Vintage Cars
Till a few years ago, collecting vintage and classic cars and restoring them was a nascent business among enthusiasts with deep pockets who had a good understanding of car mechanics. However, it has become a serious business in the past few years.

Currently, there are just 5000 vintage cars up for grabs. But the demand is huge and hence the price of these cars is also quite high. Buying a vintage car will make you dearer by at least Rs. 5 crores and when it comes to the upper limit, well..lets not talk about it. However, such investments offer lucrative returns ranging from 12% to 25% within a span of 10 years. The sale of these national treasures is prohibited abroad by Indian law and that is what saves these from further declining in number. Owning a vintage car can be a matter of pride and hence cars such as those custom-made for Maharajas or used by the womenfolk of a royal household are worth a fortune. Such a rare classic promises to bring unimaginable returns and pride of ownership.

Wine
This might amuse many but for ones who can resist gulping it down, wine can become serious investment avenue. It is proving to be one of the most exotic alternative investments with returns at 10-50% a bottle. But the key to success is to stay invested for long. The investment horizon for wines to mature can be as high as 25 years. You can invest in wines in 3 ways:

• Buy bottles: This is the most traditional way to invest in wine. A thorough examination of the brand, vintage, longevity, history of the producer, consistency, score and storage conditions are essential to determine the quality of the wine. Moreover, it is advisable to store your wine in the country from where you have procured it rather than importing because import duty is much higher than the storage costs abroad.
• Wine funds: You can also invest in wine through specialty funds that buy wine. The funds will send you a share certificate with details of your investment, including a net asset value of the share. They will also give you regular updates on the value of your wine. The minimum lock-in period varies across funds. At the time of exit, you receive the net profit depending on the growth in the value of the wine.
• Wine futures: If you want to invest in wine even before it is bottled, opt for wine futures. These are also called wine primeurs. Investing in wine that has not been tasted is considered riskier than buying bottles or buying wine funds. However, if you are confident about the returns then there is no harm in it.

Another advantage of investing in wine is that it is not liable to capital gains tax (CGT), because of a tax regulation called the “Wasting asset rule”. This says that if an asset has a life of 50 years or more no CGT is payable on it. Hence, wine can be a very profitable investment option if done the right way.

Stamps and coins
Stamp and coin collection has been a hobby for many people for many years now. But now, it has emerged into an investment option. An attractive feature of collecting and investing in coins is that it is much cheaper and affordable as compared to other collectibles. Hence, it is not just for the High Net worth Individuals. Rare stamps offer a fine safe investment, where the investor’s capital is guaranteed, and is coupled with the potential for strong returns in the medium to long term. Stamps are a long term investment where you can expect returns in the range of 10-15 % over 5-10 years horizon. The record for the costliest Indian stamp stands at about Rs. 74,50,000 for a single example of the 1854 blue and pale red ‘Four Annas’ which was bought in October 2010. However, rare stamps are regularly sold for Rs. 50 lakhs and more. Rare coins can be as expensive as Rs 5 lakhs. One can expect a return of around 15% on rare coins. You can buy coins through online auctions as well as from rare coin dealers. However, one needs to do research regarding the rarity and desirability of the stamps and coins before investing.

Paintings
Buying art as an investment is a relatively new phenomenon in the Indian market. Of late, people have started recognizing the fact that paintings are more than just a pretty wall adornment. If well-picked, they also have the potential to translate into decent sums of money. Consider this, a Pablo Picasso painting was sold for $106.5 million at Christie’s in New York, setting the world record for any work of art sold at an auction. This art fever is catching up in India as well with several HNIs willing to shell out huge sums of money to buy such extravagant pieces of art. And it’s worth investing as the returns from investing in artwork are very rewarding. But before that, one must see how much does one need to invest in order to get these high returns. If you are really serious about investing then you must have at least Rs. 1 crore with you and preferably much more. Because the more funds that you are willing to put in, the more returns you will get. Returns can range from 15% to 20%. During the time frame between 1995 and 2001, the annual appreciation in the value of investments in art was only around 5%. By 2006, it had picked up and there was great euphoria around investment in paintings.

