Profiteering through Arbitrage funds

Since June 2014, three asset management companies (AMCs) have launched arbitrage funds, therefore taking the number of funds available for investors to 14. Especially post-budget, these funds have garnered a lot of attention as a substitute to short-term debt funds. 

Neeti Trivedi, Partner, Acumoney Consulting says, “Arbitrage funds always existed but returns in short term debt funds were always comparable owing to which these funds did not really garner investor interest. Post the Budget, the changes in taxation of debts funds have made debt funds rather unattractive for short term investments.” 

Over the last one year, ending on August 8, 2014, the best performing fund in this category was Kotak Equity Arbitrage Fund with returns of 10.03% and the worst performing fund was Birla Sun Life Enhanced Arbitrage Fund 8.10%. As a category these funds tend to outperform in volatile market. 

Should you invest?

“Not a good time to invest in arbitrage funds. Arbitrage funds are good investment in a sideways market but now when we are looking at a possible bull run. Now if we look at the debt market then most probably we will witness a downward interest rate cycle. In such a scenario it is a very good opportunity to invest in debt funds. Hence, against the equity as well as debt funds, we are not recommending arbitrage funds under current market environment to our long term investors,” says Rohit Shah, Founder of GettingYouRich. 

Vidya Bala, Head of Mutual Fund Research, FundsIndia.com opines, “Arbitrage funds need not be timed. They are basically funds used to hedge or limit risks. Hence, one can invest in them any time.” However, she adds, that investors need to understand that arbitrage funds work best during volatile markets when the fund gets arbitrage opportunities between cash and derivative segment.

Meanwhile, Lakshmi Iyer, Chief Investment Officer (Debt) and Head Products, Kotak Mutual Fund believes that at the current juncture, there are reasonably good arbitrage opportunities in cash and futures equity market. She says, “Given that the bullish undertone in the market is likely to continue, we believe that it is appropriate to look at equity arbitrage funds now.” 

Seemant Shukla, Associate Director, Edelweiss Asset Management says, “If you were to look at the category since 2007, when the markets have seen multiple cycles, there have been just 3-4 months in 2008, when there were no significant arbitrage opportunities.”

“With its equity orientation, the dividends are tax free and the capital gains are tax free too, if the units are held for more than one year, making it more tax efficient than Liquid and Debt Schemes,” says Shukla. Hence, he recommends that arbitrage funds should be a part of all asset allocation strategies.

“Arbitrage funds, although categorised as equity funds, can replace some portion of the money lying in liquid funds. These funds do not qualify as a long term investment for generating wealth but are more an instrument for parking short term money. Not more than 5-10% of the portfolio depending on the overall asset allocation should be allocated to this category of funds,” says Trivedi of Acumoney Consulting. Since most funds have exit load upto 3 months, hence minimum holding period should be at least 3 months.

Adding a word of caution Trivedi says, “However, with a slew of NFOs and additional investments into these funds and with the limited arbitrage opportunities, it remains to be seen if the funds indeed can keep up the performance,” says Trivedi.

Do they always maintain 65% equity?

Many arbitrage funds in their mandate mention that they invest in debt products when they are not able to find investment opportunities on the equity side. Hence leaving the fear for investors that the debt allocation can get more than 35% and hence it may not qualify for taxation benefits. 

Bala of FundsIndia considers the flexibility as a good sign. She says, “It is a good strategy for fund house to give themselves the leeway to invest in debt if arbitrage opportunities are hard to come by. This is better than the risk of holding unhedged allocation in equity.”

Trivedi adds, that funds need to stick to the mandate to avail the tax benefits relating to equity funds. The reason why it is difficult for investors to gauge the level of debt position in an arbitrage fund is due to their derivative transaction. “The funds would typically ensure that they invest at least 65% into equity. Since this includes the derivative transactions as well, the funds typically would be able to maintain the stated allocation,” says Trivedi. 

Volatile market or Unidirectional market 

An important question that arises is does arbitrage fund perform only in volatile market or does it perform in unidirectional market as well. 

In volatile markets the price arbitrage between cash and derivative segment tends to have a high spread, thus providing opportunities to make profit.

Shukla of Edelweiss Asset Management says, “If you analyze the data of Arbitrage Funds since 2007 and split it further in periods where either Nifty has moved significantly upwards or significantly downwards, you will observe that the base case returns delivered by Arbitrage funds have been closer to 7-8% and the highest returns has been closer to 10-11% - proving that these funds can deliver stable and consistent returns across market cycles.”

Meanwhile, Iyer explains that arbitrage funds also performs during bull market. She says, “Arbitrage funds typically tend to do well in a market where sentiments are a tad bullish, as futures tend to trade at a premium during such times.” She further adds, volatilities also do offer opportunities for trading some portion of the portfolio.

Further explaining Shukla says that the price of a stock trade at different levels in the Cash market and the Futures market. The differential in the price is primarily because there is a risk premia attached to take exposure in the Futures market. This differential is closely linked to the risk-free rate existing at that point in time. 

“Thus, irrespective of the market movements the differential in the Cash and Futures markets will always exist – what will differ is the rate of differential. This will ensure that the Arbitrage opportunities exist even if the markets are unidirectional/range-bound,” says he.

ELEMENTS

An Example of Arbitrage Investing 

In simple terms Arbitrage is the simultaneously buying and selling of the same asset across two different markets in a way that the investor profits from the price difference. Since there is a simultaneous act of selling and buying, arbitrage is considered to be risk-free since the two positions automatically hedge the price risk of the asset going up or down in value. While there are many different strategies for arbitrage trading, allow us to share two examples. 

Cash-Future arbitrage --

Suppose Tata Motors' equity is trading at INR 100 on the NSE. Meanwhile, the 1-month Futures contract is trading at INR 110 on the NSE. The trader can buy the underlying and sell the Futures contract.

Since Futures contracts are traded in lots, the trader should execute the same number of shares. Since Tata Motor's has a lot size of let's say 50, the trader should purchase 50 shares of Tata Motor's at INR 100 and sell one lot of Tata Motor Futures at INR 110.

Now, the trader has two options. As the price difference between the Futures price and the Equities price is INR 10, he needs to wait for the price difference to be lower than INR 10 to earn a profit. If this is not possible, he can hold the positions overnight and execute the reverse trades on a future date.

Spot arbitrage -- (In India MFs are not allowed to delve into spot arbitrage)

To put it as an example. Tata Motor’s shares are trading at INR 100 on the BSE and is available for INR 110 on the NSE. Then an astute trader would simply purchase the shares at INR 100 from the BSE and sell the same quantity for INR 110 on the NSE, thereby registering a profit of INR 10. Since cross-clearing has not been approved in India, the trader would need to sell the BSE shares and purchase back the NSE shares within the same day to capture the profit. Therefore, even after paying for all transaction costs, the trader would reap in some profit. 

