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4 THINGS TO DO, WHEN U ARE FORCED TO BUY A POLICY WITH HOME LOAN!

  Have you even seen cases where when a person wants to get a home loan, and the bank or the lender says that taking some kind of ULIP policy or some other kind of insurance product is mandatory if you want the loan to be approved? Most of times, banks impose this restriction in the final stages of loan approval process because that’s the time when most of the customer will not reject the option and will forcefully go for it, because they don’t want to lose the home loan for this tiny roadblock.

If you are thinking about 50 lacs of home loan, you will not get stopped by this 40,000 per annum premium policy. Here is a case which was discussed on our jagoinvestor forum.

I recently planned to buy a home. So, after market research I approached SBI bank. But the manager informed by saying that ‘I need to take SBI Insurance along with home loan’ else will not sanction SBI home loan. Please let me know whether is it the case with SBI home loans?

Cross Selling is Unfair – IRDA

Some customers falls for these kind of gimmicks, but in reality there is no compulsion to buy any kind of product with home loan. It’s just a marketing gimmick and a way to exploit people. IRDA itself has clarified in its circular that this kind of bundling or forced selling is not fair and should be stopped. However banks still continue to ask customers to buy the insurance along with home loans and ill treat them.

Tying is defined as two or more products packaged together where at least one of the products is not sold separately while Bundling occurs when products are packaged but are also available separately. There could be various issues of concern for the consumer that arise from cross-selling. Packaging two or more products could become unfair to the consumer when it impedes his or her choice or makes price comparisons difficult or impossible.
One of the major concerns is bringing in transparency to prevent unfair commercial practices. At the same time, cross-selling facilitates service providers to use existing channels to reach out to those who are looking to buy insurance products. It is, however, necessary to ensure that the consumer is not put to any kind of disadvantage because of the packaging.
J. HARI NARAYAN
CHAIRMAN (IRDA)

So what’s the way out? It might be, that if you are careless on documentation front, the bank might sell you the policy and you come to know about it very late; like it happened in this case where Axis bank sold life insurance along with home loan to this guy. While you always have an option to go to consumer court over the issue, that comes a little later.

What way you can settle this at the bank level itself? The main idea is to communicate to bank officials that you are not a easy bait and are an informed investor who knows his rights as a customer. Below are a few things you can do in a situation when bank tells you “Sir – Insurance is compulsory along with home loan, else it will not be processed”

What to do when forced to buy insurance along with home loan ? Lets see 4 tips which you can use when you are told by your lender that some kind of policy is mandatory to buy along with home loan.

Option 1 – Directly tell them, you know the rules

One of the simple things you can do is tell them straight forward that you know the rules on this, you are aware about the RBI circular that these practices are not fair and ask the bank for an explanation on how they are still doing it. Also tell them, that you have yourself helped another friend of yours to get a home loan without the bundled insurance when XYZ bank asked for it. You can tell them that you have already filed for RTI to IRDA and asked for this, if they want you can bring the RTI reply from IRDA. This first tip itself should be enough for your home loan provider to come to the right path.

Option 2 – Reject the Offer and Wait – They will come back

When you show desperation, they know you will do anything for getting a home loan and that’s one reason why they put forward such idiotic restrictions of taking policies. Another thing you should do in these kind of situations is that you can just reject the offer totally and tell them that you really are not so desperate to get the home loan, you can wait for some months or you already know other bank officials who have not put forward such kind of restrictions . In all probabilities, they will just come on track or if not that time, they will be back to you later saying – “Sorry Sir, we take back that restriction .. blah blah… ”  This is exactly what happened with Muthu Krishnan which he shared on this blog some time back

IDBI tried to con me in similar manner. I told them that I don’t need their loan. After two days, they called back and offered loan without insurance which i accepted. Though you are absolutely desperate for loan, do not show it to the banks. The banks are very desperate to disburse loans as it is their livelihood and not ours. They will come around to our terms.

Option 3 – Ask them to give it in writing

The next option is to look at the bank official and ask him to give in writing that “Buying the Policy is mandatory along with Home Insurance” and also tell them you are thinking of inquiring about this with banking ombudsman because you have already filed a case for your friend and got compensation for this. If they are not ready to give it in writing, tell them that you don’t need home loan from them anyways, but you will still file a complaint with Banking Ombudsman to see what can happen and politely ask the official if he can also share his Name, designation and Employee id for additional information.

