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7 Factors to Consider Whether Your Investment is a Value Trap

7 Factors to Consider Whether Your Investment is a Value Trap

1. Earnings and Cash Flow

If a stock’s price is very cheap compared to past earnings this is a warning sign. Past earnings have little effect on the future price of an investment. The markets are looking forward to discount future cash flows. If an investment has fallen to the point where it is absurdly cheap compared to past earnings, that is a clue something is deeply wrong.

2. Business Plan

Beware of a business plan that is not understandable or is unprofitable. If a company is unable to make profits or has a plan that is complicated and hard to explain – avoid it.

Bypass companies whose business plan has been outdated by new technologies.  If a product or service is outdated it doesn’t really matter how many other good attributes the company has; it will most likely fail. Technological obsolescence is a common misfortune of many business plans.

3. Management

Poor management can sink almost any company. If management is selling stock, giving guidance that is untrustworthy, or cutting the dividend; beware. These would be signs of a possible value trap.

Look for management that owns their company’s stock; insider buying is a positive sign. Quality management will give trustworthy guidance and demonstrate they have the knowledge to successfully guide the company.

4. Accounting

Producing complicated or fraudulent company accounting  reports often means there is additional hidden problems. Any hint of fraud should eliminate an investment from consideration for purchase. This usually results in further declines in the stock or bond price.

Real value investments will have transparent financial reports and credibility with investors. Quality companies with sound management will demonstrate openness and honesty with their successes and failures.

5. Balance Sheet / Debt

The balance sheet may be more important than the income statement for sorting out value traps. High debt can cause problems with liquidity and solvency that can sink an otherwise good business plan. A highly leveraged company has less leeway for making mistakes or overcoming obstacles.

A strong balance sheet is the foundation of a quality company and provides a margin of safety. When a company faces adverse conditions a conservative capital structure gives them the financial flexibility to meet the challenges.

6. Strategic Advantages

A company that lacks strategic advantages to overcome tough competition or heavy regulations can lose their ability to compete. In today's cutthroat global markets a company must have sustainable competitive advantages. Before purchasing a cheap stock be sure the company has competitive advantages that will provide the cash flow and growth needed to raise the price of the stock.

Does the company have the ability to stay ahead because they are a market leader, have economies of scale, pricing power, differentiation of product, cost benefits, or have powerful brands. Without one or more competitive advantages the company may not be able to thrive.

7. Look Forward Instead of Backwards

A stock may look cheap when compared to its past earnings. But the market values companies on future earnings and growth of those earnings.  What a company has earned in the past will have little to do with its value today.

Most financial sites quote P/E ratios based on past earnings. Looking forward means estimating future earnings and cash flows; then comparing those metrics, not past metrics, to the current price

http://www.livemint.com/Money/9phbcmsyFD51butAA60VxN/Value-trap-dangers-of-cheap-stocks.html

Small size, big ambitions

Stocks

Small size, big ambitions

Bearish conditions might be the right window of opportunity to step into the world of small caps. This particular space is highly risky but can deliver mouth-watering gains

The political environment, even compared with the days of coalition governments, was never so chaotic as it is today. Hopes of an accelerated pace of reforms with the formation of a stable government at the Center with a clear majority in the Lok Sabha have been dashed. Instead, India is losing crucial time to legislate to move the economy to a higher growth trajectory.

As the political slugfest continues, it is more or less understood that the opposition parties will remain defiant and the budget session of the parliament will see another wash-out. Key legislations such as the Goods and Services Tax (GST) Act, which is considered as a mother of all tax reforms, is likely to remain in a limbo. The Indian economy is expected to report growth of 7.6%. This will be a five-year high. But the optimism associated with this number is lacking on the ground. Passage of GST can create a feel -good factor that is very much needed to boost the market’s morale.

Questions are being raised over the methodology used for the calculation of economic growth. The doubts have a solid base. India’s exports declined 13.6% to US$ 21.07 billion in January 2016 over a year ago. Ironically, exports have fallen for the 14th straight month. Sluggish exports depict a grossly disappointing picture as the figure is based on the lower base of January 2015. Moreover, the dip in exports is on account of poor performance by a variety of sectors, be it petroleum, engineering, leather, chemicals and marine products and readymade garments.

Aggregate net sales of around 4,000 companies slipped 5.2% and net profit plunged at an accelerated pace of 7.8% in the December 2015 quarter. This is in contrast with the economic growth of 7.3% reported in the December 2015 quarter. Poor corporate earnings over the last few quarters show a divergent trend from the growth in the gross domestic product (GDP). In fact, mounting bad loans is one of the prime indicators of economic sluggishness. Lately, non-performing assets (NPAs) in the books of public sector banks have spooked the market.

The performance of the banking system has turned out to be a sore point for the market. The S&P BSE Bankex is down 31.4% from the 52-week high and 16.1% to 16,221 in the current calendar year (CY) till 18 February 2016. In February 2016, banking stocks dragged down the broader indices. Apart from crony capitalism, the record NPAs is to an extent a reflection of the poor state of the economy and challenging business conditions.