Vintage Guitars
You would be thinking that guitars are purchased only by guitarists. But that is not true. In fact, for some people, guitar is a form of art; wall art or as a free standing sculpture. But now, buying guitars, especially vintage guitars, has become a financial investment. Well-known brands such as Gibson and Fender can make great investments. A Vintage Guitar can start from anywhere around Rs 20000 and might end up into Rs 5 lakhs or even more. A vintage guitar could give you returns in the range of 10% to 50% depending on its make and its age. Generally, guitars made before World War II are the most sought after and hence provide the greatest returns. If you really want to invest in these, there are various exhibitions held in India which showcase these musical masterpieces. Apart from this, there are musical shops as well which sell vintage guitars such as Jhankar, a Kolkata based music shop which deals in vintage guitars. For guitar enthusiasts, this is a double treat because they are able to hold on to a musical instrument which they love and also earn income from it.

Memorabilia
The memorabilia market is vast and is growing at a fast pace. Memorabilia could be anything, from Sachin Tendulkar’s cricket bat to Mahatma Gandhi’s spectacles. It could be anything that has some emotional values attached to it. The largest markets, however, are sports and entertainment, and the most popular trading is done through auction houses, specialty dealers, and internet auction sites like eBay. Make sure you invest in the big names in sports, entertainment or historical memorabilia as these will increase in value over time. A Madonna costume was once sold at an astounding Rs. 1.25 crores. A baseball bat was auctioned for an amazing Rs. 15 crores. Similarly, a Superman comic book was auctioned for Rs. 11 crores. When it comes to returns, you can easily earn in the range of 10% to 15% in a span of 10 years. I believe we all remember Vijay Mallaya’s pride in buying Tipu Sultan’s sword some years ago.

Luxury Watches
The main features to look out for our rarity, complexity and the condition which makes all the difference when looking for a luxury watch. But while there are major gains to be made, it takes a good eye to know the difference between a clever investment, and a waste of time. In such a vast and specialist industry where prices range from $1,500 into the millions, it’s difficult to know where to start. But as a prospective investor, you can head to an auction to find some of the most lucrative deals on luxury time pieces. While looking for rare watches, there are to brands which are considered to be meant for the ultra-rich, Rolex and Patek Philippe. An investor who purchased an 18 carat white gold Patek Philippe for $430,000 in 1995 can now sell it at its current market value which is a whopping $3.47 million. So the returns are very promising. And when you consider the fact that it is a recession proof investment, you have all the more reason to smile. The most important thing that one needs to keep in mind while investing in luxury watches is not the amount that you are going to invest, but the quality and brand of the watch.

Having read about all these, it should be well understood that most of the above do not have an organised market where you can buy and sell these at a market rate. You have to put in a good amount of efforts in finding the right buyer/ seller and the getting the right price. Another important key to investing in any of these is the time element. Most of these investments generally pass from generations to generations and keep appreciating in value over time.
So folks, now if you happen to win a lottery or hit a jackpot, you know how to utilise it.

Happy investing.
Rohit Roy and Praveen Bajaj

Related posts:

1. The Best Investment for Children in India
2. Investing in Mutual Funds – Dividend or Growth Option?
3. Mistakes Mutual Fund Investors Must Avoid

Dividend Vs Growth Option

Dividend Re-Investment Option

Many AMCs might offer you Dividend re-investment option, under which dividend declared is actually re-invested in the same fund at the then prevailing NAV. This option is not very different from growth option except the fact that re-invested dividend is also eligible for benefit under 80C. However, dividend declared attracts dividend distribution tax (DDT) and compulsorily gets invested in the same fund. This beats the purpose of declaring dividends and leads to un-necessary payout of DDT reducing the fund size. Not many AMCs have this option and hence the same has not been declared in details here.

Let’s Talk Numbers

Back to dividend and growth option, apart from the above mentioned qualitative difference, I tried to analyze the quantitative performance of two options. I extracted data for ELSS of 4 popular AMCs and compared the returns from growth and dividend options. Dividend received from the two options in various financial years were assumed to be invested at the then prevailing fixed deposit rates.

Following is the result-

I find that dividend option is slightly better even at the then prevailing conservative interest rates. In case you can invest the dividend income at a better rate, you overall return from the investment increases.

How do they compare?

Benefit of opting for dividend option is the flexibility that you get out of getting the cash and being able to decide what to do with the available liquidity. In case you think the fund is better, you can any which way invest the dividend in the fund back. Cost that you pay for it is the DDT that AMC deducts before paying the dividend to you. From my analysis, even after paying the DDT and investing at the FD rates, dividend option gives slightly better returns

Moneybol Recommendation

Thus what it all boils down to is the re-investment risk. In case you can manage this re-investment rate properly, it is recommended to opt for dividend option. But in case you are a conservative investor who does not enjoy liquidity a lot and want to get worry-free investment, growth option is better. With online investing (read here) made easier, you should decide for yourself how to invest rather than depending on financial advisors for such small but important decisions.

