The Investment Thread

Big Daddy

Super User
Big Daddy, equity dividend in India is taxed before it is distributed in share/MF holders.
Did not know that. It is strange because it may be assuming same tax for everyone. Typically, I have to compute my annual income by accounting for wages+dividends+capital gains - deductions before I get to taxable income and then tax bracket. In deductions, I deduct property taxes, capital losses, state taxes, investment interest (margin interest), charitable contributions etc.

Some people can also deduct university tuition and health care expenses. It is pretty complicated. Also, Obama was saying that tax on dividend interest for rich should be different. That proposal did not go anywhere as it was pretty stupid because rich would have sold certain shares and bought something else.

Big Daddy

Super User
It looks pretty straight forward but since it is fixed it should not make much difference anyway. One of the benefits of not paying tax right away is that you get to defer the tax and still make some money for a few months (on taxes that you may owe) before you pay taxes. Also, if some dividend is used to compute a person's tax bracket then you may be encouraging some people to invest. For example, if there was no fixed tax rate and taxes are computed on total income (salary +dividends) then poor people, being in low tax rate, may be encouraged to invest more because they will pay low dividend income tax than the rich people (who would be in higher tax bracket) for same amount of dividend received. This is a good way to encourage investing in financial markets for the middle class (better than government run social programs).

BTW, in the US dividend income is seprated into two categories: qualified dividends and unqualified dividends. For qualified dividends the tax rate is fixed (either 15% for high income tax payers or 5% for low income tax payers) and unqualified (ordinary) dividends go into your annual total income category where people will pay different taxes based on their tax rates (What is the difference between ordinary dividends versus qualified dividends). So it is a complicated hybrid structure.

The hybrid structure helps financial markets because the rich, lured by 15% tax rate, tend to invest in stocks that give qualified dividends (which for some rich are in millions). Also tax rate for middle class for qualified dividends is 5%. However, middle class with low income tend to invest in REITs that give unqualified dividends because REIT dividend payout as % of stock value is usually higher than that for stocks. Rich also invest in tax exempt municipal bonds allowing state governments to run deficits. Also, some part of taxes paid on foreign dividends goes into tax deductions to avoid double taxation.

BTW if I am reading the document correctly then in India the fixed tax rate on dividend income is either 20.5% for stocks or 33% for money market, which is an outrage.
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Big Daddy

Super User
Here is a complicated subject-- Annuities. You may have asked yourself what goes up when interest rates go up? Stocks and bonds usually go down so where do people put their money? Annuities is one answer. Annuties provide guaranteed income for life but you have to give up principal in return. You are transferring risk of running out of money to an insurance company by giving them the principal in return to a guarantee that the company will provide you steady income as long as you will live. If you die in one year, Insurance company keeps the money. If you live for 40 additional years then insurance company has to keep paying you money for 40 years. Annuities provide useful diversification tool for a portfolio and guarantees that you will get a certain minimum income for life. Annuities are similar to pensions where you get pension as long as you live.

So what is the connection between RBI interest rates and Annuities? Well, how much an Annuity pays depends on the prevailing interest rate at which you put your money into an Annuity. Since interest rates change, putting money into annuities is generally beneficial when interest rates are high. This is one reason why investors rush to annuities when interest rates go up. Every investor is running out of time when it comes to annuities. With retirement closing in, there are only so many opportunities every investor will get to invest in annuities. If you don't know what annuities are then you really are running out of time.

Here is an example of how annuity will work. Let's say you have 10 years to retirement and you invest :r: 100,000 when RBI interest rate is 5%. Annuity interest rate will be computed as fixed rate + variable crediting rate + RBI interest rate. Since you will not be taking money from the annuity for next 10 years, your principal is allowed to grow :r: 208, 835.60 giving you an income of :r: 1,476 month for life.

Now, let's assume that interest rates go up to 7% in 5th year (beginning) and you decide to add another :r: 100,000. The second investment will grow for six years at higher total rate (10.5%) while first investment will grow as the previous rate (8.5%). At retirement a weighted average rate is computed (9.38%) and you will receive :r: 2, 916 / month for life. Keep in mind that this is a simple example because age is also factored in to estimate payout. Generally older you are you will get higher rate which would boost your income more than what is shown in the example.

There is a third option where a person waits till s/he retires and takes out all his money and invests into annuities. It may work well or it may not work well. For example, in our case the interest rate at the time of retirement is 2% giving an annuity payout interest rate of approximately 5.5%. Depending on how much principal grew in alternative investments, he may get higher monthly payments. Generally, it is risky to wait. You should always consider investing some part of your money into annuities when interest rates are high.

This concludes a general summary of annuities. The primary risk of annuities is that you don't want insurance company issuing annuity going bankrupt. Most countries have legislation that requires insurance companies to set cash aside for their annuity commitments making annuities very safe.