Subdued prices of crude oil have emerged as one of the global concerns. Crude oil plunged below US$ 30 a barrel in January 2016. This is a 12-year low. Mid February 2016, Saudi Arabia, Russia, Qatar and Venezula announced their intention to bring discipline in production to support prices of crude oil. The plan is to freeze crude output at the January 2016 levels. This is one big positive news for global markets. The market requires easy money generated through high crude oil prices to sustain asset valuations across the world. Countries such as Saudi Arabia, Russia and several African countries are facing fiscal crunch owing to the slump in crude oil prices.

Iran ,which has entered international markets after lifting of sanctions, might play the spoil-sport. It might prefer to regain share in the crude market. However, after initial hiccups and concerns, the country seems to be game for market discipline. With a new lobby in the making to control supply, crude bounced back to around US$ 35 per barrel mid February 2015. But uncertainty remains whether the new lobby will see the light of the day.

On 16 February 2016, negative interest rates came into effect in Japan. The negative interest rates were announced in January 2016. The Bank of Japan, the country’s central bank, will charge banks 0.10% for parking additional reserves with it. Whether this move will revive the Japanese economy remains doubtful but will ensure easy liquidity. The US Federal Reserve in February 2016 raised concerns over increased uncertainty in global markets. Now the possibility of interest hike by the Federal Reserve has diminished. In addition, the European Central Bank might opt for further monetary easing. In short, the liquidity taps might remain wide open across the developed world. This is another positive news for the market.

Foreign portfolio investors (FPI) continue to dump Indian equities. The trend might reverse with clarity on global liquidity. FPI offloading is a matter of grave concern. Unless and until this section of investors resumes buying, domestic equities will remain under severe pressure. This is despite buying by domestic institutional investors.

FPIs net sold equities worth Rs 14356 crore in January 2016 and net offloaded equities worth Rs 6465 crore in the month till 18 February 2016. Domestic institutional investors invested Rs 12875 crore in equities in January 2016 and Rs 5977 crore in the month till 18 February 2016. But this is no match for the prowess of FPIs.

In this gloom, global weather agencies have indicated overall weakening of the El Niño phenomenon in their initial predictions. This is another positive for India that faced two consecutive droughts in CY 2014 and CY 2015. Weather forecaster India Meteorological Department will be coming out with first official forecast for 2016 southwest monsoon  in April 2016.

The S&P BSE Sensex, the benchmark, slid 2,468 points, or 9.5%, in CY 2016 till 18 February 2016. The S&P BSE Mid-Cap was down 11.9% and the S&P BSE Small-Cap index 16.7% in this period. The Sensex is off 21.2% from its 52-week high, the Mid-Cap index 15.9% and the Small-Cap index 19.2%.

In terms of technical analysis, with over 20% decline from the yearly high, the Indian market is already in a bear territory just as several other global indices. This information is numbing and might make nervous even shrewd and seasoned investors. Talk is already on about the possible bottom. Again this is a never-ending guessing game.

Bearish conditions are expected to prevail for some more time. This might be the right window of opportunity to step into the world of small caps. This particular space is highly risky as investors can practically lose their entire capital. But, at the same time, it is probably the only category that can deliver mouth-watering gains. Further, assessing small-cap stocks for investment is a gigantic task. There are several hundred small-cap stocks to be scanned and appraised.

To de-risk, investors can focus on small caps with a sound business model that has chances of survival in future. This critical for long-term investment. The stature of a company within its industry can provide better insights about its sustainability and prosperity.

In this context, investors can pick small-cap companies that are among the leading players within their industries. These small-cap leaders might be worth a look in the present market carnage. Importantly, investors should be extremely choosy while taking the ultimate investment call.

Capital Market picked companies with market capitalization of less than Rs 1000 crore and also from the lower strata of mid-cap firms with market value below Rs 2000 crore. Additionally, companies with some amount of mutual fund investment were shortlisted. Last, and important, companies commanding leadership position or are among the leading players in their industries were selected (see table: When size does not matter).

Everest Industries is a classic example. With a Rs 1268-crore turnover in the fiscal ended March 2015 (FY 2015), the market share is 14-15% in the fiber-cement roofing. The two distinct business segments of operations comprise building products and steel buildings. The building products segment contributes around 75% to the top line. Established eight decades ago, the portfolio includes a complete range of building solutions for roofing, ceiling, wall, flooring and cladding and steel buildings for industrial, commercial and residential applications.

Building products and solutions are available in over one lakh villages and 600 cities in India. The products and solutions are distributed through 38 sales depots and 6,000 dealer outlets. Over 1,500 pre-engineered steel buildings have been designed and erected across 275 cities. Also, exports go to around 25 countries. Building products are manufactured across six units, with aggregate capacity of 8.10 lakh tonnes per annum (tpa), while the steel building division, in aggregate, has capacity of 72,000 tpa.

Initiatives such as Make in India, Swachh Bharat and development of smart cities will be beneficial. Further, to reach the objective of housing for all by 2022, the government is aiming to build four- crore affordable houses in the urban areas and two crore in rural areas.