Whatever it is, take informed decision and not arbitrary ones.

Happy and profitable investing.

Authors – Priyesh Kesharwani and Praveen Bajaj

Related posts:

1. ELSS Mutual Funds
2. ULIPs or Mutual Funds – Comparison
3. How to Invest in Mutual Funds in India

Corporate Fixed Deposits are deposits made by investors in Corporations and Non-Banking Finance Companies (NBFCs) for a particular time period at a fixed rate of interest. But why am I talking about corporate fixed deposits?

Corporate FD appears to be very attractive to those who are aware of the returns it promises. Lot of investors feel that it is similar to a Bank FD in terms of risk profile, but gives higher interest. In reality, it is different from the regular Bank FD in the sense that in this case companies issue these FD’s for expansion of its business and fulfilling cash requirements.

All you wanted to Know About Corporate Fixed Deposits

A company raises capital by issuing fixed deposits to the investors. The interest rate is generally higher compared to a Bank FD and is generally lies in the range of 9 – 15 %. These deposits are used by the company to fund its expansion and meet its cash requirements. A Corporate FD is just like a regular loan that we take from any financial institution. The company makes periodic payments i.e., interest payments, generally once a year, to all the investors in return for the deposit they made with them. However, sometimes, the interest payment can be done based on the investors’ choice. For example, if you want a monthly interest scheme, you just need to mention this at the outset and you will be given an option whether you want monthly, quarterly, semi-annually or annual interest payments. At the end of the deposit tenure the company repays the money deposited to all the investors.

You might be thinking that if corporate FDs are so lucrative, why are they not as popular as Bank FDs?

The reason is that these deposits are unsecured. If the company is unable to perform as expected or starts making losses, the interest payments may be skipped and in the worst case, if the company declares bankruptcy, the whole deposited money may be lost.

This is the reason why company fixed deposits offer a higher rate of interest, generally 2-3% more than Bank FD’s, to attract high risk investors who want better returns that what is offered by Banks.

Should you invest in Corporate FDs?

Going through the article you must be thinking whether investing in company FDs is a good idea or not. Considering the fact that it is unsecure and you may lose money if the company goes bankrupt then you might feel that it is not worth it. However, this is not true. Not all companies are bad, or rather mismanaged, that it will go bankrupt. Therefore, careful selection of the company is paramount in making your investment a success. There are a host of well performing companies who use this option as this is a cheaper method to raise money as opposed to borrowing from banks. If you do proper research about the company before investing, there is high probability that you will earn interest payments on time and that the company will meet its commitment to repay your deposit at the end of the deposit tenure.

How to decide which company’s FD is good?

To make sure that your invested money does not go down the drain, you need to research about the company before investing. You can keep the following points in mind while doing research on a company.

• Past History- Any company which has a strong track record of performance and profit generation for a period of at least 10 years would be a better choice than a newer company that is yet to establish itself. If the company had already issued such FD schemes in the past, then you can check if they made timely interest payouts and proper principal repayment. It will give you a good idea as to whether they will do the same with your deposits.
• Credit Rating- Checking the credit rating by credit rating agencies like CRISIL and ICRA, of the issue can give you a clear picture. A higher credit rating means that the security has credibility. These credit ratings are arrived at after studying the company extensively. Therefore, these ratings can be of great help for investors. A rating of AAA is considered to be more superior to AA rating. Generally, companies with lower credit ratings offer higher interest rates to attract investors for the additional risks they are taking.
• Term of investment- If you are planning to invest in corporate FDs, it is advisable that you go for a medium term of investment, i.e., invest for a period of 2 to 3 years. By choosing such tenure, you have the option of revisiting your decision about the security. If you feel that the company or the industry as a whole isn’t performing well, you can let your investment mature and look for better options. However, you don’t get this option if you invest for 5 or 10 years.
• Sector to which the company belongs- It is very important to make sure that the sector to which the company belongs is a well performing one. For example, the Indian aviation industry is going through turbulent times right now, especially Kingfisher Airlines. With the whole Aviation sector going through tough times, chances are that, any aviation company that is coming up with an FD issue may face difficulties in honouring their interest payment commitments. So, make sure that you study the sector of the company and figure out if the sector is expected to perform steadily over the next 2-3 years.
• Interest Rate- Another point to notice is the interest rate. If the interest rate offered by the company is very high, say 15%, then it shows that the company is desperate to raise money and is willing to offer an unusually high rate of interest to attract investors. It is advisable to stay away from such desperate companies.

