted.

Book building vs fixed price

The main difference between the book building method and the fixed price method is that in the former, the issue price is not decided initially.

The investors have to bid for the shares within the price range given and based on the demand and supply of the shares, the issue price is fixed. On the other hand, in the fixed price method, the price is decided right at the start.

Investors cannot choose the price, but must buy the shares at the price decided by the company. In the book building method, the demand is known every day during the offer period, but in fixed method, the demand is known only once the issue closes.

Book building vs. Reverse book building

While book building is used to raise capital for the company's business operations, reverse book building is used for buyback of shares from the market. Reverse book building is also a price discovery method, in which the bids are taken from the current investors and the final price is decided on the last day of the offer. Normally the price fixed in reverse book building exceeds the market price.

Book building is the price discovery method in which the investors bid for the shares of the company during IPO/FPO. They are given a price range in which the investors have to bid for the shares.

Depending on the demand and supply of the shares, the issue price is fixed. Those who bid at the price higher than the issue price end up getting refund and those who bid at the price below the issue price end up paying the remaining amount.

Source: Bank Bazar

What is Excise Duty all about?

In the Indian tax structure, there are a lot of taxes that people pay for different reasons. Income tax, sales tax, entertainment tax, value added tax etc. All these taxes are existent because in some way or the other it impacts and helps the economy. One such tax that is prevalent in any manufacturing sector is the excise duty.

What is excise duty?

An excise or excise tax (sometimes called an excise duty) is a type of tax charged on goods produced within the country (as opposed to customs duties, charged on goods from outside the country). It is a tax on the production or sale of a good. This tax is now known as the Central Value Added Tax (CENVAT).

Though the collection of tax is to augment as much revenue as possible to the government to provide public services, over the years it has been used as an instrument of fiscal policy to stimulate economic growth. Thus it is one of the socio-economic objectives.

What are the types of excise duty?

There are three different types of central excise duties which exist in India which are as follows:

Basic - Excise Duty, imposed under section 3 of the 'Central Excises and Salt Act' of 1944 on all excisable goods other than salt produced or manufactured in India, at the rates set forth in the schedule to the Central Excise tariff Act, 1985, falls under the category of basic excise duty in India.

Additional - Section 3 of the 'Additional Duties of Excise Act' of 1957 permits the charge and collection of excise duty in respect of the goods as listed in the schedule of this act. This tax is shared between the central and state governments and charged instead of sales tax.

Special - According to Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable goods that come under taxation, in line with the Basic Excise Duty under the Central Excises and Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the Special Excise Duty shall or shall not be charged, and eventually collected during the relevant financial year.

Which goods are excisable goods?

The term 'excisable goods' means the goods which are specified in the first schedule and the second schedule to the Central Excise Tariff Act, 1985, as being subject to a duty of excise and includes salt.

Who is liable to pay excise duty?

The liability to pay tax excise duty is always on the manufacturer or producer of goods. There are three types of parties who can be considered as manufacturers:

• Those who personally manufacture the goods in question
• Those who get the goods manufactured by employing hired labour
• Those who get the goods manufactured by other parties

Is it mandatory to pay duty on all goods manufactured?

Yes, it is mandatory to pay duty on all goods manufactured, unless exempted. For example, duty is not payable on the goods exported out of India. Similarly exemption from payment of duty is available, based on conditions such as kind of raw materials used, value of turnover (clearances) in a financial year, type of process employed etc.

What is the consequence of evading payment of excise duty?

Under the different sections of the central excise act, the fines for evading tax can range from twenty-five to fifty per cent of the amount of duty evaded. When you look at the amount of excise you may have to pay, this is a rather large amount and along with the financial repercussions, you also have to encounter a tarnished image.

Supernatural Power

There was this case in this hospital's Intensive Care ward where patients always died in the same bed on Friday mornings around 9am regardless of their age, gender, medical history or medical condition.

This puzzled the doctors and some even thought that it had to do with the supernatural: Why did death occur at that same bed around the same time every Friday?

So the doctors decided to go down to that particular ward to investigate the cause of the deaths.

Come Friday morning, everyone at the hospital ward nervously waited for the terrible phenomenon to occur again. The new (unknowing) patient laid there.