The new unit for steel building and metal roofing at Narmada in Gujarat was commissioned in FY 2015. Built with a capital outlay of Rs 50 crore, the plant, with a manufacturing capacity of 30,000 tpa, will cater to projects in the western, central and southern regions and save freight cost and ensure faster deliveries. Commercial production of fibre-cement roofing sheets at the manufacturing facility at Somnathpur in Odisha started in May 2015. The plant, with installed capacity of 8,000 t per month, achieved 100% utilization in FY 2015. A 72,000-tpa fibre-cement board plant is being set up in the UAE through a wholly owned subsidiary in Mauritius to cater to the Middle East market.

With debt of Rs 300.8 crore, the debt-to-equity ratio stood at 0.89 times end FY 2015. Consistently making profit and paying dividends over the last decade, mutual funds held 15.54% stake end December 2015. The stock reported an all-time high of Rs 430 in July 2015 and is now available at Rs 201.9.

Salzer Electronics is another example of a small-cap leader. The largest manufacturer of Cam- operated rotary switches (market share 25%) and wire ducts (20%) in the country, a wide range of products are manufactured at five facilities located in Tamil Nadu and Himachal Pradesh. Incorporated in 1985, total and customized electrical solutions are offered in the switchgears, wires and cables and energy management business through a portfolio of over 15 products. The industrial switchgear business is the largest revenue segment, with a share of 50%, followed by copper (34%), energy management (12%) and building products (4%).

Auto component maker LG Balakrishnan & Bros is the largest supplier of drive chains to original equipment manufacturers, with a market share of 70%. The share is around 50% in the replacement market. Founded in 1937, the transport company evolved as a major manufacturer of chains, sprockets and metal-formed parts for automotive applications. There is a consistent track record of profit and dividends over the last decade.

Business segments include transmission, metal forming and others. Transmission products include chains, sprockets, tensioners, belts and brake shoe. Offers also comprise metal-forming products consisting of fine blanking for precision sheet metal parts, machined components and wire-drawing products for internal use as well as for other chain-manufacturing plants, spring-steel suppliers and umbrella manufacturers. Products are marketed under the Rolon brand. Manufacturing units are spread across Tamil Nadu, Maharashtra, Uttrakhand, Karnataka and Haryana.

There is a 25:75 joint venture with Renold Holding PLC of the United Kingdom, Renold Chain India, manufacturing industrial chains. The small cap is moderately leveraged, with a debt-to-equity ratio of 0.49 times. Mutual funds held 13.38% equity end September 2015.

Kaya is a leading specialty skin-care solutions provider in the country and Middle East, either directly or through subsidiaries. Incorporated in 2003 as wholly owned subsidiary of Marico, the demerger came in September 2013. Holistic skincare solutions are delivered through a range of Kaya Skin Clinics. Nearly 107 Kaya Skin Clinics are owned and operated in India and 20 in the Middle East.

Also, a product retail format, Kaya Skin Bar, is operated with 104 outlets in the country. Kaya Skin Clinic, the chain of specialized skincare clinics, offers customized solutions by expert dermatologists and are backed by skincare technologies. One clinic and 37 Kaya Skin Bars across formats were added in the country and one clinic acquired in the Middle East in the third quarter of FY 2016.

Services are offered in the areas of acne reduction, acne-scar reduction, pigmentation, anti-ageing, and laser-focused permanent hair reduction along with regular beauty enhancement and maintenance services. Also, there are over 50 skincare and haircare products, ranging from daily skin care to specific skin concerns such as acne, pigmentation and ageing. Mutual funds held 5.38% stake end December 2015 in the debt-free company.

The Anand group company, Gabriel India, was listed in 1978 and commands 80% market share of ride-control products such as shock absorbers in the commercial vehicle segment and 45% share in the passenger-car segment. There are technical collaborations with KYB Corporation of Japan, KYBSE of Spain and Yamaha Motor Hydraulic Systems of Japan. Lately, a technology license agreement was signed with Koni Shock Absorbers of the Netherlands.

The manufacturer of front forks and rear shock absorbers for two-wheelers, McPherson struts and shock absorbers for passenger cars, axle, cabin and seat dampers, suspension shock absorbers for commercial vehicles and shock absorbers for railway coaches is headquartered in Pune and owns six manufacturing facilities and three satellite plants located close to originial equipment manufacturers (OEMs), with an aggregate manufacturing capacity of 28 million units per annum.

A significant 86% of the total revenues is derived from the domestic market and remaining 4% from exports. Clientele includes almost all the prominent two- and three-wheeler, passenger-vehicle and commercial-vehicle manufacturers (OEMs). The balance sheet is strong, with negligible debt. Mutual funds owned 6.32% equity end December 2015.

Incorporated in 1973, Dynamatic Technologies is one of the world’s largest manufacturers of hydraulic gear pumps and automotive turbochargers. The global tier I supplier to major global aerospace OEMs such as Airbus, Boeing and Bell Helicopters designs and makes highly engineered products and operates in the three segments of automotive and metallurgy (revenue contribution of 66%), hydraulics (18%) and aerospace and defence (16%).

The automotive and metallurgy division supplies engine, transmission, turbocharger and chassis parts to leading global OEMs. Also, high precision, complex metallurgical ferrous castings are made for automobile engines and turbochargers. The division supplies critical engine and transmission products to around 50% of the passenger cars made in the country.

