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Stocks FAQs

Q. Am I required to sign any agreement with the broker or sub-broker?

A. Yes. For the purpose of engaging a broker to execute trades on your behalf from time to time and furnish details relating to yourself for enabling the broker to maintain client registration form you have to sign the “Member - Client agreement” if you are dealing directly with a broker. In case you are dealing through a sub-broker then you have to sign a ”Broker - Sub broker - Client Tripartite Agreement”. Model Tripartite Agreement between Broker-Sub broker and Clients is applicable only for the cash segment. The Model Agreement has to be executed on the non-judicial stamp paper. The Agreement contains clauses defining the rights and responsibility of Client vis-à-vis broker/ sub broker. The documents prescribed are model formats. The stock exchanges/stock broker may incorporate any additional clauses in these documents provided these are not in conflict with any of the clauses in the model document, as also the Rules, Regulations, Articles, Byelaws, circulars, directives and guidelines.

Q. Can a retail investor also bid in a book-built issue?

A. Yes. He can bid in a book-built issue for a value not more than Rs.1,00,000. Any bid made in excess of this will be considered in the HNI category.

Q. Can I apply for the IPO online?

A. As per the cyber rules of Government of India, this facility is not provided. Only in case of book building issues, the brokers can bid online on behalf of subscribers.

Q. Can I change/revise my bid?

A. Yes. The investor can change or revise the quantity or price in the bid using the form for changing/revising the bid that is available along with the application form. However, the entire process of changing of revising the bids shall be completed within the date of closure of the issue.

Q. Can I know the number of shares that would be allotted to me?

A. In case of fixed price issues, the investor is intimated about the CAN/Refund order within 30 days of the closure of the issue. In case of book built issues, the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue. The registrar then ensures that the demat credit or refund as applicable is completed within 15 days of the closure of the issue. The listing on the stock exchanges is done within 7 days from the finalization of the issue.

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Mutual Funds FAQs

Q. Are investments in mutual fund units risk-free or safe?

A. This depends on the underlying instrument that a mutual fund invests in, based on its investment objectives. Mutual funds that invest in stock market-related instruments cannot be termed risk-free or safe as investment in shares are inherently risky by nature, whereas funds that invest in fixed-income instruments are relatively safe and those that invest only in government securities are the safest.

Q. Are investments in mutual funds liquid?

A. Yes. Investors of open-ended schemes can redeem their units on any business day and receive the current market value on their investments within a short time period (normally three- to five-days). Investors of close-ended schemes can redeem their units only on maturity but can sell it in the secondary market like stocks

Q. As a unitholder, how much time will it take to receive dividends/repurchase proceeds?

A. A mutual fund is required to despatch to the unitholders the dividend warrants within 30 days of the declaration of the dividend and the redemption or repurchase proceeds within 10 working days from the date of redemption or repurchase request made by the unitholder.

In case of failures to despatch the redemption/repurchase proceeds within the stipulated time period, Asset Management Company is liable to pay interest as specified by SEBI from time to time (15% at present).

Q. Can a mutual fund change the asset allocation while deploying funds of investors?

A. Considering the market trends, any prudent fund managers can change the asset allocation i.e. he can invest higher or lower percentage of the fund in equity or debt instruments compared to what is disclosed in the offer document. It can be done on a short term basis on defensive considerations i.e. to protect the NAV. Hence the fund managers are allowed certain flexibility in altering the asset allocation considering the interest of the investors. In case the mutual fund wants to change the asset allocation on a permanent basis, they are required to inform the unitholders and giving them option to exit the scheme at prevailing NAV without any load.

Q. Can a mutual fund change the nature of the scheme from the one specified in the offer document?

A. Yes. However, no change in the nature or terms of the scheme, known as fundamental attributes of the scheme e.g.structure, investment pattern, etc. can be carried out unless a written communication is sent to each unitholder and an advertisement is given in one English daily having nationwide circulation and in a newspaper published in the language of the region where the head office of the mutual fund is situated. The unitholders have the right to exit the scheme at the prevailing NAV without any exit load if they do not want to continue with the scheme. The mutual funds are also required to follow similar procedure while converting the scheme form close-ended to open-ended scheme and in case of change in sponsor.