To check out various Company and NBFC Fixed Deposits’ available in the market currently and the rate of interest they offer, click here. Any questions related to the various FDs can be asked by posting a comment below.

Things to Know Before Investing in Corporate FD

• Companies pay high commissions to brokers to push their company’s FD. Resist yourself from giving into the convincing appeal of such agents or brokers to go for a particular fixed deposit.
• You should regularly review company’s performance and its share prices in comparison with the overall market movements.
• Until your interest income from any such FD is less than Rs. 5000 per year, no income tax will be deducted at source (TDS) from such interest income.
• Diversify your portfolio of fixed deposits and thus reduce the risk by spreading them over number of companies in different industries. Don’t put more than 10% of your investment in any particular companies FD.
• Carefully preserve the papers like Fixed Deposit Receipt (FDR), you get from the company as proof of deposit, to avoid hardships at the time of getting your money back. You might get it after more than one month from application date.
• Companies offer various options related to the frequency of interest payout like monthly, quarterly, half-yearly or annual. There exists another option of interest accumulation and no payout. Delay the interest payout as much as possible. This will earn you interest on interest (compounding effect) and hence will generate higher interest yield on your investment.

MoneyBol Recommendation

Based on the above discussion, find below the name of some Corporate Fixed Deposits which you can consider:

Corporate FDs are decent investment options. However, you need to make sure that you have left no stones unturned in doing the back ground research before investing.

Author – Rohit Roy & Vineet Patawari

Related posts:

1. IFRS: an improvement in accounting quality as well as corporate governance
2. Should Age Determine Your Investments in Equity?
3. Beginner’s Guide for Stock Market

Solution to the Problem Refer to the article on Ten Credit Card Precautions You Must Take. Other than taking the prescribed precautions, one should keep in mind the below mentioned points.

Lack of Awareness about High Interest Cost
Credit card is the most expensive debt around. Most of the credit cards charge 3 to 3.5% per month i.e. whopping 36 to 42% per annum. Even private money lenders don’t charge that kind of interest.  The reason why most of the people get into the trap is that, they are not aware of such high cost. Though the RBI has stipulated that banks must inform clients of their annualized rate of interest, in most cases, this is mentioned in fine prints.  People see the small figure of 3% per month and rarely stop to do the calculation of the interest burden they have to carry.

Pay the Entire Amount due Every Month
First, truly understand that using your credit card doesn’t exempt you from making that payment. Live within your monthly budget. Never bring forward your shopping based on what you think you will be able to pay back. We all need to recognize the words ‘minimum payment due’ for the trap it really is. So remember, if you use a credit card pay up the entire amount due at the end of the month.

Negotiate with your Card Issuer
If you notice that your credit card bills are getting out of hand, speak to your card issuer right away. Explain that while paying the interest may not be possible, you can afford to pay the principal debt amount. Banks (issuer) may show some leniency in some cases in order to retain the customer. Some banks are even willing to outline a debt-repayment programme. They may extend the period of the payment or may agree to accept a reduced interest rate.

Break a FD or Take a Loan
Paying off the credit card debt must become your first goal. For this, even taking a personal loan is worth. Interest on such unsecured loan is as high as 20% per annum, but that’s still lower than what you are paying towards credit card debt. Noting you’ll earn by way of interest on any form of investment will equal what you are paying towards interest on that debt you have run up on your credit card. So it’s worthwhile to break any fixed deposit or withdraw investments to pay off this debt.

Go to Neutral Debt Counseling Session
One such centre, which I came across, is Abhay – an initiative of bank of India, which anyone can avail of irrespective of whom they bank with. Such centers have experts can help work out the best way to pay off debt and structure finances.

Decide on One Credit Card
After you have gone through all these channels, decide on single credit card that you would like to keep. Your choice could be based on
• the credit limit available on that card
• the interest rate
• what type card it is and the offers and reward points you get on such card
• the fact that you have standing bill payment instructions attached to that card

Once you have decided, transfer your debt from other cards to this one. That is possible to arrange when you have a card that still has balance available on it.

Switch to Debit Cards Tossing the credit card away is the safest way of not getting into the debt trap. Opt for debit card instead. That way you are only using money you have in your savings account. You should ideally have enough cash in the bank to take care of expenses for six months.