Options of Arbitrage Funds

Fund	2007	2008	2009	2010	2011	2012	2013	1-Year Return (%)
Kotak Equity Arbitrage Fund	9.06	8.30	5.15	6.31	7.51	9.58	9.18	10.03
ICICI Prudential Blended Plan	8.79	9.25	3.53	6.39	7.69	10.47	9.45	9.73
ICICI Prudential Equity Arbitrage Fund	-	8.32	3.67	6.52	7.63	10.11	9.80	9.73
IDFC Arbitrage Fund	8.30	7.82	3.29	5.56	7.87	9.32	9.23	9.68
JM Arbitrage Advantage Fund	8.95	9.02	4.52	6.55	6.75	9.46	9.15	9.68
SBI Arbitrage Opportunities Fund	9.23	8.33	4.14	5.76	8.34	9.11	9.03	9.29
IDFC Arbitrage Plus Fund	-	-	3.28	5.54	6.54	9.07	8.95	8.82
UTI SPrEAD Fund	8.84	10.60	6.41	4.83	8.36	8.65	7.66	8.79
Reliance Arbitrage Advantage Fund	-	-	-	-	8.32	9.89	9.70	8.74
Religare Invesco Arbitrage Fund	-	8.69	4.22	5.70	7.47	9.12	7.91	8.60
Birla Sun Life Enhanced Arbitrage Fund	-	-	-	5.41	7.12	7.06	9.45	8.10
Date as on August 8, 2014

NOTE: the reason of taking the returns from 2007 is to show the performance in bull run like 2007 and in 2009. 

P.S. This is the submission draft. The actual story had appeared in October issue of Money Today. You can read the final version. Click here or copy paste the given below link - http://businesstoday.intoday.in/story/arbitrage-funds-substitute-short-term-debt-funds/1/210796.html

Book review: The Thoughtful Investors.

A book that must be read by investors who prefer their own research and have been struggling to find a book with examples of Indian companies

In the subhead of Author’s Note in ‘The Thoughtful Investor’, Basant Maheshwari writes: “Most people can’t figure out ki paisa jaldi banana hai ya jyada?” (Meaning, ‘whether to make quick money or lots of money?’). 

This simple sentence can make one think about the purpose of investment. As this can lay the cornerstone of the investment philosophy and allow perspective. 

Basant Maheshwari’s background is interesting and there are many lessons for all investors. Most importantly it tells us about his grit. A man who saw the double whammy of luck, once in the form of losing his business to government and then when on suggestion from his friend when he tried learning software in late 1999, the technology bubble went bust. Many people would have given up at this point. On the other hand, Maheshwari created multiple source of earnings by teaching, getting into mutual fund distribution and stock investments. 

The book has seven segments distributed over its 430 pages, it targets serious investors and deals with nearly all the topic that an investor would want think or know about. While the editing could have been better making the reading flow smooth and interesting. But the biggest benefit for an Indian investor is references to Indian stocks and examples which can be easily related to. 

For example when he explains that wealth creation needs patience, the illustration is so apt that any investor can check up on the Indian stocks and connect to it instantly, for example: “A point to consider is Nestle whose stock went nowhere from 1999 to 2005 before rising ten times in the next eight years and Asian Paints which is more than 2000 times over the last twenty nine years and was up just 3 times for the period 1992 to 2002. Both these companies were doing well despite the stagnating stock prices and hence their investors were in the long term, adequately rewarded for the waiting period.” 

One of the weakness would in the books would perhaps be its history lessons. While all the usual suspects are there but none are from our own backyard: Harshad Mehta, Ketan Parekh, or 2008 crash. Considering that the book was catering to Indian investors it would have been excellent to have details of these three events as part of history.   

In the book Maheshwari also talks about how he has made his money by staying away from pharmaceuticals. Now some investors may think, that was not the wise decision but he has defended his rationale well. He says, "Personally, I think that a) at best a froup of pharmaceutical businesses can generate an annualised return of 30% which we can get from other opportunities as well and b) Warren Buffett become the richest investor in the world by ignoring the pharmaceutical stocks in US which is as a country was the mother of all research & development activities of any kind." Another way of looking at it would be that an investor should stay in their area of competence rather than making investment without having a full understanding of the business. 

The book also provides a brief checklist for investors who like to do their own research for reference. It’s a book worthy of reading for any investor if they plan to make money by participating in stock markets. 

Taking a Contrarian Stance

S&P BSE Consumer Durables has given absolute returns of 48% (Dec 31, 2013 to Aug 06, 2014). During this period the sectoral indices that were laggards were S&P BSE IT (8.22%), S&P BSE Teck (9.66%), and S&P BSE FMCG (9.70%) even though when Sensex gave returns of 21.39% in this period. 

There is an uptick in the sentiments of many investors after the formation of the new government. The story that led to the euphoria was that there was a new and strong government after many years and the new prime minister has a track record of performance. This was further supported by reports of increase in construction activity. But according to an economic alert by Standard Chartered as on August 11, 2014, “A favourable base effect and delayed rains likely boosted construction activity and production of construction-related materials. The revival in domestic demand has yet to provide support for manufacturing activity; the favourable base effect for mining and electricity might fade in the coming quarters.” This could in effect result dampen on the sentiment in the overall market and hence investors may look to deploy investment in the IT and FMCG sector. This raises the pertinent question for investors if these defensives are the new contrarian?

Divergent views

Sankran Naren, CIO, ICICI Prudential AMC believes that from a price-to-earnings basis, most of the consumer stocks are still trading at about 30 times. “Owing to that, we continue to be underweight on them, but having said that, the business models are robust and if there is a slowing down of the monsoon, it would affect this sector as much as it affects the auto sector. We believe that the sector is not attractive at this point of time, but if the valuations were to correct, it will offer a reasonably good investment opportunity for the long term,” says Naren.

He considers that, IT and pharmaceuticals are fairly valued sectors. But Naren also highlighted that whenever there is a global risk off, these are sectors which are likely to outperform the market on a correction. Adding a further word of caution, he says, “If the rupee appreciates, both tech and pharma will be sectors to avoid, but if the rupee stays either stable or depreciates marginally, tech and pharma will become reasonably attractive. Having said that, we do not believe there is a material undervaluation in any large cap tech or pharma stock at this point of time.”