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Insurance FAQs

Q. Can a policy holder have both paper and electronic policies?

A. Policy holders can choose the form in which they want their policies issued – paper or electronic. A policy can be bought or maintained in one form only – either in electronic form or paper but not in both. However, a policy holder can choose to keep some policies in electronic form and others in paper form – only the electronic policies will be reflected in his e IA account and he can use repository services only for the e policies (and not the paper policies)

Q. Can anyone become or set up an Insurance Repository?

A. No, only entities approved by Insurance Regulatory and Development Authority (IRDA) can become an Insurance Repository.

Insurance Companies cannot set up an Insurance Repository on their own nor can they hold more than 10% stake in any Insurance Repository.

Q. Can I take health insurance plan for my parents who are senior citizen? Is there any tax benefit available if I pay premium for them?

A. Yes, you can take health insurance plan for your parents who are senior citizen. Now a day’s so many insurance company has designed product especially for senior citizens. You are also eligible to claim tax deduction u/s 80D upto Rs 20000/- P.A. if you pay premium for them.

Source:CAMS

Q. Can policy holders have multiple e Insurance Accounts if they have multiple Insurance policies issued by various Insurance Companies?

A. No. IRDA stipulates that an individual can have only ONE e Insurance Account across Repositories, irrespective of the number of policies owned by a policy holder – thus, if a person has an e IA with say Repository A, with any other Insurance Repository. All Repositories will have systems in place to check this before opening an e IA – any application for a second or multiple e IA will be rejected by the Insurance Repository. All the electronic policies owned by a policy holder can be credited or held under this single e IA.
/n Source: CAMS

Q. Can the eIA be operated by the Policy holder only?

A. Yes, the e IA can be operated by the account holder only during his life time, unless, of course, he has been unfortunately rendered incapable to operate it (incapacity due to mentally unsound means or terminally ill as certified by a medical practitioner). In such circumstances, the e IA may be operated by the Authorized Representative (AR) appointed by the account holder (pl see below for details).

The account holder is strongly advised to keep the log In ID and password for online access of his e IA confidential and not share it with anyone else.

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Real Estate FAQs

Q. Does availing of a teaser loan make sense?

A. Availing of a temporarily discounted home loan without taking a protracted view of one’s financial position is not advisable. One should be aware of the manner in which one’s finances will be affected after the teaser period is over and real-time lending rates kick in.

Q. Does it make sense to buy a home now?

A. That depends on one’s actual objectives and level of need. If one is a first-time home buyer, attempting to time the market makes little sense. Any correction will be a brief phenomenon, and prices inevitably rise again. This is a risky game that only investors should play.

Q. In whose name are the stamps required to be purchased?

A. The stamps are required to be purchased in the name of any one of the executors to the Instrument.

Q. Is a POA revocable?

A. Yes, a POA can be either revocable or irrevocable, depending on what sort of a POA one has made.

Q. Is there any way by which I can claim exemption from tax on capital gain?

A. Several options are available for saving capital gains. For example, in the first place invest in a residential house property or a flat to make investment so as to see that capital gains are exempted. Likewise, if a person were to make the investment in REC or NHAI bonds then also he enjoys complete exemption from the long-term capital gain payable by him in respect of capital gains due.

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Investing Logic FAQs

Q. Why you should not be investing just to avoid tax?

A. Investments are made to achieve financial goals in future. An investment is expected to earn an estimated rate of return which will help you pay for your needs in future. Hence your investments should be purely based on factors such as your financial goals, your risk profile and time in hand.

An investment can always help you to save tax. For example, an investment in tax saving bank fixed deposit fetches you a tax deduction up to Rs 1.5 lakh under section 80C of Income Tax Act. However that should not be the sole criterion to invest. Consider a situation- Suresh is in his early thirties and has no financial liabilities. He intends to save for his retirement which is due 25 years from now. He should ideally be taking a bit more risk and investing in equities. Equity mutual funds and not fixed deposits is a better prescription for his financial goal of retirement. If keen to save on tax, he should ideally be in tax saving mutual funds and other diversified equity funds.