Asia’s largest producer of hydraulic gear pumps is also one of the largest in the world. There is 65% of market share of the organised tractor market in India. The aerospace and defence division supplies airframe structures and precision aerospace components.

Among the popular stocks with mutual funds, with holding of 10.22% end December 2015, the high balance-sheet leverage, with a debt-to-equity ratio of 2.81 times, end March 2015 is a matter of concern. However, the ratio had been declining consistently over the last two years.

Gulshan Polyols is one of the largest manufacturers of precipitated calcium carbonate (PCC) and sorbitol in the country. The first Indian producer of rice-based dextrose mono-hydrate (DMH), maltro-dextrin powder (MDP) and liquid glucose, for which a manufacturing unit has been set up at Muzaffarnagar in Uttar Pradesh (UP), has undertaken capacity expansion of starch sugar: liquid glucose, MDP, DMH and glucose powder.

The business portfolio covers starch sugars, calcium carbonate, alcohol, agro based animal feed and on-site PCC plants with production facilities at Muzaffarnagar, Bharuch in Gujarat, Dhaula Kuan in Himachal Pradesh, Abu Road in Rajasthan, Patiala in Punjab and Tribeni in West Bengal. Products are offered to several industries including pharmaceuticals, personal care products, footwear, tyres, rubber, plastics, paints, alcohol, value-added paper, agrochemicals, food and agro products. Key clients are Colgate-Palmolive, Hindustan Unilever, Dabur, Asian Paints and ITC.

The star export house is setting up new projects in UP and Madhya Pradesh to manufacture agro- based animal feed, DMH, MDP, liquid glucose and green-field grain-based distillery unit to produce extra neutral alcohol. Both the projects are expected to go commercial by March 2016. Additional revenues of Rs 250 crore are expected from these two projects in FY 2017.

Transport Corporation of India (TCI) is among the leading integrated supply chain and logistics solutions provider. The infrastructure boosts of an extensive network of owned offices and 10.5 million square feet of warehousing. Product offerings include TCI Freight, TCI XPS, supply chain solutions, TCI Global and TCI Seaways.

The TCI Freight division provides total transport solutions for cargo across dimension and product segment. The TCI XPS division offers door-to-door and time definite solution for customer’s express requirements. Services are provided at 13,000 locations in India and 200 countries globally.

TCI Global offers freight forwarding and customs clearance activities across boundaries largely serves industries like pharmaceuticals, commodities, retail, fast moving consumer goods and auto. Real estate arm TCI Developers looks into the development of commercial properties. Investment of Rs 275 crore has been made to create capacities in FY 2016. Debt was Rs 320 crore and the debt- to-equity ratio stood at 0.61 times end March 2015.

In October 2015, the board approved the demerger of the TCI XPS business into TCI Express. The demerged business will be listed after securing requisite necessary approval. Equity shareholders will receive one share of TCI Express for every two shares held in TCI. This business has tremendous growth potential, specifically in the e-commerce space, requiring focused leadership and management attention.

MPS is among the leading publishing services outsourcing companies offering end-to-end publishing solutions across the author-to-reader value chain. Services include content development, printing and digital publishing services, technology solutions, media products and customer services for educational, trade and scholarly publishers. The one-stop destination for some of the largest publishing companies in the world has a team of around 2,850 employees. There are offices in Bengaluru, Chennai, Delhi, Gurgaon, Noida, and Dehradun and at Portland, Orlando, Durham, Effingham and Champaign in the US.

The zero-debt company had cash and cash equivalents of Rs 179.6 crore end December 2015. This is significant quantum of cash taking into account the market value of Rs 1204.5 crore and net worth of Rs 256.1 crore. Considering the book value (BV) of Rs 137.6 per share, the stock is available at a price to BV of 4.7 times. Around 52% of the revenue are from North America, followed by 46% from Europe and theUK and the remaining 2% from the rest of the world. Client concentration is high, with top five accounting for 64% and top 10 about 82% of the revenues. This is a matter of concern.

Mayur Uniquoters is one of the largest manufacturers of synthetic leather in the country, with an installed capacity of 3.05 million linear meters (mlm) per month. Production was 23.07 mlm in FY 2015 as against 21.16 mlm in FY 2014. Mainly products are sold to the footwear, furnishing, automotive and automotive replacement segments. Marquee customers include Ford and Chrysler in the USA and Ford India, General Motors India, Mahindra, Maruti, Honda Motorcycles and Scooters, Tata Motors and Eicher Motors. Bata, Action, Lancer, Relaxo, Paragon, VKC group are the key clients in the footwear segment. Around 26% of the revenue come from exports.

Operational performance has been on a dream run, with 8.7 times jump in turnover and 22 times in net profit over the last decade. Forays are being made into new geographical markets and new segments to keep up the growth momentum. There are plans to increase capacity to 3.6 mlm per month. Importantly, the company is almost debt free considering cash and investments. A third interim dividend of Rs 0.85 per share, or 17%, on face value of Rs 5 was declared in February 2016.

Eveready Industries is the market leader in the domestic battery and flashlight market, with sales of over 1.2 billion batteries and nearly 25 million flashlights. There is a share of 50% in the battery and 75% in the organised flashlight markets. This apart, the basket of products consist of light emitting diode (Led) bulbs, compact fluorescent lamps, incandescent bulbs and other lighting products and packet tea.