“Export oriented companies have a very good opportunity to perform from here onwards because of two factors. First is that depreciation of the Indian currency has made Indian companies competitive. If we remove sector specific competition from other countries, the large competitor for India is China, and with the appreciation of the Renminbi, the competitive advantage has narrowed,” says Sachin Shah, fund manager at Emkay Investment Managers. He also mentioned that clients have started looking at the country specific concentration risk, hence many companies would be coming to India, which put together will bode well for the export industry. 

Lalit Thakkar, Managing Director - Institution, Angel Broking believes that the IT and Pharma provide structural upside due to a weak currency and strong cash flow combined with reasonable valuations. He says, “Sector rotation always creates opportunity. FMCG requires a more opportunistic strategy as it will provide short term spurts when accumulated on declines.” 

He further added that infrastructure sector along with PSU banks are challenging as the economy is not turning around at the same pace as the improvement in their valuations warrant. Besides many structural issues in these sectors will take time to be resolved which is not being factored by investors.

Adding perspective to the argument, Vinay Kumar Agrawal, Equity Research Analyst, WealthRays Securities says, “Equity Markets around the world have been very volatile in the recent months due to various economic data released and policy decisions taken. Geopolitical environment has also not been stable and tensions in various part of the world is having a direct impact on Equity Markets.” During such a scenario sectors like Energy and Banking are the ones most affected by this volatility and Investors are losing confidence in these sectors and they are taking profits even for small movements which add more market risk for these sectors. If this global scenario continues, more money can be expected to flow into defensive sectors like Pharmaceuticals and FMCG. 

Meanwhile, Rakesh Tarway, VP and Head of Equity Strategy, Equity and Derivative Products, Motilal Oswal Securities points,  “Yes, they have been contrarian for some time now. During the last one month as the market is consolidating in a range, CNX FMCG and CNX IT have recorded positive gains and have outperformed NIFTY by 5% and 4% respectively.”

Investment Opportunities 

“We believe that the real contrarian investing at this point of time is seen in long duration fixed income which is attractive on a valuation basis,” says Naren ICICI Prudential AMC.

Any long term investor should have a diversified portfolio. Tarway of Motilal Oswal says, “After a rally of close to 50-100% in cyclical, it is all the more prudent to increase weight in defensives like IT and FMCG.”

But good opportunities can also be found in other sectors as Anand Shah, Associate Director, BNP Paribas, says, "If I were to look at a sector where the fundamental is good and there has not been a run up then I would say 'telecom' and the other one is cement. In these two sectors I believe there is some value left."

"Now you need to buy into companies that can deliver on expectations. And from this aspect we think that there could be a good case in the private sector banks, auto ancillary and in some textile. In the immediate anything can happen but over a longer period of time these pockets will make money for investors," says Anand Shah.

Meanwhile, Sachin Shah of Emkay believes that currently there are stock level opportunities, there is no sector as a whole that is undervalued. Giving an example, he says, look at IT sector, the valuation is reasonable but the business has become more commoditized. The threat is not from any country, it is now more about how IT companies add meaningful value to the service they are providing. So the companies that bring innovation will show better earnings growth. 

Stock Picks 

“Infosys and Wipro among large caps are attractively placed” says Thakkar of Angel Broking. He points out that both companies are going through a transition making it possible for them to capitalize on productivity improvements. “As the economy and sentiment improve in US and Euro along with a supportive domestic currency and attractive valuations at 15x FY15E earnings, they provide a good risk-return trade-off,” says Thakkar.

TCS had shown better results than its peers this quarter and had outperformed the industry growth. Agarwal of WealthRays Securities says, “It is expected to grow at higher rates and eventually the stock could be seen trading around 2800 levels. Any depreciation in Rupee will benefit the company in near terms.”

Among the FMCG sector, ITC is a steady stock. It is trading at lower multiples as compared to its peers currently. “Increments in cigarette prices is expected to adversely affect volume growth but ITC plans to enter businesses like dairy and beverages reducing its dependency on cigarette business income. Though food inflation and delayed monsoon will affect its profitability. But as compared to other sectors, inflow is likely to continue into defensives as global volatility continues,” says Agarwal.

Meanwhile, Agarwal recommends Lupin in the Pharma space. His rationale is that in coming near term, the market is expected to show a downward move led by the mid cap and small cap stocks in sectors such as auto etc. Hence, heavyweight Nifty stock such as Lupin would be one of the major attraction of the investors for investments in Pharma sector.

P.S. This is the submission draft. The actual story had appeared in October issue of Money Today. You can read the final version. Click here or copy paste the given below link - http://businesstoday.intoday.in/story/contrarian-investor-stocks-infosys-wipro-tcs-itc-it-fmcg/1/210978.html 

Evaluating Management

Talk to any investment expert, growth or value or the ones that use blended approach, all would recommend that investors should look at the quality of the management. But how should one check the quality of management?

There are multiple ways of evaluating company management. Be it quantitatively or qualitative judgement. Experts tend to use a combination of these criteria to form their opinion on company management.

Qualitative aspect

Ravi Gopalakrishnan, Head Equities, Canara Robeco Mutual Fund looks at how well the capital was used by the management. He says, “The ability of the management to deploy capital efficiently based on past track record needs to be evaluated. For example periodic raising of capital from the market or unrelated capital expenditure for new ventures should raise red flags.” He doesn’t stop here, other variables he looks at are the quality of board, background of key management personnel, transparency and communication.

“Management quality is about evaluating intension of management. One way to check is whether management is overpromising and under delivering,” says Vinay Khattar, Head of Research at Edelweiss.

Parag Parikh, Director of Parag Parikh Financial Advisory Services (PPFAS) says, “We can observe a few things that can help gauge the quality of the management like the treatment of minority shareholders. If management also owns controlling stake in the company it is vital to see how the management is using the shareholder’s funds.” He also advises to check how the management has dealt with acquisitions in the past & try to understand the rationale behind them. 

“We can monitor management during lean times when the industry is under performing. That’s a good time to separate smart managements from the rest who will take advantage of the lean times to invest in new capacity for the expected upturn,” says Parikh.

So there is no one standard on the quality side either. But a number of items that investors should look at based on availability of information.

Quantitative aspect

“Consistent dividend track record of the company helps us evaluate the ability of the management to reward shareholders,” points Gopalakrishnan. Among the financial parameters which can be used to evaluate management quality are growth rates of the company and its margin compared to industry average across various business cycles. “Further, consistency of returns ratios such as ROE, ROA, and ROCE compared to Industry average across different business cycles also helps us in understanding the efficiency of use of capital by the management”, he says.