Share your biggest learning out of this article or by handling credit cards

Related posts:

1. Pros and Cons of Credit Card
2. Ten Credit Card Precautions You Must Take
3. Consolidating Debt – What are my Options?

January

• The beginning of the year is an ideal time to evaluate the monthly income and expenditure of your household. Make your savings plankeeping future needs in mind, both short-term and long-term goals.
• Review all your loans – home, car, study, etc. Evaluate the interest payments. Think whether you can make savings by refinancing or can you afford to make higher monthly payments towards that loan so as to save on interest.

February

• Get an insurance policy for yourself. This will save you tax also as the financial year ending i.e. 31st March is close. Remember you should not leave everything for the last moment.
• Your household income and expenditure already evaluated go over what you are paying towards various utilities. See if you can cut down some unnecessary expenditure. It is always wise to make a note of all your expenditures somewhere for easy analysis of how much you are spending where.
• As tax payment is around the corner, you may think of making some tax-deductible charitable donations (deduction u/s 80G) which you have been thinking to do so throughout the year but have not done till yet.
• Start making all tax-deductible expenditures prior to year end. So pay up your property tax and if you have let out some property on rent, pay the society’s charge if any for rental of premises as this charge is deductible.
  

March

• Consider the savings made so far to check whether you are moving ahead with what was planned earlier. Make necessary adjustments as necessary. Ensure that your savings amount is suitably invested so as to optimize your earnings.
• 
Keep yourself updated about the latest announcements regarding cut-backs or tax-slashes in the budget. Consult a financial planner to see how savings from these can be maximized.
• Make sure that you have made all your investments for tax planning u/s 80C. Don’t forget to buy or renew health insurance to get deduction u/s 80D.

April

• April is the month when you need to plan your tax-saving investments for the next financial year.  Insurance payments, SIPs, etc. should all be set up so that they run smoothly throughout the year.
• If you are salaried, this is the time to repay existing loans or make long term investments as most increments in salaries are announced this time of the year.

May

• Tax returns are supposed to be filed before July. It is wise to compile your returns before June end to avoid last minute hassles.
• It is wise to set up an efficient filing system and keep things organized throughout the year. This will avoid any kind of trouble in finding important papers at the right time.

June

• With other important things in place, this is a good time to prepare a financial plan keeping future in mind. Explore various options available.

July

• Every member of your family who receives an income must have a PAN card. This includes children if they have bank accounts or investments in their name. Apply for a PAN card if you do not have one yet.
• PAN card is essential for opening a demat account to trade shares, purchasing a house or car or getting a telephone connection.

August

• This is the time to check whether you are sticking to all the investment and savings plans made. It is quite likely to get complacent and forget about decisions taken three – four months back. See that your savings are in line with your plans. If not, make necessary adjustments.
• Remember that September 15 is the date for payment of advance tax. Keep your paperwork ready.

September

• With the festive season and holidays around the corner, make sure you make necessary arrangements. It is a good idea to set aside an amount for some festive shopping or a family holiday. Some sort of indulgence is a must for that ‘I am feeling good’ factor.

October

• Take out some time for asset reallocation or portfolio rebalancing. If a particular area seems good, transfer some of your funds there.

November

• Most salaried people receive their bonuses around this time. Make sure that this money goes into some kind of investment or in getting something for which you have longed for an entire year or more.
• Think about your retirement plans. Decide at what age you want to retire and make a plan towards saving enough to make that happen.

December

• The end of the calendar can be a reminder to consider making your will. Make a list of all your assets and your dependents. Meet your lawyer and get some reliable witnesses.

Related posts:

1. Financial planning: Tips to help you get financial success
2. The Importance of a Financial Education to Young Minds
3. ULIPs or Mutual Funds – Comparison

This is the time of the year when most of us get a call from the HR department to file our investment declarations so that appropriate TDS can be deducted from our monthly incomes. Consequently this is the time when we start thinking about tax planning (or tax saving to be more precise). Though tax planning is a round the year exercise, but its not late if you start even now. After all, investing Rs 1-1.5 lacs in about 35 days is not is not a tough job. But it might become a tough job if you do not have an idea about where to invest, what are the best investments which will satisfy your RETURNS-LIQUIDITY-SAFETY trinity. I will try to bring to your notice some of the simple and popular investment avenues (or any expenditures which can be instrumental in fulfilling the “tax saving” purpose of investment.