There is an extensive network consisting of 15 sales offices, 44 nationwide distribution centres and 3,000 distributors, giving a reach to villages with population of 5,000 and more. Products are available with around 3.2 million outlets. Besides the flagship brand, Eveready, other brands include PowerCell, Jaago, Eveready digiLed, Tez and Lava. The debt-to-equity ratio declined consistently over the last three years to 0.37 times in FY 2015.

The domestic Led market is expected to grow at a compounded annual growth rate of 35.9% from CY 2014 to CY 2020 to reach Rs 21600 crore. This is an alluring business opportunity. An order worth Rs 48.3 crore was bagged mid February 2016 from Energy Efficiency Services for design, supply and maintenance of self-ballasted 9W Led lamps for Madhya Pradesh.

APL Apollo Tubes is the largest producer of electric-resistance welded (ERW) steel tubes in the country, with capacity to produce over 1,050,000 tpa. There are six manufacturing facilities located at Sikandarabad in Uttar Pradesh, Hosur in Tamil Nadu, Bengaluru in Karnataka and Murbad in Maharashtra. Key product categories include over 300 varieties of mild steel black pipes, galvanized tubes, pre galvanized tubes and hollow sections. The main focus is on producing structural ERW steel tubes.

Largely, products are sold in tier 2 and tier 3 cities with adistribution network comprising of more than 500 dealers. Exports are to Europe, the US, the UAE, Australia and Asia. There is confidence about future demand and plan to double the capacity to 20 lakh tonnes over the next three-four years with a capital outlay of Rs 400 crore. There has been a consistent and robust rise in turnover over the decade.

The plunge in commodity prices has proved to be boon, resulting in margins expansion in recent times. Debt stood at Rs 483.2 crore, with the debt-to-equity ratio of 1.1 times, end FY 2015. Mutual fund owned 16.53% of paid-up capital end December 2015.

Conclusion

India is a geographically vast and diverse market. It is difficult to determine market share of several industries, particularly where the unorganized sector is dominant. Largely, investors have to rely on what companies have to say about themselves.

Investors should focus on the growth dynamics and drivers along with risks while assessing these small caps for investment. There should be enough business opportunities for them to grow their business and create shareholder wealth in future. This is very important and indeed a pre-requisite while assessing small caps for investment.

Assessing the credentials of promoters is another important task. This exercise is a must. Equity investment is all about handing over hard-earned money to the management that, in turn, deploys it to nurture and grow the business. Considering this fact, it is essential to pay adequate attention to the track record of the management.

The small-cap world is difficult to navigate. Picking industry leaders is one of the qualitative approaches for investment in this space. This is anytime better than exploring single-digit small caps at the bottom. The recent market correction can be used as an entry point to search for quality stocks that can appreciate rapidly in the medium to long term.

Highlight the important provisions of income tax (IT) ?

 Highlight the important provisions of income tax (IT) ?

As per the IT Act, 1961, income is taxable under five heads: salary, house property, business or profession, capital gain and other sources. A salaried person must obtain Form 16 from his employer every year. As much as 30% standard deduction is available on income from house property. Income is to be considered as deemed let-out on second house property. Deduction of interest on loan for self-occupied house-property is allowed up to Rs two lakh. For other house property, actual expenditure of interest on housing loan is allowed as deduction. Repayment of the principal amount of the housing loan is deductible up to Rs 1.50 lakh under Section 80C of the IT Act.

Tax audit is compulsory if business sales turnover exceeds Rs 1 crore. Tax audit is also compulsory if the gross receipts of professionals exceed Rs 25 lakh.

If sales turnover is below Rs. 1 crore, then net profit of 8% or higher is to be taken as business income. Otherwise, tax audit is required. The due date for tax audit and income tax return is 30 September. A tax payer other than company and those eligible for tax audit are required to file income tax return before 31 July.

Tax payers subject to tax audit should deduct tax at source (TDS) on particular transactions. TDS should be on the date of credit or payment, whichever is earlier. TDS payment should be made on or before the 7th day of the next month. TDS returns are to be filed quarterly. If TDS is not deducted, then deduction of 30% of expenditure is not allowed.

Long-term capital gains (LTCG) will arise if transfer of specified capital assets is made after three years. Capital gains on shares are said to be long term if held for more than one year. Generally, long-term capital gains are taxable at 20%. LTCG on shares on which securities transaction tax (STT) has been paid is exempt from tax. Short-term capital gains are taxable at 15% if STT is paid and as per applicable slab rates in other cases. Dividend received from domestic company and mutual funds is exempt from tax.

Agricultural income is exempt from tax. Gifts received from non-relatives exceeding Rs 50000 are taxable. IT is not chargeable on gifts received at the time of marriage, as per of will, in case of succession and from specified relatives.

The maximum deduction limit under Sections 80C, 80CCC and 80 CCD is Rs 1.50 lakh. Deduction of medical insurance premium is available subject to the prescribed limits. Deduction limit of interest earned on savings account is up to Rs 10000. Income earned by a minor child is clubbed in the hands of parents.