Meanwhile, Parikh adds to it by mentioning, that he also looks at working capital related metrics over a period of time, as it shows how the management constantly endeavours to avoid cash drain through good working capital management. He further adds that ratios that measure credit risk over a period of time tells, how comfortable the management is about borrowing money to fund growth. “All these metrics tracked over a period of time along with understanding the business operations can give us a fair idea about the management’s ability to run their business well,” he says.

Vivek Mahajan, Head fundamental Research, Aditya Birla Money believes that one can easily get the historical record of all the key parameters of the company performance (both financial and operational) during good as well as bad times. On top of that if the management is willing to share fair view on the company as well as industry and most important, is sharing key operational parameters of the company with investors then it is acceptable. “In case management is not able to disclose some data points, in view of competition, it is acceptable,” says Mahajan. 

Differentiating the management intention.

One of the most difficult part is to figure out when the management has unintentionally made a mistake, and when they were involved in poor decision making or they are making decisions with malicious intent. Since, the ability of management to identify the needs of the business in terms of capital requirements for new business opportunities or for expansion of existing capacity is an important criteria for evaluation.

Gopalkrishnan says, “If the intent of the management is to create a long term profitable organisation, management is likely to be more conservative / realistic in setting targets or goals for itself while red flags should be raised when the targeted goals are way beyond the industry norms.”

“Reporting false revenues, excessive related party transactions where the management owned entities benefit the most, issuing increase in salary despite underperforming business, issuing warrants to key management that allows them to purchase shares at below quoted market rate, making unnecessary purchases of trophy objects like helicopters / private jets with the company’s funds, using listed entity’s funds to create assets benefiting unlisted group companies, etc. These are ways that intentionally harm minority shareholders,” says Parikh.

He further adds that there may be instances where the management has taken to risk to back a particular business that did not turn out the way they anticipated for reasons beyond their control. “The distinguishing factor between wrong intent and bad luck is the amount of the business that was at stake,” he says.

Sharing his views, Mahajan adds, “Investors should get cautious, usually, when the top management gives indication of venturing into non-related business from the core business, without proper justification.” Key example can be the case of Satyam Computers. Satyam Computers, which was into the business of software development, was planning to venture into the infrastructure business. He adds, software and infrastructure business are totally unrelated businesses and has pole apart style of doing business. Later on, it was revealed, cash on book with Satyam Computers were fictitious and the company was trying to hide the same, by the way of acquisition of infrastructure company.

Giving another example, Mahajan says, “Crompton too was punished some four years back once they announced intention of acquiring a plane. They subsequently got rid of the same in within a year.”

Another important point to watch out for management intention is the changes in dividend policy, changes in accounting policy, etc. says Khattar of Edelweiss.

Is meeting management important?   

It is not possible for small investors to meet the management, even though many experts always point that one should meet the management to understand their intention. Gopalkrishnan believes that if management is not approachable for small investors, the management evaluation can be done through the process of channels through which they would normally communicate. For e.g. Attending Annual General Meetings would give perspective about the future course of management’s plans or alternatively through Annual Reports where management gives colour on the business environment.

Further, an analysis of the annual report might give some aspects of the management quality in terms of capital allocation, debt position, related party disclosures, etc.

Parikh further adds that, “If an investor cannot meet the management at all & yet wants to understand the business & the management quality then he/she should interact with customers of that business, suppliers to that business, dealers / distributors, competitors, etc. This can give a good idea about how the management treats these entities. It’s not fool-proof but adds another layer to our understanding about the management.” 

Arpinder Singh, Partner and National Leader, Fraud Investigation & Dispute Services, EY says, "Being sceptical is very important. For example if the accounts receivables is equal to a full year’s sales then it’s a clear red flag. Or growth has been nearly 100% in the last one year whereas for the last 10 years the company has been reporting only 15%. So the management will give a rosy picture so I would actually advice that go meet the customers and vendors."

This can further be supplemented by management interviews and quarterly conference call transcripts. By doing this an investor can a have good sense on the quality of the management, vision and the way management plans to execute.

It is not an easy work to assess the management of the company but nonetheless there are ways to assess them.

ELEMENT - 1

Quick guide: Qualitative Evaluation Management

1. Capital Efficiency –The ability of the management to deploy capital efficiently based on past track record needs to be evaluated.

1. Quality of Board – The composition of the board of directors in terms of independence, quality and experience of persons in the board determines the broad outlook for the company. 

1. Background of key management personnel – Further, the experience and track record of key management personnel in running the business also is a key determinant of management quality.

1. Ability to move up the value chain  - It is important to determine if the company has invested in backward and forward integration and thereby improved its operating efficiencies over time.

1. Ability to de-risk the business at all levels– The ability of the management to de-risk the business is also an important criteria. It is important to evaluate whether the company has been able to perform consistently compared to peers & industry during both, upturn as well as during the down turn in business cycles. Ability of the management to protect the business from uncertainties and global events also needs to be evaluated.

1. Transparency and communication – Finally, the extent of how transparent the company is in terms of sharing / communicating the information with the investors as well as to the public at large also helps in evaluating management quality.

1. Treatment of minority shareholders & upholding their rights:  – Check out the related party transactions within the promoter group. They inform which promoter group entity has benefited from transactions with the company.

ELEMENT - 2

Arpinder Singh, Partner and National Leader, Fraud Investigation & Dispute Services, EY, shares his views on what investors should look at in a private company. The same principles can also be employed in a public listed company.

Round tripping is where you create fictitious customers and vendors. To take an example, there is a company which shows 1,000 crore of sales to customers and also shows that supplies came from vendors which is also an exact amount of 1,000 crore. So the company management will show it was a no-profit and no-loss situation but it’s the red flag. In this the money just flows between customers and vendors who are all related parties and the balance sheet is inflated. If you look at most of the financial statement fraud that are reported in the newspaper is around this. So what we suggest is that rather than talking to management investors should always go and meet the top five customers and vendors.

Background check is very important. While investors have been doing it in India pre-investment, I believe investors should also do a background check post-investment in a company. By background check I mean see if the promoter has other businesses as well, not listed or having any connections with the current business? If there has been tax raid on this business or any other business? Is there any police case against him? Is the promoter black listed in the CIBIL or globally on something called world check?

I think post investment investors should also track the cash flow and not limit it to P/L and financial statement. How much money was put in and how is it being used every month. Usually many investors just invest and then they do not bother much for a year, till the next financial statement.

Being sceptical is very important. For example if the accounts receivables is equal to a full year’s sales then it’s a clear red flag. Or growth has been nearly 100% in the last one year whereas for the last 10 years the company has been reporting only 15%. So the management will give a rosy picture so I would actually advice that go meet the customers and vendors.