Indian annuities may work slightly differently. I have explained what is commonly known as fixed annuity. Their are variable return annuities where cash payouts for life get adjusted for inflation. Also, annuities can be bought for one life or two lives (husband and wife). Payouts for two lives is generally lower. There are other customizations. For example, you can buy annuity for one life with guaranteed minimum payout for 10 years. This way annuity will pay money to you as long as you live but if you were to die in one year since you began cashing the annuity then, due to guaranteed minimum payout of 10 years clause, your wife will get guaranteed money for 10 years before annuity stops paying her any money (because it was single life with 10 year guarantee). You may look at following sites for more info on Indian annuities:

Best pension plans in india ? Disadvantages and Advantages
Immediate annuity products getting competitive, but choose carefully - Moneylife
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Big Daddy

Super User
What is Bitcoin?
Trading Legal in India?
Any Investment Strategies?
The way bitcoin is created is by solving a series of mathematics problems of increasing computational complexity. The easy ones are solved using a PC and complex ones require supercomputers. There are math problems that cannot be solved by the fastest computer in the world working for a million years. Once a problem is solved a bit coin is created and person who solved the problem owns it. There are finite set of math problems that will create only finite set of bit coins (21 million to be exact Source: Bitcoin now outguns all of Earth's supercomputers - May. 23, 2013).

Modern computers are not powerful enough to solve all these math problems but simple ones with lower complexity are solved creating several million bitcoins. The bitcoin economy has brought several scientists and computers together to create a grid computing environment to harness the collective power of parallel computers to solve these math problems. Just like sports, the process is fair as anyone can win. That anyone will be most likely living in developed country to have access to computing power and math skills. The future problem solvers would be big IT organizations like IBM with its army of scientists working in IBM Watson Research center who have access to petaflop super computers.

Given finite number of bit coins will be created and given that people in the world will exactly know how many bitcoins exist in the world (i.e., number of problems solved), forgery is next to impossible. Also, the value of bitcoin is independent of any government and is dependent on world economy as opposed to a local economy. The variable value of bitcoins also allows people to avoid paying taxes or worry about exchange rates.

While the value of bitcoins is guaranteed to go up beating inflation there will be short term volatility based on demand for bitcoins in financial markets. Once mined people can buy and sell bitcoins. This buying and selling of finite bitcoins creates volatility. Thus, there are two ways to make money from bitcoins-- mine them by solving math problems or trade them like buying and selling stocks. The first option will make you rich (provided that you solve sufficient math problems) and the second option involves risk similar to trading stocks.

Bitcoins guarantee that their value will increase because no one can print bitcoins. The complexity of math problems guarantees that they will be solved very slowly and supply will be limited raising the value of existing bitcoins. The only way to make money from bitcoins in India is by mining them. I don't think you can trade bitcoins in Indian markets.

In the future bitcoins will directly compete with national currencies-- US dollar in particular-- forcing controls on government spending. Most countries would want to keep their currencies intact to collect tax revenues.

Part 2-- Bitcoin mining is outsourcing or crowd sourcing or using cloud computing (platform as a service)

The way I understand it is that you can also be a bitcoin miner without any math skills. All you have to do is invest in hardware and then connect your computer to a server that will use your computer processing power to solve math problems. Once a problem is solved, you get a bitcoin. Organizations save a lot of money in energy costs and hardware by using your computer and pay you back in bitcoins that you can go and trade. To mine more bitcoins, you will have to buy more hardware. Organizations also save on recycling cost of electronic waste. This is another way to join bitcoin mining. I am not sure how cost effective this option is because you are essentially making money by leasing your personal computing resources. It seems most bitcoin miners use this part 2 option which will probably not make them rich. I think bitcoin economy may allow companies scalability and access to processing power without having to invest a lot of money in hardware. Just like outsourcing, these part 2 bitcoin miners may be earning very little return on their hardware investments.
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Guys any idea how much time , it will take to transfer PF from one account to another..?

right now if i try to access my epf balance for old account , am getting message as "member settled" but still the amount is not reflected in new account...


Equity Markets in a Correction Mode, Falling Indian Rupee ~USD/[email protected] 60.725, Macro Looking Weak ...But despite all concerns given the Valuations it's a good time for buying few Quality Stocks. Recommend everyone to start making portfolio of these stocks which will deliver superior returns in 12-15 months.


-Bajaj Finance - Rs. 1374
-Mahindra Finance -Rs. 250
-HDFC Bank -Rs. 623
-Kotak Mahindra Bank -Rs. 688
-ING Vysya Bank -Rs. 604
-Axis Bank -Rs. 1249

Disclaimer~Investments in Equity Market is subject to Market Risk.


Armchair Traveller :(
I've seen the moves of reliance group companies and I believe its due time to start accumulating RPower & RCom, especially the former. Keep horizon of minimum 2 years & I believe one shall reap sweet returns.