Form 26AS provides information about TDS, advance tax paid and details of refund. Notice may be sent to the taxpayer if the income mentioned in Form 26AS and the IT return filed has differences. IT return should be filed if income exceeds the basic exemption limit. The basic exemption limit for individuals for assessment year 2015-16 (financial year 2014-15) is Rs 2.50 lakh. The basic exemption limit for senior citizens, i.e., above 60 years, is Rs three lakh. The basic exemption limit for super senior citizens, i.e., above 80 years, is Rs five lakh.

Advance tax is to be paid if tax liability during the year exceeds Rs 10000. As much as 12% of surcharge is applicable if income exceeds Rs one crore.

Tax of 30% is applicable on income of a partnership firm, company and limited liability partnership. Details of bank accounts, passport number and Aadhar card number have to be given in the IT return.

Details of fixed assets held in foreign country ares required to be given in the IT return. If the taxable income of the individual is less than Rs five lakh, then relief of Rs 2000 is available in tax. E-filling of return is compulsory if income exceeds Rs 5 lakh.

From the fiscal year ended March 2015, depreciation is to be calculated as per the New Companies Act, 2013.

The replies are only in the nature of guidelines. The tax counsellors and the publication are not responsible for any decision taken by readers on the basis of the same.

source: capital market

12 Basic Stock Investing Rules Every Successful Investor Should Follow

12 Basic Stock Investing Rules Every Successful Investor Should Follow

There are many important things you need to know to trade and invest successfully in the stock market or any other market. 12 of the most important things that I can share with you based on many years of trading experience are enumerated below.

1. Buy low-sell high. As simple as this concept appears to be, the vast majority of investors do the exact opposite. Your ability to consistently buy low and sell high, will determine the success, or failure, of your investments. Your rate of return is determined 100% by when you enter the stock market.

2. The stock market is always right and price is the only reality in trading. If you want to make money in any market, you need to mirror what the market is doing. If the market is going down and you are long, the market is right and you are wrong. If the stock market is going up and you are short, the market is right and you are wrong.

Other things being equal, the longer you stay right with the stock market, the more money you will make. The longer you stay wrong with the stock market, the more money you will lose.

3. Every market or stock that goes up will go down and most markets or stocks that have gone down, will go up. The more extreme the move up or down, the more extreme the movement in the opposite direction once the trend changes. This is also known as "the trend always changes rule."

4. If you are looking for "reasons" that stocks or markets make large directional moves, you will probably never know for certain. Since we are dealing with perception of markets-not necessarily reality, you are wasting your time looking for the many reasons markets move.

A huge mistake most investors make is assuming that stock markets are rational or that they are capable of ascertaining why markets do anything. To make a profit trading, it is only necessary to know that markets are moving - not why they are moving. Stock market winners only care about direction and duration, while market losers are obsessed with the whys.

5. Stock markets generally move in advance of news or supportive fundamentals - sometimes months in advance. If you wait to invest until it is totally clear to you why a stock or a market is moving, you have to assume that others have done the same thing and you may be too late.

You need to get positioned before the largest directional trend move takes place. The market reaction to good or bad news in a bull market will be positive more often than not. The market reaction to good or bad news in a bear market will be negative more often than not.

6. The trend is your friend. Since the trend is the basis of all profit, we need long term trends to make sizeable money. The key is to know when to get aboard a trend and stick with it for a long period of time to maximize profits. Contrary to the short term perspective of most investors today, all the big money is made by catching large market moves - not by day trading or short term stock investing.

7. You must let your profits run and cut your losses quickly if you are to have any chance of being successful. Trading discipline is not a sufficient condition to make money in the markets, but it is a necessary condition. If you do not practice highly disciplined trading, you will not make money over the long term. This is a stock trading “system” in itself.

8. The Efficient Market Hypothesis is fallacious and is actually a derivative of the perfect competition model of capitalism. The Efficient Market Hypothesis at root shares many of the same false premises as the perfect competition paradigm as described by a well known economist.

The perfect competition model is not based on anything that exists on this earth. Consistently profitable professional traders simply have better information - and they act on it. Most non-professionals trade strictly on emotion, and lose much more money than they earn.

The combination of superior information for some investors and the usual panic as losses mount caused by buying high and selling low for others, creates inefficient markets.

9. Traditional technical and fundamental analysis alone may not enable you to consistently make money in the markets. Successful market timing is possible but not with the tools of analysis that most people employ.

If you eliminate optimization, data mining, subjectivism, and other such statistical tricks and data manipulation, most trading ideas are losers.

10. Never trust the advice and/or ideas of trading software vendors, stock trading system sellers, market commentators, financial analysts, brokers, newsletter publishers, trading authors, etc., unless they trade their own money and have traded successfully for years.

Note those that have traded successfully over very long periods of time are very few in number. Keep in mind that Wall Street and other financial firms make money by selling you something - not instilling wisdom in you. You should make your own trading decisions based on a rational analysis of all the facts.

11. The worst thing an investor can do is take a large loss on their position or portfolio. Market timing can help avert this much too common experience.

You can avoid making that huge mistake by avoiding buying things when they are high. It should be obvious that you should only buy when stocks are low and only sell when stocks are high.

Since your starting point is critical in determining your total return, if you buy low, your long term investment results are irrefutably better than someone that bought high.