Also another important factor that investors should always ask, though the new companies act gives direction on whistle blowing policy, but investors should always also check this aspect of a company. The employees always get to know when something is wrong and they will also report it and making sure the mechanism is such that you as investor also gets to know about it.

One of the trends that we witness is that while major investors are hiring us for assessing the financial statement, they also request someone from the forensic team to look into key risk area to avoid major embarrassment in the future. For example in terms of excessive cash - are the bank statement correct or forged? Are the sales what the company is telling us? Is there any money being syphoned out to related parties?

With foreign investors we are noticing an interesting point, perhaps because of the UK Bribery Act of the Foreign Corrupt Practices Act, they are all checking if the company has been paying bribes to get the business, etc. They are making sure they do the bribery and corruption due diligence before investing. So they want to know if you have the right policies, are they heavily dependent on government businesses?

This is the submission draft. The actual story had appeared in August issue of Money Today. You can read the final version. Click here or copy paste the given below link - http://businesstoday.intoday.in/story/return-value-yearly-systematic-investment-plans-sip/1/209784.html

Upgrading or learning a new skill

How many times you have felt that there is perhaps a need to upgrade your knowledge of the latest things in your field of choosing? Or how many times have you felt, that ‘it would be nice to know more about a subject that you had perhaps enjoyed during college days’ but the call of duty, from both personal and professional life, didn’t allow you the opportunity? Well now there is a chance to learn all of that for free through MOOCs. And there is also an option to pay and be certified.

MOOC

Massive open online courses (or MOOCs) are online courses trying to share college-level knowledge. All lectures and course materials are accessed online, and to check the knowledge given by the course there is a process whereby online tests would be available. In some cases there is a provision for peer review, where in other students will check your copy while you will check the other students’ copy.

“There are two aspects to MOOCs: a technology platform that can enable new pedagogy and mode of delivery that increases the reach to a much larger audiences,” says Sundar S Balasubramaniam, Dean, Academic and Resource Planning BITS Pilani. He further adds, “We believe that the technology is still evolving and there are many aspects of MOOCs which will complement conventional learning but also open up new modes of learning.” Balasubramaniam believes that MOOCs are likely to prove beneficial for mature learners and varied groups where learners will be able to learn at their own pace and way.

Isaac Chuang, a professor at Massachusetts Institute of Technology (MIT) for electrical engineering and computer science and of physics, and also co-lead of a research team from MIT and Harvard shares the vision and thought behind MOOC. He says, “MIT sees that MOOCs may lead to the spread of knowledge worldwide, and improvements in on-campus education, such as in residential universities like MIT and Harvard.”

Stanford, another world renowned university, runs its own instance of an open-source online learning platform (Stanford OpenEdX) that supports research and experimentation in instructional design. In a report on MOOC 2013, John Mitchell Vice Provost Stanford was quoted as “Stanford's vision is much broader than MOOCs. We're thinking about how we will best educate students for generations to come.”

There are two directories which track all major MOOCs available online – www.mooc-list.com and www.class-central.com. One can either look for universities followed by courses offered or they can search for specific topics like – computer science or artificial intelligence, economics, music, etc, – and then decide on the university. Among the most popular MOOCs are Coursera, edX, saylor.org, Canvas, Alison, Udemy, etc. 

How will it help?

Abhay Tandon, an employee at Scaale Capital, took a course through the platform of Coursera, from University of Maryland’s on ‘Developing Innovative Ideas for New Companies’. He says that his MBA degree gave a strong theoretical understanding, but Coursera classes gave him a firm practical basis, like realizing how investors in Spain differ from those in the U.K.

Shashi Kant, a student at IIT, is doing various courses from Coursera and edX related to computer science. He reasons, “I am doing courses related to computer science as it supplements my course and it could pay off in career too as it provides you world class knowledge at just no cost.” He further adds that in the industry, the tag of your college will get you a platform but after that an individual will survive only through knowledge. He says, “Many of my friends (mostly students) are also doing these courses to improve their knowledge.”

Ketan Kapoor, Co-Founder and CEO, Mettl, a skill based online assessment platform, says, “We have seen the industry move from knowledge based hiring to skill based hiring.” He points that on the job skills and competencies are the most important selection criteria for most organizations. “If individuals are taking up the initiative of upskilling themselves, adding new feathers to their hats - they definitely come across as self-starters and motivated individuals to the hiring teams - apart from the obvious skill adds,” says Kapoor. However adding a word of caution against high hopes, he says, “The candidate applying with a certain skill set learnt from MOOCs will have a disadvantage against an experienced professional who has used that same skill set in his projects.”

Ajit Joshi, who was previously working as National Presales Manager at Ingram Micro India, says "One of the interesting incident was when I started watching the videos of Introduction to Operations, I realized there were so many things that I can implement at my company bringing in more efficiency and better coordination between departments."

Ashutosh Telang, EVP & Global Head HR, Marico says, “At Marico, we encourage employees to continuously upgrade their knowledge. Learning by doing is core to our development philosophy and this is supplemented by training, education, perspective building and coaching.”

Kapoor’s views were resonated in Telang’s words as well. Telang says, “Education and experience play an important role in assessing an individual’s capability.” Furthermore he says, “While potential talent and talent within the organization upgrade their domain knowledge through online courses or MDPs, what really matters is the ability to apply this knowledge in their work context to make a difference.”

Futures of MOOCs

Telang opines, “Access to curriculum through MOOCs conducted by reputed institutes enhances the credibility of the education and as more people enroll in MOOCs, organizations will have to take cognizance of this and revise their hiring guidelines.”

“The average age of learners registering for MITx courses is between 26 and 35 years old.  Many of these folks are professionals seeking to learn new things.  Such lifelong learning will naturally be of interest to corporations seeking to improve their workforces,” says Chuang of MIT.  

Balasubramaniam of BITS Pilani says, “The best thing about MOOCs apart from the immediate and tangible benefits is that it is forcing educators and administrators to think about learning and education in a fundamentally new way. In India MOOCs have the potential to enable half a billion India youth to access expertise in different domains.” Companies in a few countries have only invested in MOOCs but are also leveraging MOOCs for in-house training. Acceptability may take a few years but it is bound to happen. 

The Tough Part

Scheduling is an important criteria if you are student/working professional - some MOOCs allow you to join anytime of the year and some have the semester system, some allow you to learn at your own pace and some have strict schedules for lectures and assignments. Some courses provide you with a certification and some don't.