Also, the attitude of investing for the sole purpose of saving tax makes many individuals myopic. Investments have to be done regularly. But when one joins the 'tax saving' band-wagon, he invariably ends up investing in last week of March, and in many cases, ends up buying something that does not serve his long term financial goals.

Better take all round view of your finances while investing. Tax can be one of the parameters of the checklist you use while investing, not the sole parameter.

Q. Why you should prefer to average up than average down?

A. Averaging or buying more is a typical action most traders and investors undertake when they trade or invest. Averaging down means buying more when the stock is going down contrary to expectations and averaging up means buying more when the stock is going up in the desire direction. Let us understand this with relevant examples.

Suresh bought shares of XYZ company at Rs 100 with a view that the price will touch Rs 125 in a month. However, soon after his purchase the stock tumbled to Rs 98, so he added more to his kitty. The stock further went down to Rs 95 and he bought more. Here he is said to be averaging down.

Ramesh bought shares of PQR company at Rs 100 with a view that the price will touch Rs 130 in a month. Soon the stock hit Rs 105 mark and he bought more and he further added to his position when the stock crossed Rs 107 mark. He is averaging up in his trade, says the market jargon.

The logic offered by a trader who is averaging down is that the average cost of the holding goes down and the trader makes big profit when the price gains. However, an attempt to average down can be a loser's game. When the stock price moves contrary to expectation, the trader may have got his analysis wrong. A call that has gone wrong can further wipe out trader's capital. The hope that the price will rebound make many traders add to their losing position which further aggravates overall losses if the price does not respond favourably.

Hence market wisdom says that one should further add to the winning positions. If a trader is making money in a trade, it makes sense to add more to that position. If he has bought a share and the share is in bullish phase, he should ideally buy more than feeding capital to a loss making position.

The old adage of cut your losses and let your profits run is to be kept in mind when one trades.

Q. Why a stock hitting 52 week low does not necessarily make an attractive buy?

A. It is a dream of every investor to buy low and sell high. Where do you see a stock available low? - Obvious answer to this question is to go for list of stocks quoting at 52 week low. Exchanges and media both are quick to offer this list which makes it a low hanging fruit for many. But the reality can be way different. One may not necessarily get a good 'buying opportunity' when he is looking at a stock quoting at 52 week low.

To understand the risk one is exposed to when he buys a stock just because it is quoting at 52 week low, we should understand how the 52 week low stock list is made. When a stock's current price is lowest as compared to the prices it has quoted over last one year, the stock is included in this list. However that does not mean the downside in the stock is over. The stock price can tumble further the next day and it will again appear in the 52 week low list for that day. A stock in downward trend will keep appearing in the 52 week low list for many days. And one may not make any money buying a stock which is moving down because the business fundamentals of the company are ruined.

Classic example of this is the downfall in technology stocks post dot com bust. The stocks were in downtrend for months and ruled 52 week low list for long period of time, before disappearing from the trading screens. If one would have bought into one such name just because it is quoting at one year low, he would have lost his capital.

Technical analysts treat a stock hitting a new low as an opportunity to further sell that stock, as the stock quoting at new low confirms continuation of bearish phase. Fundamental analysts do look at stocks quoting at low prices, but they seldom buy them. The buy action in stocks quoting at 52 week low by a fundamental analyst, is generally backed by solid analysis of the business fundamentals of the company. Hence it pays not to solely rely on 52 week low price as a good buying price for a stock.

Q. Why you should not chase penny stocks?

A. It is tempting to buy 1000 shares of a stock that is quoting at Rs 3 than to buy one share which is quoting at Rs 3000. For some the thrill of buying hundreds of shares (large quantity) pushes them to buy a penny stock - a stock quoting at an absolute low price. For some Rs 3 is very cheap and accessible whereas Rs 3000 is too costly to buy. Whatever be the reasons, many individuals are seen chasing the next Infosys and next Larsen & Toubro. However, chasing penny stocks just because they are quoting in single digits may not be a wise idea.

The first logical reason is - a stock that has done well and is expected to do well is preferred by most investors which is why it quotes at 'high' price whereas shares of a company that has not done well and may not have a great future languish at low levels. No wonder penny stocks in most cases disappear from the trading screens than making it to the top – it is an unwritten law of the market. It is not necessary that the story you heard of someone buying thousands of shares of a stock at Rs 8 and then selling it at Rs 1000 has to be false. But it is the exception that proves the law.