The Income tax department allows you deductions for various investments/expenditures under different sections all of which have different limits of tax deductions. We will first know about the investment avenues under various sections and then about the limits for these sections.

Under Section 80C (Limited upto Rs 1 lac)

Monetary limit

As written above, the upper limit for deduction under section 80C is fixed at Rs 1 lac. Thus total allowable deduction, combining all of the above instruments cannot exceed Rs 1 lac. You can have a combination of the above mentioned investment/expenditures to exhaust the limit (subject to individual limits on some of the instruments)

I like to mention here that I have listed only the popular and simple avenues above and not all of them. There are a number of clauses which might fit your case better. You can have a detailed list of the various deductions at Tax department’s website here.

There are a number of other sections under which deductions can be availed like 80D, 80E, 80G and so on. I will discuss these sections in next article.

Happy investing till then!! Thanks

Related posts:

1. 5 Easy tips to save money- Does saving mean no spending?
2. 5 top picks of the year 2011
3. Financial Planning Calendar

If you have been considering applying for a credit card, you may have already been shopping around for a cheap credit card. It is hard to miss out on stories in the media regarding consumers paying high interest rates and paying high annual fees on their credit cards. So by shopping around, you no doubt want to find a card with a low rate and preferably no annual fees. Before you continue shopping, though, you may want to consider if you do want a credit card after all as well as how you plan to use it if you do get one.

The Pros of a Credit Card
There are some advantages to carrying “plastic” in your wallet on a regular basis. If you find a cheap credit card, you can simply slide it into your wallet and enjoy the peace of mind that comes with knowing you have some extra cash on hand to use as needed. You may not plan to charge new purchases to the card, but it’s nice to know that if you have the need for cash due to an emergency and are unable to get cash any other way, you can use your card. Many people also use their credit card to build up a higher credit score. By making small purchases on the card regularly and then paying the balance off in full each month, you can establish or build a great credit rating.

The Cons of a Credit Card
The cons of using credit cards are well-noted by stories covered in the media on a regular basis. There are numerous stories about people who are buried under a pile of credit card debt. Many people are carrying thousands, or even tens of thousands, of dollars in credit card debt. These are balances that may be incurring interest charges of hundreds of dollars per month in some cases, and it can take years to pay off these balances. In some cases, credit cards can lower a person’s credit rating when payments are not made regularly or when high balances are carried. Plus, because it can take so long to pay these high balances off and because interest charges and annual fees eat into your future income, credit cards can affect your long term financial future, too.

As you can see, there are some reasons to keep at least one credit card in your wallet at all times. However, you do want to find a cheap credit card with a low or no annual fee and a low interest rate. You also want to use the card responsibly and pay off the balance each month to minimize the negative aspects of using credit cards.

Related posts:

1. How to get out of Credit Card Debt?
2. Ten Credit Card Precautions You Must Take
3. Consolidating Debt – What are my Options?

What do I mean by Arbitrage

It is a kind of trading where traders earn profits by exploiting price difference of similar or identical financial products on different market or in different forms and this Arbitrage exists because of market inefficiencies.

Example: – A program can buy or sell the future stock of a commodity like gold depending upon the spread level of same product of different expiry month contract in the Indian commodity market (MCX).

Let us take the October and December contract of gold. Since current month for gold is October, under all normal circumstances, we will have more liquidity in the October contract and comparatively December contract does not have such liquidity. So in the spread trading, when we say buying a spread, it would typically mean we are buying the October contract and selling the same quantity of December contract and the price difference of gold between two contracts is known as the spread. Similarly, with sell spread we sell the current contract i.e October contract and buy the December contract. As a normal trading rule, our aim is to buy the spread at low levels and sell at high levels or vice versa. For instance-

If we are of the view that this difference will increase, i.e in absolute terms, the spread between October and December contract will decrease, so we will sell the spread at current levels. We go short on October contract and go long on December contract. After 5 days, the prices increase as follows-

Thus we make a gain of Rs 34 on gold spread. It needs to be mentioned here that this spread has equal chances of decreasing as well in which case we would have lost money on the strategy. The key in arbitrage lies in executing the buy/ sell spreads at required levels with very less impact cost. This is where technology comes into play.