“The main challenge I found was varying deadlines because different Universities have different time issues in accordance of IST,” says Kant.

The Easy Part

Among the benefits, the most common benefit that everyone talked about were, since it is a video lecture you can pause and rewind to as many times as you want until you understand the concept. In a traditional classroom, it is highly unlikely. Secondly, one can do it anywhere as per their convenience, whether traveling in a bus, sitting in a cyber cafe or relaxing on a Sunday at home. Third, classroom participants comes from all over the world, hence, giving a complete sense of global learning with lot of new perspectives added from different angles in the discussion forums.

In Kant’s experience, “the good thing going through this format is that you are completely free to go at your own pace. In many courses you'll get new iterations of the course in just one or two upcoming months so you can have multiple options of doing such courses.”

Additionally Tandon believes there is one additional benefit, he says, “These courses don’t cost much and thus are a major value-add for those who can’t afford to take up regular courses.”

A word of Advice

Telang of Marico suggests that one should select content that is targeted and meaningful. He says, “Choose a course with videos, scenarios, case studies, and other application- focused learning activities. Most important part is to apply MOOCs experience to solve a practical challenge in work environment.” It is important to recognise that each one of us has a distinct learning style, being aware of it and choosing the right course and media goes a long way in building the capability.

Kapoor of Mettl advises, “If your focus is employability, then it makes a lot more sense to pick courses that compliment your portfolio and help you gain skills needed for your dream job.”

“Test yourself on the problems.  Data is showing that learners in MITx on edX courses spend far more time and effort working on problems than using any other kind of resource provided by the course,” says Chuang.

This is the submission draft. The actual story had appeared in August issue of Money Today. You can read the final version (which includes experience of individuals). Click here or copy paste the given below link - http://businesstoday.intoday.in/story/free-online-courses-mooc-harvard-mit-bits-pilani/1/208508.html

Retirement funds now given same tax benefits pension funds

On SEBI's recommendation for the pension market, retirement funds floated by fund houses will now be given the same tax benefits as other pension funds with the new budget.

To read the full version Click Here or copy paste the given below link--  

http://businesstoday.intoday.in/story/new-pension-system-mutual-funds-pension-funds-tax-benefits/1/208596.html

"Please Don't Share About Your Pay with Coworkers"

Surfing across the plethora of reading materials available online, I came across this article When the Boss Says, 'Don't Tell Your Coworkers How Much You Get Paid' on The Atlantic. 

This article talks about the gag rule at companies and how the employees are discouraged to talk about their salaries or perks/tips with their colleagues. According to the article, though it is illegal in USA to tell your employees that they can't share about their salaries with co-workers but it is a prevalent practice. 

There were two interesting observations in it. The first was: 

"Even the most confident among us can melt into awkward, self-conscious messes when we have to negotiate our salaries, and asking a coworker about pay seems akin to asking about their sex life." 

Don't think the above  requires any further explanation. The second observation was: 

"Private companies are showing that opening up the books completely can work, while the public sector has done that for decades, yet many still fear that talking about pay would destroy our workplace collegiality."

This was quite correct, in public sector the pay scale is very transparent, even in India. Therefore the question is why such secrecy? How does it make a difference? 

While the usual argument that I managed to read is that employees may not put in the same amount of effort if they are not motivated. But let's face it, every work can be quantified and  some amount of quality check can also be introduced. I think the simple solution would be to give performance based bonus with some component of quantification, and some amount in terms of quality. Its also not necessary that all of this has to be paid in full. I agree setting up that process would take some time and cross-disciplinary understanding but its definitely possible! 

Well since I have managed to retain your attention so far, let's turn talk a bit on the focus area of this blog. When you are planning to invest in any company, always look into the amount of payment made to a CEO and boar of directors (given in the annual report). Also read any note on this subject and compare this over the years. It is most of the time a vital clue if you can trust the company on transparency level or not. A company which is giving undue among of money to its CEO, just because they are also founders, then it is definitely a red flag.

Similarly when you see the list of the members of the board of directors, check how people are related to the business or the founders or the CEO, and also how much are they paid and how often are the meetings held and their views sought after. If the members of the board of directors can bring industry or cross-disciplinary insight to the business and their fees is in line with the industry (check companies of similar size and in similar domain) then it is acceptable or keep an eye on the company with periodic review.

p.s. if you are reading this and can point out to some company which has implemented some unique and perhaps open structure of salary and also makes sure that performing employees are given due encouragement then do share with me. 

Circle Rate & Market Rate, what’s the difference?

Has your broker or the person from whom you were buying the land, flat, residential complex complained about the increase in circle rates? Have you read about the increase of circle rate in your city in the media? Did it raise the queries: What is a circle rate? And what is a market rate?

What is a circle rate?

Circle rate is the minimum value at which the sale or transfer of a plot, built-up house, apartment or a commercial property can take place. This rate is set by the state government’s revenue departments or the local development authorities. Rohan Sharma, Senior Manager Research & REIS, JLL India, says, “The circle rate is in line with what the state government officials’ perceive as the prices at which property sale or transfer should be undertaken.” Within a city, there are different circle rates for different localities.

Since the real estate market is opaque and there is no accurate price index, the purpose for setting in the circle rates is to put a check on speculation of property prices.

Sharma points that across all property markets in India, the circle rates are lower than the actual market rates because circle rate are not revised often enough to keep them in tandem with the market price.

Therefore, circle rates do not represent the actual barometer of ground realities.

Box 1:  Circle rates is the least price at which the transaction can take place. The associated stamp duty and registration charges for the sale of the property is always decided on the basis of the transaction amount. And this transaction price can be higher than the circle rate, hence the stamp duty and registration will be higher. For example, circle rate in Worli area of Mumbai is in the range of Rs 32,293 per sq. ft, where as the market rate is approximately around Rs 62,000 per sq. ft; hence the market rate is at a premium of 92 per cent as over the circle rate. Whereas in another part of the city, Bandra (West)the circle rate is Rs 30,398 per sq. ft as against the market rate of Rs 42,000 per sq ft. Thereby, the premium over the market rate is of 38 per cent (Rates shared by Capri Global Capital Limited). Hence in the above example, if the transaction is done at the market price then the stamp duty and registration charges will also be set according to the market price, that is the transaction price.

What is a market rate?

Market rates are the price that one pays to buy a property, it is determined based on the agreement between buyers and sellers. Sunil Kapoor, Executive Director, Capri Global Capital, says, “Market rates are determined by the seller's expectation of price and the buyer's inclination to pay.”