Some doctors held wooden crosses, prayer books and other holy objects to ward off evil...and they waited.

8am, the patient was still alive...

8.30am...still breathing...

Just before the 'cursed' time, the door to the ward swung open...

Then At Exact 9.00 Am, the part-time Friday cleaner, comes in and unplugs the life support system so that she can use the vacuum cleaner!

Snotty receptionist

An older gentleman had an appointment to see the urologist who shared offices with several other doctors. The waiting room was filled with patients.
As he approached the receptionist's desk, he noticed that the receptionist was a large unfriendly woman who looked like a Sumo wrestler. He gave her his name.
In a very loud voice, the receptionist said, 'YES, I HAVE YOUR NAME HERE; YOU WANT TO SEE THE DOCTOR ABOUT IMPOTENCE, RIGHT?'
All the patients in the waiting room snapped their heads around to look at the very embarrassed man.
He recovered quickly, and in an equally loud voice replied, 'NO, I'VE COME TO INQUIRE ABOUT A SEX CHANGE OPERATION, BUT I DON'T WANT THE SAME DOCTOR THAT DID YOURS.'

Champu Kavita

Pareshaan thi Champu ki wife
Non-happening thi jo uski life
Champu ko na milta tha aaram
Office main karta kaam hi kaam

Champu ke boss bhi the bade cool
Promotion ko har baar jate the bhul
Par bhulte nahi the wo deadline
Kaam to karwate the roz till nine

Champu bhi banna chata tha best
Isliye to wo nahi karta tha rest
Din raat karta wo boss ki gulami
Onsite ke ummid main deta salami

Din guzre aur guzre fir saal
Bura hota gaya Champu ka haal
Champu ko ab kuch yaad na rehta tha
Galti se Biwi ko Behenji kehta tha

Aakhir ek din Champu ko samjh aaya
Aur chod di usne Onsite ki moh maya
Boss se bola, "Tum kyon satate ho ?"
"Onsite ke laddu se buddu banate ho"

"Promotion do warna chala jaunga"
"Onsite dene par bhi wapis na aunga"
Boss haans ke bola "Nahi koi baat"
"Abhi aur bhi Champus hai mere paas"

"Yeh duniya Champuon se bhari hai"
"Sabko bas aage badhne ki padi hai"
"Tum na karoge to kisi aur se karunga"
"Tumhari tarah Ek aur Champu banaunga"

(WAKE UP CHAMPU)

Classic Definitions

1. Cigarette : A pinch of tobacco rolled in paper with fire at one end & a fool at the other.

3. Experience : The name men give to their mistakes.

4. Atom Bomb: An invention to end all inventions.

5. Lecture : An art of transferring information from the notes of the lecturer to the notes of the students without passing through "the minds of either".

6. Conference : The confusion of one man multiplied by the number present.

7. Compromise : The art of dividing a cake in such a way that

everybody believes he got the biggest piece.

8. Tears : The hydraulic force by which masculine will-power is

defeated by feminine water-power ..

9. Dictionary : A place where divorce comes before marriage.

10. Conference Room : A place where everybody talks, nobody listens & everybody disagrees later on.

11. Ecstasy : A feeling when you feel you are going to feel a feeling you have never felt before.

12. Classic : A book which people praise, but do not read.

13. Smile : A curve that can set a lot of things straight.

14. Office : A place where you can relax after your strenuous home life...

15. Yawn : The only time some married men ever get to open their mouth.

16. Etc. : A sign to make others believe that you know more than you actually do.

17. Committee: Individuals who can do nothing individually and sit to decide that nothing can be done together.

18. Marriage : It's an agreement in which a man loses his bachelor

degree and a woman gains her master degree.

19. Divorce : Future tense of marriage.

20. Philosopher : A fool who torments himself during life, to be

spoken of when dead.

21. Diplomat : A person who tells you to go to hell in such a way that you actually look forward to the trip.

22. Opportunist : A person who starts taking bath if he accidentally falls into a river.

23. Optimist : A person who while falling from Eiffel Tower says in

midway "See I am not injured yet."