How technology/algorithms can help in carrying on arbitrage

Algorithmic trading refers to automated trades executed through software programs, which do not require humans to place orders every time. There are computer programs written to buy or sell a security, currency or commodity at a given or predefined level. These programs are so fast that people, who look at various developments and decide trade, would be left way behind because a machine has done it in milliseconds. So it has become extremely difficult to earn profit for the manual traders. The future belongs to traders with superior technology in case of arbitrage business. The National Stock Exchange (NSE), which controls more than three fourths of the trading volumes, has approved applications of 200 of its members, roughly a fourth, to trade using algorithms.

In program trading we normally gives inputs like the required buy spread and sell spread to execute the trade and the number of pair quantity etc. Some algorithms do not even require any input. Algorithms can be made in such a way that the program start quoting in the illiquid market and when the system gets a fill in this illiquid market then it sends a market order in the liquid market to grab the required buy spread.

What are the advantages of using algorithms?

• Efficiency of algorithms comes from the fact that the whole process can be done in a millisecond’s time. Thus saving Time.
• Accuracy of execution improves as time lag is reduced and better prices can be quoted
• Since the system doesn’t get fatigued, continuity of process is ensured

There are so many other way to do arbitrage like calendar spread, multi exchange trade, main mini spread, different exchange of two different countries and other ways also and program trading used in those all types of arbitrage.

Author: Bratin Mukherjee, Analyst, Kredent Group

Praveen Bajaj, Head – Research, Kredent Group

Related posts:

1. All about algorithmic trading
2. Options glossary
3. Open Interest – Essential Trading Tool

In such difficult times we have to ask a few difficult questions to ourselves before committing our money to any mutual fund scheme. Here I give you three questions which you must contemplate on –

1. Do I understand the risk associated with market linked instruments like mutual fund? It may be safer than direct investment in shares but it has got its own problems and risks. Because of enough diversification, stock specific risk might be reduced but the market risk still remains.
2. How to make intelligent choices between different types of funds –balanced versus diversified equity (all stocks), open-ended versus closed-ended, SIP versus lump sum?
3. What is the objective of buying the mutual fund? For tax saving you’ve tax saver funds (ELSS), if you are bullish on a particular sector, say pharma, you have sector specific funds like “Reliance Pharma Fund”, if you want regular cash flow from your investment, you can opt for dividend option of a fund.

4 mistakes mutual fund investors should avoid

1. Not reading Offer Document Carefully: Don’t miss reading about the following things in the offer document (prospectus) of any mutual fund AMC
   1. Verify that you have received an updated version of the offer document. Otherwise, your decision will be based on out dated information, specially the historical performance of the fund.
   2. Investment objective of the fund. It can be – to generate regular income or long term capital appreciation or to closely match returns of a benchmark or something else.
   3. Risk factors should be properly evaluated against your own risk appetite. Credit risk, market risk, interest-rate risk etc. are all crucial and should be analyzed based on your expectations (protection of capital or regular flow of income or something else) from the investment.
   4. We’ve all heard that past performance is not an indication of future returns.  However, we must read the historical performance of the fund critically, looking at both the long and short-term performances.
   5. Fees and expenses include various commissions named as entry load and exit load. Though entry load is restricted by SEBI but there are certain adjustments with your NAV to compensate the middle-men. These are paid in the form of upfront and trailing commissions.
2. Choosing sectoral funds without analyzing the sector: It is very important to understand the risk-return profile of a sector fund.  Investment in sector fund has to be timed very cautiously as the return will have the seasonality effect of the underlying sector. If you have entered into the right sector at the right time and if that sector performs, your investment in the fund will give you substantial return, most of the time more than market returns. For example Reliance Diversified Power Sector Fund gave handsome returns in the period 2004-06. Downside of sector funds is that individuals like us can seldom time the market properly.  If you have not seen 2-3 market cycles, then you should remain away from sector funds.
3. Investing based on short term performance of the fund: Reading too much into 1 month, 3 months and 6 months performances, without checking the consistency of returns in longer terms like 3 years and 5 years can be very risky. Relying on researches like “last month, equity funds with higher exposure in defensive sectors like health care and FMCG, fared the best” can be misleading as the trend may be very short lived.
4. Not knowing the underlying securities of your fund: Without knowing the composition of the portfolio of your fund, it is not possible to get the desired diversification. Take an instance where you invest in a few mutual funds to obtain a diversified portfolio. However, if all these funds hold same underlying shares, bonds, etc. you are not getting the required diversification. You must also know on what sectors your fund is overweight and on what sector it is underweight, which helps you map it to your risk appetite.