It is a price range arrived at by looking at actual transaction prices in a location, and is a better indicator of what sellers demand and what buyers are willing to pay. As these prices are determined by demand and supply, an area with lower supply but higher demand will inevitably command higher prices when compared to another.

The difference

Even though circle rates and market rates are connected, they have a limited impact on each other. In reality the market rates are never below the circle rate. A significantly higher difference between the two is an indication of lag between market perception of the value and the authority’s view of it.

This difference has also been stated as the key reason for black money transactions in the Indian real estate market.

In most cases when a property is sold or transactions, stamp duties and registration charges are usually paid by the buyer. “It has been argued that the increase in circle rates causes the rate of transactions to drop. Be that as it may, the gap between the circle rate and the market rate reduces and the proportion of genuine buyers with clear, accounted money entering into transactions increases. Though this may reduce transaction velocity, it also reduces the incidence of black money being parked into real estate assets”, says Sharma.

Revising the circle rates every quarter or once in six months will keep the market rate and circle rate more in tandem. At the same time, state governments' treasuries would generate higher tax collection from real estate transactions, as stamp duty is paid on a circle rate which is in sync with the market rates, or close to them. Also it will significantly help in curbing the incidence of black money and money laundering through real estate.

However, this will impact the property buyers’ with additional burden as they would have to shell out higher stamp duties, resulting in marginally higher transaction costs and overall cost of ownership.

But this act will help to remove the black money in real estate, and hence it would behave in a rational manner as far as pricing of projects is concerned. Rather than considering this as a wasted expenditure, it will be helpful in increasing the investment value, and therefore potential resale value, of the property. Finally, higher revenue for the government means more funds available for support infrastructure development.

As an individual should you look at the circle rate or market rate more often? Sachin Sandhir, Managing Director, RICS South Asia says, “Buyers should look at the market rate, as that determines their buying capacity. Market rate also indicate the extent of appreciation in an area.”

Ideally one should look out for the difference between the circle rate and market rate earlier and at current levels.  For genuine buyers a less difference between circle rate and market rate will be beneficial, since loans are given on the basis of the sales deed, which is often closer to the circle rates.

(This is the submission draft. The story had appeared in July issue of Money Today. To read the final version click here or copy paste the given below link--  

http://businesstoday.intoday.in/story/buying-property-circle-market-rates-comparison/1/207690.html)

Who has got it wrong -- SEBI or the Journalist?

Business Standard published a news article where it informs that SEBI has sent notice to 20 AMCs, for parking undeployed funds in short term debt instruments.

"By Sebi norms, an AMC cannot park funds in short-term deposits of banks in excess of 15 per cent of net assets of the scheme. The investment could be raised up to 20 per cent but only after the approval of trustees." -- Business Standard 

Now I think there is a serious problem with this news. Perhaps it is correct or maybe SEBI needs to do a bit of homework. Each fund has a strategy. Anyone who has been reading market history or has had the chance to see it will know that no strategy works all the time.

At one point in time, the fund manager will not able to find good ideas to invest in because of the strategy or the philosophy is not suitable for that market condition. In such times the choice for the fund manager would be limited. Either they can keep the money in some safe, liquid deposit or take risk beyond their comfort level. Therefore, this notice from SEBI’s does question their wisdom or the reporting standard?

I don’t know what to think! Perhaps the SEBI.

ETFs in India - Where they are and what to expect?

Why equity exchange-traded funds attract few investors in India.

Despite the potential to grow, ETF in India are slowly losing its relevance as active fund management still outperforms ETF in returns as well as on risk parameters

Mukesh Chothani, president at Investment Consultant Association in Nashik, some 170 km away from Mumbai doesn’t market, exchange traded fund (ETFs) to investors. The reason: Simple it doesn’t pay. Says Chothani, “Unlike equity mutual fund we do not get anything in an ETF. In Nashik the total investment market is about Rs 2,000 crore and ETFs investment is about Rs 50 crore. Among the clients whom I advise, about 1 per cent of the AUM is in the ETF segment.”

Cut to Aashish Somaiyaa, CEO and MD of Motilal Oswal Mutual Fund himself believes in parking his money in active funds than passive funds. Somaiyaa says, “I would personally prefer to invest in an active fund driven by a philosophy I understand, and agree to.” It’s interesting because it comes from a fund house that started from selling ETF funds to investors and today has changed their marketing strategy by selling active mutual funds. The reason being lack of interest in ETF’s in India.

Players like Chothani sells ETF to clients where he is sure that they would pay him an advisory fee. It’s not just Chothani but the trend is similar across Nashik and in the country and the number says it all.

The ETF space in the Indian mutual fund industry has a meagre share of 0.5 per cent of the equity asset under management (AUM) till the launch of GS CPSE Exchange Traded Scheme. After the GS CPSE ETS had garnered Rs 3395 crore, the share of the ETF/ETS in the equity space has risen to 2.45 per cent. Compared globally the ETF industry continues to grow, as investors and traders around the world become more familiar with the unique features of ETFs. According to E&Y, at the end of October 2013, from 215 providers on 58 exchanges.

Why is the ETF market small in India?

Awareness about ETFs is currently very limited. Maximum awareness is about the gold ETFs due to the popularity. Vishal Dhawan, Chief Financial Planner at Plan Ahead, an investment advisory firm, says, “Since a large number of ETFs are based on equity indices, and equities as an asset class has seen very limited participation from investors in the last few years, ETFs have naturally not got much attention.” He expects that as equity markets start to get enhanced participation, ETFs would become more popular as well.

Adds Rohit Shah, a SEBI registered Investment Adviser based out of Mumbai, “Indian savers love fixed deposits and real estate, they don't yet understand how ETFs can be leveraged in one's portfolio. Another reason is internationally ETFs are low cost products. In India, with AMC expenses, brokerage, securities transaction tax (STT), Demat charges, the ETFs aren’t attractive and the cost structure are very much similar with actively managed funds.”

Everyone accepts that the ETF market is not deep in India because there are less institutional investors in India who are using it as an investment vehicle. Vineet Arora, Head – Product Distribution at ICICI Securities says, “ETFs are not on the approved list of many institutional investors, even the IRDA has recently allowed insurance companies to invest in ETFs.” Meanwhile Vinod Jain, Founder of Jain Investment points that the institutional market is not deep in India as pension funds hardly invest in the Indian stock market.

“With the latest effort of the market regulator to bring in more transparency and shift the business model towards fee or advisory based structure rather than the commission based model, the ETFs will witness new demand from the retail investors as financial advisors would be recommending the product more often, considering ETFs are cheaper in cost and the advisor will look into the asset allocation for the investors,” says Aashish Somaiyaa, CEO and MD of Motilal Oswal Mutual Fund.  Adds Chothani, “In India we need to decide if ETFs will be promoted as an investment product or as a trading product.”