24. Pessimist :- A person who says that O is the last letter in ZERO, Instead of the first letter in word OPPORTUNITY.

25. Miser : A person who lives poor so that he can die rich.

26. Father : A banker provided by nature.

27. Criminal : A guy no different from the rest...except that he got caught.

28. Boss : Someone who is early when you are late and late when you are early.

29. Politician : One who shakes your hand before elections and your Confidence after.

30.. Doctor : A person who kills your ills by pills, and kills you with

his bills.

31. Computer Engineer : One who gets paid for reading such mails

Bored with your job?

Are you feeling de-motivated at work? Does the thought of getting ready for work make you feel sapped of your energy levels?

If yes, then it's time to recharge your batteries and bring back the zing in your job. As the old adage goes, 'All work and no play makes Jack a dull boy', often, repeating the same professional task, not receiving enough appreciation or being doled out lesser pay than you deserve can make your professional life mind-numbing and dreary. So, before you plan to call it quits and find a new job, here's how you can find satisfaction in your current job...

1. Fun + work = Job satisfaction

If you are fed up of doing the same task over and over again - responding to E-mails, taking phone calls, filing documents, find a way to make your work more interesting. Make friends at the workplace, throw a party, add creativity to your job or simply take a break and gossip. This will surely lighten up your mood!

"I completely believe in working hard and partying harder! If you are making a lot of money and you have no time to spend it, there's no point devoting long hours at work. It's necessary to de-stress yourself if you want to keep your interest in work alive," says Shruti Gulati (name changed on request), a media professional.

2. Self appreciation

Are you losing enthusiasm because nobody appreciates all your hard work? Nobody pats your back for a job well done? Well, then all you need to do is appreciate your own efforts. Doing so will not just boost your confidence levels, but will also make you want to work more and improve your skill sets. Analyzing your own tasks can help you identify hidden flaws in your working style and help you rectify the same.

"I always make it a point to compliment my staff, even if it is for a cup of coffee well made, or any task well done. Who doesn't like a pat on their backs? But at the same time, one should be realistic and not lose confidence even if your senior/boss doesn't acknowledge your work. One should keep working towards his goals and improve his performance constantly to get noticed and get complimented for the same," says Ajay Singh, marketing head of a firm in Mumbai.

3. Set a goal

"If you have a set a goal, you would be more than willing to fulfill it and when you see things’ happening in the direction of your goal, your sense of achievement is doubled. Hence you're happier and work harder," says Neha, a human resource professional with a multi-national company in Delhi.

Besides setting short term goals and meeting deadlines, think of where you want to see yourself ten years from now and how your present job can help you get there. Evaluate your present job in context with your career goal. Also, reassessing your performance and progress from time to time and keeping a track of your career graph can be of great help in enjoying what you do.

4. Cluttered desk?

It may sound simple and you may not attach too much importance to it, but a messy desk and cluttered office environment undoubtedly drains the employees' motivation. A neat workstation is of great help in creating a structured thought process. A cluttered desk will not just make you feel lethargic and demodulated, but will also act as an obstruction to concentration.

"I feel that a neat workstation helps me concentrate better. My desk has just the basic things I might need during work – a pen holder, a phone and a calendar, as I believe that sticking too many pictures or quotes etc. distract me from work," says Aayushi Pathak, manager in a private bank in Noida.

5. Sleep well

"It is extremely important to take care of your body, especially if you are spending long hours in office. Your physical well-being is crucial for your mental-well being. If you don't sleep well or skip your meals too often, it will certainly affect your concentration and enthusiasm towards your job. Being physically fit is inevitable for a healthy lifestyle," says Manuj Singh, a fitness trainer.

Not sleeping enough or partaking of a well balanced diet or stressing you, physically and mentally, can affect your mood and energy levels. Often, working for longer hours takes a toll on your health and you generally start having a hard time. Exercising or meditating may be a good way for your physical and mental well-being.

6. Pamper yourself

Do you spend your weekends sleeping or occupying a couch, watching TV? It's time to go out and pamper yourself. Pursue your hobbies; visit a spa or even an amusement or water park to rejuvenate your senses. Spending time with your family/friends or going for a long drive is a great stress-buster.