The second reason why a penny stock may not be cheap as compared to a high priced stock is the price it commands may not be true representative of the underlying value. For example, a company which has gone bankrupt may have its shares trading at Rs 5, when in reality the value of these shares may be closer to zero. A company that is doing extremely well and growing 30% year on year will see the stock prices zooming over a period of time. A share quoting in thousands - say Rs 5000, may actually worth much more and hence appear on the buy list of most analysts.

If one looks at valuation parameters such as price to earning, price to book value; many penny stocks appear costly, whereas high priced shares may appear much cheaper. For example, a stock quoting at Rs 5 may have earning per share of 5 paise, which boils down to price to earning ratio (P/E) of 100. A stock quoting at Rs 5000 may have earning per share of Rs 100, which means the stock is quoting at P/E of 50. Higher the p/e costlier the share. Put simply, in aforesaid case, share priced at Rs 5000 is actually cheaper than Rs 5 share and may have better prospects too.

Never buy a penny share because it is quoting at low price. Buy one if you know the business prospects - buy value and not the price, says the old wisdom.

Q. Why you should choose investments that contain downside risk while participating in upside?

A. When markets are in bull phase, most investors ask for the best performing stock or the best performing mutual fund scheme. If a scheme has given 100% returns in past year, it is the best bet for them. But in reality one should look at the ability to contain downside as much as the ability to generate returns in the upside.

The old adage says that today's investor does not benefit from yesterday's returns. If an investment has shown good appreciation in the past, that does not make it necessary that it will keep giving similar returns in future. Hence there is no point focusing too much on returns generated by an investment. An investment that has done well in the past, may actually post a loss in future. For example, an individual who invested in January 2008 in equities looking at spectacular returns posted in CY2007, have lost money in CY2008.

Downside cannot be ruled out altogether in financial market, and especially in volatile asset classes such as equity one has to be very careful. Consider this - a stock has fallen to Rs 40 from purchase price of Rs 100. In this case the investor is sitting on a loss of Rs 60 or 60%. Now if he wants to recover the loss, his investment must show a gain of 150% and not 60%. An investment that contains downside helps the investors in bad times. Aforesaid example makes it clear that the required rate of return to recoup losses is higher than the rate of loss. Do look for investments that offer high returns, but do not ignore how they are expected to behave in bad times.

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Borrowings FAQs

Q. Does income of an individual affect his loan taking capacity?

A. Income of the applicant is an important factor for the banks while ascertaining if they want to lend to the individual. Higher the income, better it is for the loan applicant. Loan sums are typically a function of the take home income and the consistency of the income.

Q. Does the property value matters in the home loan?

A. Banks typically fund up to 80% to 85% of the home value. Even if the income of the loan applicant supports offering more loan banks do not go beyond their threshold limit. Banks first expect the property buyer to bring in his contribution from his own funds, and the remaining money is lent by the banks. In case of commercial property, the banks typically fund only upto 50% to 60% of the property value, subject to fulfilling other eligibility criterion.

Q. What is a co-branded card?

A. A bank may tie up with a partner such as airline, retail chain, movie exhibition chain and issue a credit card that offers specific loyalty programmes or member reward programmes for expenses incurred at partner offerings. Such cards are called co-branded cards.

Q. What is a loan against fixed deposit?

A. Banks offer short term loans against the fixed deposits. The tenure of these loans are typically less than the tenure of fixed deposits and charge 1% or 2% more rate of interest than the rate of interest at which the fixed deposit is made. Banks also offer overdraft facility against fixed deposits.

Q. What is a secured credit card?

A. Credit card issued against a fixed deposit with the bank is called secured credit card. Unlike other credit cards, which do not issued against collateral, applicant must keep a fixed deposit with the bank. Bank then issues him a credit card with a credit limit less than the amount of fixed deposit. Such credit cards are used by those individuals who have a low credit score or have adverse remarks on their credit report to build a credit history. If the credit card holder defaults on the credit card bill, the bank forecloses the fixed deposit and recovers the dues.

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