Related posts:

1. Things you want to know about Exchange Traded Fund (ETFs)
2. Mutual Fund Analysis-May 2010
3. ELSS Mutual Funds

Thanks and happy reading

ASSIGNMENT – Notice to an option writer that an option has been exercised by the option holder.

AT-THE-MONEY – An option whose strike price is equal – or approximately equal – to the current market price of the underlying

BEAR SPREAD – A spread which is put on with the expectation that futures prices will decline.

BULL SPREAD – A spread which is put on with the expectation that futures prices will rise.

BUYER – The purchaser of an option, either a call option or a put option. Also referred to as the option holder.

CALL OPTION – An option which gives the option buyer the right to purchase (go “long”) the underlying futures contract

CLASS OF OPTIONS – All call options – or all put options – on the same underlying futures contract.

CLEARING CORPORATION – The Board of Trade Clearing Corporation, whose function it is to clear (match) all purchases and

CLOSING TRANSACTION – A purchase or sale that liquidates -offsets – an existing position. That is, selling an option that

COMBINATION – A position created either by purchasing both a put and a call or by writing both a put and a call on the same

COVERED OPTION – An option written against an opposite position in soybean futures.

CREDIT SPREAD – A spread in which the value of the option sold exceeds the value of the option purchased.

DEBIT SPREAD – A spread in which the value of the option purchased exceeds the value of the option sold.

DELTA – The amount by which an option’s price will change for a unit change in the underlying futures price. With the

EXERCISE – The action taken by the holder of a call if he wishes to purchase the underlying futures contract or by the holder

EXERCISE PRICE – Same as strike price.

EXPIRATION – The date after which an option may no longer be exercised. Although options expire on a specified date

FUTURES CONTRACT – A contract traded on a futures exchange for the delivery of a specified commodity or financial instrument at a future time. The contract specifies the item to be delivered and the terms and conditions of delivery.

FUTURES PRICE – The price of a particular futures contract determined by open competition between buyers and sellers

HEDGE – The buying or selling of offsetting positions in order to provide protection against an adverse change in price.

HOLDER – See Buyer.

IN-THE-MONEY – A call is said to be in-the-money if its strike price is below the current price of the underlying futures

INTRINSIC VALUE – The dollar amount that could be realized if the option were to be immediately exercised. In other

LONG - The position, which is established by the purchase of a futures contract or an option (either a call or a put) if there

MARGIN - The sum of money or securities, which must be deposited – and maintained -in order to provide protection to

MARGIN CALLS - Additional funds which a person with a futures position or the writer of an option may be called upon

NAKED WRITING - Writing a call or a put on a futures contract in which the writer has no opposite cash or futures market

OPENING TRANSACTION – A purchase or sale, which establishes a new position.

OUT-OF-THE-MONEY – A put or call option, which currently has no intrinsic value. That is, a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.

PREMIUM - The price of an option – the sum of money, arrived at in the competitive market, which the option buyer pays and the option writer receives for the rights granted by the option.

PUT OPTION – An option which gives the option buyer the right to sell (go “short”) the underlying futures contract at the strike price on or before the expiration date.

PRICE SPREAD – The purchase and sale of two options covering the same futures contract with the same expiration dates but different exercise prices.

SELLER - Also known as the option writer or grantor. The sale of an option may be in connection with either an opening transaction or a closing transaction.

SERIES - All options of the same class having the same strike price.

SHORT - The position created by the sale of a futures contract or option (either a call or a put) if there is no offsetting position.

SPREAD – A position consisting of both long and short options (all calls or all puts). For example, a long position in a call with one strike price and expiration and a short position in another call with a different strike price and/or expiration.

STRADDLE - A combination in which the put and the call have the same strike price and the same expiration.

STRIKE PRICE - The price at which the holder of the call (put) may exercise his right to purchase (sell) the underlying futures contract.

TIME SPREAD - The purchase and sale of two options covering the same futures contract but with the same exercise price, but different expiration dates.

TIME VALUE - Any amount by which an option premium exceeds the option’s intrinsic value. If an option has no intrinsic value, its premium is entirely time value.

UNCOVERED OPTION – The sale of an option without a position in the underlying futures contract.

UNDERLYING FUTURES CONTRACT - The specific futures contract that can be bought or sold by the exercise of an option.

WRITING – The sale of an option in an opening transaction.

Related posts:

1. Measuring volatility through VIX
2. Open Interest – Essential Trading Tool
3. Job Opening: Options Trading with Kredent, Kolkata