"I think it is as important to plan out 'me-time' on a weekend as much as it is to prepare a 'to-do' list for a working day. I love to pamper myself on a weekend, whether it is by cooking or going for a walk in a nearby park. I completely avoid thinking about work and deadlines. It acts as a great stress-buster," says Shreya Jain, 28, who works with an IT firm.

7. Take a break!

Don't stress yourself by working non-stop. Doing so may decrease your efficiency and gradually lead to losing interest in work. Take a break at regular intervals to keep your interest alive.

If it's been years or even months since you last went for a vacation, you may actually need a break to revitalize yourself and feel refreshed. What's better than spending some time just listening to your favorite music, reading a book you've been wanting to or spending a night in a tree house?

"My eyes feel strained and shoulders ache when I work for longer hours without taking a break. Sometimes, I also tend to skip meals if I am too engrossed in work. I frequently get a headache even when I reach home. The work pressure is too much to handle and sometimes it's just not possible to go out even for a cup of coffee," confesses Vikram, who works with a telecom company in Mumbai.

8. Analyze the problem

If you have made every effort to bring back the joy in your job, but it's been of no help, it may be time to sit back and think. What's the cause of your dissatisfaction? Is it because you are being paid less or because the work doesn't interest you anymore? Or is it because the job is not helping you learn or grow in your profession? Analyzing the problem may help you plan your next move.

"It is only after you have analyzed the problem that you can find an appropriate solution. For example, if you have too much workload, you can always tell your boss to take a few things off your plate, or share your concerns/discontentment with your seniors. If your promotion is long overdue, find the underlying causes like lack of experience or qualification and work towards the same. You can also try doing more than your job requires, so that your boss recognizes your talent and potential," explains Neha.

9. Identify your area of interest

Identifying your area of interest and finding a suitable work profile may be the best option to love your work. They say, if you make your interest your profession, you won't have a single working day. So, while it may be important to earn a living, it is equally important to seek job satisfaction.

"If you have no good reason to like your job, you may need a change in employment. You can explore various job options in your industry through job portals or networking and find something that interests you. But before you do so, you can also explore the job options within the same organization. Identifying their area of interest will not only help people gain job satisfaction, but will also prevent them from changing jobs too frequently," says Navneet Singh, a corporate trainer.

10. Focus on the positives

Try to keep your focus on the positive things about your job, rather than focusing on the negatives. For example, try ignoring things like an irate boss, difficult colleagues, impossible deadlines or long working hours. Focusing on the negatives will only make you lose your interest further. Focus on the positives like – how your current task helps you learn/grow in your career, how your experience can add value to your resume or how your present organization can help you bag a better job in the future.

Abhishek Mishra, a software professional working in Indonesia says, "Whenever I feel demodulated or frustrated at work, I try to focus on the positives. Although, it sounds impractical, but it really does help me sometimes in venting out the negative feelings. I think practicing this regularly can make one less resentful or discouraged."

"People generally tend to focus more on the negative aspects of their job when they are perturbed. They keep finding faults in everything that surrounds them. Such behavior greatly influences their efficiency levels and makes them feel even worse. The best way to handle this is to jot down the things that irritate or disturb you and how you can deal with each one of them," explains Singh.

Source: Rediff

PE ratio - How it helps in stock selection

Have you ever experienced the following scenario: you buy 1 kg of apples at Rs 100 per kg, only to find out they were available at Rs 80 per kg just a few feet away? Aren't you disappointed at having to pay more for the same quality of apples?

The same also applies to stocks.

If you buy a share of company 'A' for Rs 100 and later on find out that the share of company 'B', with better earning prospects, is available for Rs 60, it is bound to disappoint you.

So how do you find quality bargains? How can you decide if the current stock prices make sense? Does the price justify the earning prospects of the company?

The answer to these questions is: Price-Earning (PE) ratio.

Introduction to PE ratio: PE ratio is one of the most widely used tools for stock selection. It is calculated by dividing the current market price of the stock by its earning per share (EPS). It shows the sum of money you are ready to pay for each rupee worth of the earnings of the company.