12. The most successful investing methods should take most individuals no more than four or five hours per week and, for the majority of us, only one or two hours per week with little to no stress involved.

20 Stock-Investing Tips

20 Stock-Investing Tips

 Our stock analyst staff has nearly a thousand years of collective investment experience. In this final lesson of the stocks Investing Classroom, we've boiled down some of our most salient observations into 20 suggestions we think will make you a better stock investor.

1. Keep It Simple.
Keeping it simple in investing is not stupid. Seventeenth-century philosopher Blaise Pascal once said, "All man's miseries derive from not being able to sit quietly in a room alone." This aptly describes the investing process.

Those who trade too often, focus on irrelevant data points, or try to predict the unpredictable are likely to encounter some unpleasant surprises when investing. By keeping it simple--focusing on companies with economic moats, requiring a margin of safety when buying, and investing with a long-term horizon--you can greatly enhance your odds of success.

2. Have the Proper Expectations. 

Are you getting into stocks with the expectation that quick riches soon await? Hate to be a wet blanket, but unless you are extremely lucky, you will not double your money in the next year investing in stocks. Such returns generally cannot be achieved unless you take on a great deal of risk by, for instance, buying extensively on margin or taking a flier on a chancy security. At this point, you have crossed the line from investing into speculating.

Though stocks have historically been the highest-return asset class, this still means returns in the 10%-12% range. These returns have also come with a great deal of volatility. (See Lesson 103 for more.) If you don't have the proper expectations for the returns and volatility you will experience when investing in stocks, irrational behavior--taking on exorbitant risk in get-rich-quick strategies, trading too much, swearing off stocks forever because of a short-term loss--may ensue.

3. Be Prepared to Hold for a Long Time.

In the short term, stocks tend to be volatile, bouncing around every which way on the back of Mr. Market's knee-jerk reactions to news as it hits. Trying to predict the market's short-term movements is not only impossible, it's maddening. It is helpful to remember what Benjamin Graham said: In the short run, the market is like a voting machine--tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine--assessing the substance of a company.

Yet all too many investors are still focused on the popularity contests that happen every day, and then grow frustrated as the stocks of their companies--which may have sound and growing businesses--do not move. Be patient, and keep your focus on a company's fundamental performance. In time, the market will recognize and properly value the cash flows that your businesses produce.

4. Tune Out the Noise.
There are many media outlets competing for investors' attention, and most of them center on presenting and justifying daily price movements of various markets. This means lots of prices--stock prices, oil prices, money prices, frozen orange juice concentrate prices--accompanied by lots of guesses about why prices changed. Unfortunately, the price changes rarely represent any real change in value. Rather, they merely represent volatility, which is inherent to any open market. Tuning out this noise will not only give you more time, it will help you focus on what's important to your investing success--the performance of the companies you own.

Likewise, just as you won't become a better baseball player by just staring at statistical sheets, your investing skills will not improve by only looking at stock prices or charts. Athletes improve by practicing and hitting the gym; investors improve by getting to know more about their companies and the world around them.

5. Behave Like an Owner.
We'll say it again--stocks are not merely things to be traded, they represent ownership interests in companies. If you are buying businesses, it makes sense to act like a business owner. This means reading and analyzing financial statements on a regular basis, weighing the competitive strengths of businesses, making predictions about future trends, as well as having conviction and not acting impulsively.

6. Buy Low, Sell High.
If you let stock prices alone guide your buy and sell decisions, you are letting the tail wag the dog. It's frightening how many people will buy stocks just because they've recently risen, and those same people will sell when stocks have recently performed poorly. Wakeup call: When stocks have fallen, they are low, and that is generally the time to buy! Similarly, when they have skyrocketed, they are high, and that is generally the time to sell! Don't let fear (when stocks have fallen) or greed (when stocks have risen) take over your decision making.

7. Watch Where You Anchor.
If you read Lesson 407 on behavioral finance, you are familiar with the concept of anchoring, or mentally clinging to a specific reference point. Unfortunately, many people anchor on the price they paid for a stock, and gauge their own performance (and that of their companies) relative to this number.

Remember, stocks are priced and eventually weighed on the estimated value of future cash flows businesses will produce. Focus on this. If you focus on what you paid for a stock, you are focused on an irrelevant data point from the past. Be careful where you place your anchors.

8. Remember that Economics Usually Trumps Management Competence.
You can be a great racecar driver, but if your car only has half the horsepower as the rest of the field, you are not going to win. Likewise, the best skipper in the world will not be able to effectively guide a ship across the ocean if the hull has a hole and the rudder is broken.

Also keep in mind that management can (for better or for worse) change quickly, while the economics of a business are usually much more static. Given the choice between a wide-moat, cash-cow business with mediocre management and a no-moat, terrible-return businesses with bright management, take the former.

9. Be Careful of Snakes.
Though the economics of a business is key, the stewards of a company's capital are still important. Even wide-moat businesses can be poor investments if snakes are in control. If you find a company that has management practices or compensation that makes your stomach turn, watch out.