On the performance front, ETFs lag the active funds anywhere between 200 to 500 basis points. Interestingly, active funds have delivered higher returns on back of low risk. On an average the active funds enjoyed a beta (it measures volatility compared to the index) of 0.8 compared to a one of ETFs. (See: The performance differential --Active V/s Passive)

So should investors in India consider ETFs?

Experts believe otherwise. Investors should consider ETFs for the passive part of their portfolio, wherein they are looking for a passively managed lower cost solution. “International ETFs like the MOSL NASDAQ, GS Hang Seng Bees are other options that one can consider,” says Dhavan.

“This depends upon one's investment objectives, duration and current asset allocation. Since over a long period of time, ETFs can save on costs and therefore we normally recommend exposure of around 10 to 15 per cent exposure to ETFs subject to various factors,” says Shah.

There has been a raging debate on whether in a growing economy like India one should choose passive funds. PVK Mohan – Head Equity Principal PNB AMC believes that active fund manager is the choice to go for investors. “If I see the BSE mid-cap today, the FIIs own about 15 per cent of the index, the same thing 3 or 4 years ago was about 9 per cent. This tells you the interest. So the Alpha (measure of returns) generation potential continues in the near term. Over the next 4-5 years the alpha returns in India will be high, hence active fund management will be a better choice of funds.”

With the ETF segment being open to institutional investors like life insurance and pension funds, the segment has potential to grow and evolve. Investors, especially retail would be better-off investing in active funds than ETFs.

(This is the submission draft. The story had appeared in June issue of Money Today. You can read the final version Click here or copy paste the given below link--  

http://businesstoday.intoday.in/story/why-equity-exchange-traded-funds-unpopular-in-india/1/206320.html)

Tax Savings through Charity

Sharing is Caring and using the same for tax benefit.

To help in the hour of need is humanity and as much a part of the Indian Culture.

McKinsy & Company in its report, Designing Philanthropy for Impact, sums up the evolution of philanthropy in India, “India has a long tradition of philanthropic giving, with all religions promoting the concept of charity. Until the 1800s, giving in India was largely religious in nature and motivated by the search for individual salvation.

“Later, philanthropy also began to be directed toward social causes such as education and women’s rights. Throughout the 20th century, leading Indian industrialists established foundations and other charitable institutions of national importance (for example, the Indian Institute of Science, catalyzed by the Tata Group), some of which were partly inspired by the country’s freedom movement.”

Adding to this J.C. Sharma, Vice Chairman and Managing Director, Sobha Developers says, “We have been lucky to have had the opportunity to grow and live the lifestyle that not many people are privileged to lead. I believe it is our obligation to do our bit for the society.”

At one point or the other, most people tend to be involved in helping an unknown person through charity or philanthropy but there were some common queries among people.

The biggest concern was, ‘was the money properly utilized’ for the purpose for which they had been giving out charity.

“It was a big challenge to identify NGO's who genuinely work for the poor and needy of the society. So to best utilize our resources for a cause we created our own charity wing- The Paras Foundation,” says Pravesh Jain, Founder Paras Foundation and Managing Director, Paras Dyes and Chemicals.

Jain says, “It has been almost a three decade since my brother, Rakesh Jain, and I ventured into opening an old age home- Ghauranda.” The idea was to give home to homeless, our old age home provides comfortable accommodation, healthy food, health care, recreations etc. all free of cost.

“We do all our charity works through our own foundation as it is easy to monitor and evaluate. Hardly have we donated to others. But yes, in any special situation we do so after evaluating their track record and their ethics and dedication,” says Jain.

Prema Sagar, Founding Trustee, Genesis Foundation says, “There are various factors that go into evaluating an NGO. Some of the important parameters are background of founders, number of years in operation, impact of work, transparency, organizations associated with the NGO, reputation etc.”

Sagar further adds that donors can ask the NGO to provide details of how their funds have been utilized. And that the NGOs should also as a practice inform its donors about the impact that has been made by donations.

Rohit Shah, CEO, GettingYouRich and a Certified Financial Planner, says “While clients are donating money, they have no way to actually monitor the usage etc.” He then points out that organizations like www.giveindia.org are doing a good job by providing regular updates to donors. As an example, if someone has opted for education fees support to a girl, then they send progress reports on a regular basis.

The second aspect of the charity is that many people who are not aware that their charitable cause can also result in tax benefit. Samir Rahman, an IT consultant from Bangalore says, “I give out charity to religious and other NGOs in the space of the child support but I don’t look into the tax benefit angle of the same.”

The form 16 given to salaried individuals doesn't show any deductions on donations made under Section 80G. Therefore, any donation made that can qualify for tax deduction under Section 80G, for which you will have to furnish details of donations made while filing your return and claim a refund.

Post-retirement from Paramilitary Forces, Rati Acharya went to see NGOs and felt it was more about collecting money than serving the needy. So she started using her expertise as a doctor for serving the needy. "Being a doctor I started checking patients free of charge, started going for medical camps. And over a period of 15 years discovered an NGO who genuinely help people; they don’t take aid from anywhere and they organise their own camps and help people," says Acharya.

Acharya says, “If charity is to done with the aim of saving save taxes then it can be done by donating to an NGO, where the work of the NGO gives it the benefit of section 80G.” And then she adds, “If one really wants to help then that individual should give their time along with money, and they should see the effort people are putting before donating because it’s not about just helping; it’s about helping the one person who genuinely needs it.”

Ramesh Krishnan, a Cost & Management Accountant expert with Olive Lifesciences says, “My advice is that, people who want to give charity & donation should choose the institution approved by Income tax.” Giving an example he says that Government funds like – Prime Minister Relief Fund, Chief Minister Relief Fund, Earth-quake Relief Fund, Flood Relief Fund has 100% deduction eligibility etc. which is more beneficial. 

The third thing that may require some attention is where individuals would want to give out charity but they are not sure who to give. Tahseen Alam, Regional Advocacy Manager-EMPHASIS at CARE says, “It is important that one identifies for what purpose they would like to contribute. India is an emerging economy but there still exists massive inequality and poverty among sections of the population. Individual contributions play a role in addressing critical issues including children's education, women's empowerment, disaster response, livelihood support, etc.”  

(This is the submission draft. The story had appeared in June issue of Money Today. You can read the final version Click here or copy paste the given below link-- 

http://businesstoday.intoday.in/story/tax-saving-tips-contribute-to-charities-and-ngos/1/206573.html)