PE = Market price / EPS

Assume there are two companies 'A' and 'B', operating in the same sector. If PE of 'A' is 30 and PE of 'B' is 22, then 'B' is considered to be a better buy, as the market price has not gone up to reveal the earnings prospects of the company. But 'A' is considered to show higher growth prospects as compared to 'B'.

How does PE help?

Understanding PE gives the investors an idea if the stock has sufficient growth potential. Stocks with low PE can be considered good bargains as their growth potential is still unknown to the market.

If the PE is high, it warns of an over-priced stock. It means the stock's price is much higher than its actual growth potential. So these stocks are more liable to crash drastically. This was evident in the recent market crash when the stocks of all Reliance companies fell sharply.

This will allow savvy investors to sell their holdings before the stock price crashes.

Drawbacks of PE ratio

Interpretation of PE ratio is heavily dependent on comparison of the company with its peers. Also PE that is considered very high in certain sectors can be considered very low in other sectors.

For instance, companies in IT and telecom sectors have higher PE ratio than the companies in manufacturing or textile sectors.

Also PE ratio is not totally neutral. Any major announcement of a major order or acquisition by the company will certainly push up its PE. On the other hand, low PE may not indicate a good buy but could signify more serious issues facing the company. So it is very important to perform a thorough research into the background of the company, before investing.

Besides EPS itself is assumed, as it forecasts future growth based on past performance. However, there is no guarantee that the company can continue to maintain its performance each year. Also the sector in which the company is operating may experience problems as was recently seen for the IT sector.

So PE ratio cannot be considered to be a totally reliable indicator of cheap, good stocks.

Yet, PE ratio remains one of the most important ratios when it comes to stock selection

Source: Rediff

How to beat Inflation?

Inflation for the week ending July 26, 2009 is 0.17 per cent' or 'Prices of vegetables reach sky high' are some of the headlines that we come across everyday in our newspapers.

So it becomes important for us to understand what inflation is and how it affects our life. It is also important for us to know how to beat this deadly killer.

Inflation and its effect on our lives: Assume the price of 1 kg of tomatoes is Rs 14. If after a month, the price of the same amount of tomatoes becomes Rs 18, we can say the price of the tomatoes has gone up.

This price rise is called as inflation. It is a deadly killer that erodes the value of money, as you are paying more for the same quantity of goods. But not only that, it also erodes the value of our investments and makes all the goods and services beyond the reach of the common man.

Effect of inflation on investments: Our investments are heavily affected by inflation. Assume you have opened a bank deposit offering you 6 per cent interest for one year.

Now while closing the deposit account, if the inflation is 8 per cent, you actually end up losing 2 per cent (8-6). It means your investment has lost its value. In order to protect the value of your indexation, you have to use the power of indexation.

Concept of inflation index: The indexation uses the concept that as the inflation erodes the returns from the investment; you should be made to pay tax only on the actual profit made on the investment.

To help in calculation of the actual profit earned on the investment, the government has prepared an index known as the cost of inflation index. This index uses 1981-82 as its base, and its value is fixed to be 100. Now for each financial year, this value is declared.

This gives you the choice of paying long-term capital gains at 20 per cent along with indexation benefits. Alternately you can pay long-term capital gains tax at the flat rate of 10 per cent.

Calculating capital gains: In order to calculate the profit earned on which the tax should be paid, the ratio of the inflation index when the sale occurs to its value when the purchase is made and is multiplied by the purchase price of the asset.

It helps you calculate the indexed cost of acquisition, which is then deducted from the selling price.

For e.g. you bought an asset for Rs 100 in 2000, when the inflation index was 150. You sold it in 2005 when the inflation index was 300. The ratio of the inflation index when the sale occurred is 300/150 = 2. The indexed cost of acquisition is Rs. 100 x 2 = Rs. 200.

The capital gains here are Rs 300 – Rs 200 = Rs 100. This is the amount on which you will actually be paying tax. Since the indexed cost of acquisition is based on the ratio of the cost inflation index, while actually selling the asset, the tax you actually pay will decrease as this figure increases.

As the time passes, the inflation also goes up, thus reducing the taxable amount. If the profit earned is very small, you may not actually have to pay any tax, as all your gains are offset by the rising inflation.