When weighing management, it is helpful to remember the parable of the snake. Late one winter evening, a man came across a snake on the path. The snake asked, "Will you please help me, sir? I am cold, hungry and will surely die if left alone." The man replied, "But you are a snake, and you will surely bite me!" The snake replied, "Please, I am desperate, and I promise not to bite you."

So the man thought about it, and decided to take the snake home. The man warmed the snake up by the fire and prepared some food for the snake. After they enjoyed a meal together, the snake suddenly bit the man. The man asked, "Why did you bite me? I saved your life and showed you much generosity!" The snake simply replied, "You knew I was a snake when you picked me up."

10. Bear in Mind that Past Trends Often Continue.

One of the most often heard disclaimers in the financial world is, "Past performance is no guarantee of future results." While this is indeed true, past performance is still a pretty darn good indicator of how people will perform again in the future. This applies not just to investment managers, but company managers as well. Great managers often find new business opportunities in unexpected places. If a company has a strong record of entering and profitably expanding new lines of business, make sure to consider this when valuing the firm. Don't be afraid to stick with winning managers.

 11. Prepare for the Situation to Proceed Faster than You Think.
Most deteriorating businesses will do so faster than you anticipate. Be very wary of value traps, or companies that look cheap but are generating little or no economic value. On the other hand, strong businesses with solid competitive advantages will often exceed your expectations. Have a very wide margin of safety with a troubled business, but do not be afraid to have a much smaller margin of safety for a wonderful business with a shareholder-friendly management team.

12. Expect Surprises to Repeat.
The first big positive surprise from a company is unlikely to be the last. Ditto the first big negative surprise. Remember the "cockroach theory." Namely, the first cockroach you see is probably not the only one around; there are likely scores more that you can't see.

13. Don't Be Stubborn.
David St. Hubbins memorably said in the movie This is Spinal Tap, "It's such a fine line between stupid and clever." In investing, the line between being patient and being stubborn is even finer, unfortunately.

Patience comes from watching companies rather than stock prices, and letting your investment theses play out. If a stock you recently bought has fallen, but nothing has changed with the company, patience will likely pay off. However, if you find yourself constantly discounting bad news or downplaying the importance of deteriorating financials, you might be crossing that fine line into stubborn territory. Being stubborn in investing can be expensive.

Always ask yourself, "What is this business worth now? If I didn't already own it, would I buy it today?" Honestly and correctly answering these questions will not only help you be patient when patience is needed, but it will also greatly help you with your selling decisions.

14. Listen to Your Gut.
Any valuation model you may create for a company is only as good as the assumptions about the future that are put into it. If the output of a model does not make sense, then it's worthwhile to double-check your projections and calculations. Use DCF valuation models (or any other valuation models) as guides, not oracles.

15. Know Your Friends, and Your Enemies.
What's the short interest in a stock you are interested in? What mutual funds own the company, and what is the record of those fund managers? Does company management have "skin in the game" via a meaningful ownership stake? Have company insiders been selling or buying? At the margin, these are valuable pieces of collateral evidence for your investment thesis on a company.

16. Recognize the Signs of a Top.
Whether it is tulip bulbs in 17th century Holland, gold in 1849, or Beanie Babies and Internet stocks in the 1990s, any time a crowd has unanimously agreed that a certain investment is a "can't lose" opportunity, you are probably best off to avoid that investment. The tide is likely to soon turn. Also, when you see people making investments that they have no business making (think bellboys giving tips on bonds, auto mechanics day-trading stocks in their shops, or successful doctors giving up medicine to "flip" real estate), that's also a sign to search for the exits.

17. Look for Quality.
If you focus your attention on companies that have wide economic moats, you will find firms that are virtually certain to have higher earnings five or 10 years from now. You want to make sure that you focus your attention on companies that increase the intrinsic value of their shares over time. These afford you the luxury of being patient and holding for a long time. Otherwise, you are just playing a game of chicken with the stock market.

18. Don't Buy Without Value.
The difference between a great company and a great investment is the price you pay. There were many fantastic businesses around in 2000, but very few of them were attractively priced at the time. Finding great companies is only half the equation in picking stocks; figuring out an appropriate price to pay is just as important to your investment success.

19. Always Have a Margin of Safety.
Unless you unlock the secret to time-travel, you will never escape the inherent unpredictability of the future. This is why it is key to always have a margin of safety built in to any stock purchase you may make--you will be partially protected if your projections about the future don't exactly pan out the way you expected.

As you have seen in recent lessons, having a margin of safety is a recurring theme among several great investors. This is no accident; margin of safety really is that important.

20. Think Independently.
Another common characteristic you will find in the next section is that great investors are willing to go against the grain. You should find zero comfort in relying on the advice of others and putting your money where everyone else is investing. Quite simply, it pays to go against the crowd, because the crowd is often wrong.

Also remember that successful investing is more about having the proper temperament than it is about having exceptional intelligence. If you can keep your head while everyone else is losing theirs, you will be well ahead of the game--able to buy at the bottom, and sell at the top.

The Bottom Line

We've distilled a lot of information and collective wisdom into these 20 tips, most of which we have touched on in greater depth elsewhere in this Investing Classroom series. We firmly believe that if you heed the advice contained here, you will make better decisions when buying and selling your stocks.  

MUHURAT PICKS 2015

MUHURAT PICKS 2015