Benefiting from indexation: The most common method of benefiting from indexation is to prolong booking profits, such that it spreads out over two financial years. This lets you enjoy the indexation benefit for 2 years in one shot.

Also remember the indexation benefit can be enjoyed in instances where a long-term capital gains is obtained. Here debt mutual funds score over FDs and bonds, which attract the tax as high as 33 per cent.

Also the total income is taxed in case of bonds and FDs but in case of debt funds, it is only the profit is taxed. Also if you opt for systematic withdrawal plan, the total taxable income also reduces, as the capital decreases.

Inflation is a major destroyer of wealth, as it greatly affects your returns. To beat inflation, it is important to benefit from the power of indexing. It lets you reduce your tax liability after taking into account the inflation, and pay tax only on the actual gains you earned.

Also remember, longer you remain invested, lower the tax you pay as inflation goes on increasing over the period of time. Besides choose tax-efficient investment options like mutual funds to reduce your tax liability and beat inflation.

Source: Rediff

Hedging

With an increasing number of people becoming interested in finance, and taking the plunge in stock markets, understanding certain financial jargons is of utmost importance.

Those of you who frequently dabble in stock markets have often come across the term 'hedging'. Read on to find out all about 'hedging'...

What is hedging?

Hedging is something that we do in our day-to-day lives. One example is our parents getting us vaccinated against certain diseases. This ensures that the diseases don't have an adverse impact on our health.

Another example is buying insurance. We buy insurance so that if and when a medical emergency arises, the financial aspects of the unforeseen event are to a great extent taken care of.

This does not necessarily stop the event from happening, but it just ensures that the impact of that event on our lives is minimal.

Risk and returns go hand-in-hand. We must always remember that behind every high return, there lurks the danger of risk, which is ready to pounce at a slightest miscalculation.

Hedging refers to a method of reducing the risk of loss caused by price fluctuation. An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Investors use this strategy when they are unsure of what the market will do. Portfolio managers and corporations use hedging techniques to reduce their exposure to various risks. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

What are hedging strategies?

Options - The right, but not the obligation, to buy or sell a specified quantity of the underlying asset at a fixed price (called exercise price), on or before the expiration date.

There are two kinds of options. There are two sub-types - call (right to buy) and put (right to sell).

Futures - A contractual agreement, made only on the trading floor of a futures exchange, to buy or sell a particular commodity or financial instrument at a pre-determined price in future.

How is hedging done?

Let's look at one example using the futures strategy.

For a kitchen equipment manufacturer, steel is an essential raw material. The exporter enters into an agreement to export kitchen utensils and other equipment, three months hence to dealers in the American market.

This means that a contractual obligation has been fixed at the time of signing the contract for exports.

The kitchen equipment manufacturer is now exposed to the risk of rising steel prices. In order to hedge against price risk, the kitchen equipment manufacturer can buy futures contracts on steel, which will mature three months later.

In case steel prices rise, the manufacturer is protected from the risk of loss.

Now, let's analyse the different scenarios:

If steel prices rise, it will lead to an increase in the value of the futures contract, which the kitchen equipment manufacturer has bought. Therefore he earns a profit in his futures transaction. But the manufacturer has to buy steel in the physical market in order to meet his export obligation. Since steel prices have risen he faces a loss in the physical market.

But his losses will be offset by his gains in the futures market. The kitchen equipment manufacturer can recover the loss incurred in the physical market by selling the futures contract, in which he has an open position (called closing out, technically).

If steel prices fall, it will lead to erosion in the value of the futures contract, which the kitchen equipment manufacturer has bought. This way the manufacturer will incur a loss on his futures contract.

But the manufacturer has to buy steel in the physical market. Since steel prices have declined in the physical market, he gains. Therefore, the losses incurred in the futures market will be offset by the gains made in the physical market. This way one can hedge against possible losses arising from fluctuation in raw material prices.

One can hedge against interest rate and currency, too. Short selling is a hedging tool that can protect you from unnecessary risks.

A basic understanding of hedging strategies will definitely help you as an investor.

Source: Rediff