Option 4 – Take the Policy and return back in Free Lookup period

This is the last option, but if you feel that other options are great but you are victim of family pressure and at this time just need to go ahead even though you are disgusted by this force game, just go ahead with policy and pay the premium for first year. Then be a little alert and make sure the moment you get policy documents, just initiate the process of returning back the policy within the 15 day free look-up period . For those who do not know, the free look up period starts from the day you get the policy in your hands, not from the day you bought the policy. This helpful tip was shared by one of the person who shared his case with ICICI mis selling.

Conclusion

Any kind of loan should not be bundled with other products. Most of the bank officials try to pressurize the customers just to meet their deadlines and targets. So do not fall for forced selling and act like an informed and powerful customer.

Source - Manish Chauhan - www.jagoinvestor.com

 

DOCUMENTS TO CHECK BEFORE BUYING A HOUSE

If you do not conduct due diligence, you could end up losing the property and face a financial disaster

 Buying your own home may be a cherished dream, but it doesn’t take much for it to turn into a nightmare. Given that real estate is among our most expensive purchases, landing a lemon can prove to be a financial disaster. The only way to avoid such a situation is to take time out to conduct due diligence before finalising any property deal. Of course, a reliable shortcut is to buy into a project that is backed by financial intermediaries like banks. “Seldom would they hand out loans to projects where due diligence throws up pending mandatory clearances,” explains Shveta Jain, executive director, residential services, Cushman & Wakefield, India. 

    You can also engage a lawyer to carry out due diligence, but as a smart buyer, it’s best to pore through the documents yourself. Here is a checklist of documents that you should peruse before signing on the dotted line. 

Projects under construction
The first thing one should do in the case of projects that are still under construction is to make sure that the builder has all the necessary approvals in place, without which it would be considered illegal. “We have often come across cases where projects have been stalled midway due to lack of proper approvals. Even finished projects have been razed for the same reason. Hence, I would never advise to go for a booking unless you have taken a close look at the key documents,” says Ramesh Vaidyanathan, partner, Advaya Legal, a Mumbai-based commercial law firm. 

    The first of these is the permission to develop land into a residential complex. Builders need to get government approval to convert agricultural land or even land specially designated for industrial purposes into a residential area. If the builder has gone ahead without securing this approval, the entire project is illegal. In addition, there are environmental and municipal clearances to factor in. For instance, the builder has to ensure that his project does not interfere with the urban and town planning, and that it has unrestricted road access. 

    Next, you need to find out if the builder has the authority to transfer the undivided share of land to each flat owner and the entire plot to the society, on completion of the project. A Knight Frank research report on ‘Parameters for Buying a Home’ mentions that you should also ensure the builder does not reserve any right on your portion of the apartment, such as balconies or terraces.
    Lastly, never forget that there’s many a slip between the blueprint and the final product. The developers tend to charge a
    premium for additional features, such as 

    a swimming pool or designer furniture. However, unless you ask the builder to incorporate all the promised features in the agreement and make provisions for penalty in case of non-fulfilment, you stand on shaky ground. Any sample flat that was shown to you would be demolished long before you obtain the possession of your house, leaving you with little evidence if you decide to drag the developer to court. Also, watch out for the fine print: builders may slip in a clause in the agreement, stating that they reserve the right to alter any of the promised features. To be safe, take a look at the approved construction plans and ensure if they match what has been promised to you. Ask the builder to show you the requisite permits from the concerned authorities. While the approved construction plans have to be mandatorily displayed at the construction site at all times, all the important approvals should be available at the builder’s office. Under the Transfer of Property Act and Maharashtra Ownership Flats Act, a seller is required to disclose all facts relating to the property, which includes the various permissions secured by him. In case a builder refuses to do so, a prospective buyer has recourse under the same Acts. “However, if any of these documents is missing or the builder refuses to show them to you, it is best to stay away from the project,” warns Vaidyanathan. In addition to these documents, you should also take a look at the Commencement Certificate for projects in Mumbai. As the name suggests, this certificate is given to the builder to begin construction only after he has obtained all the requisite clearances.
Independent home owner 

“As a primary rule, check and verify if the seller owns the property and has a right to dispose it of,” says Jain. In case he is a joint owner, he cannot sell the property without the consent of the other owner(s). 

    One way to be sure of ownership is to go through the house agreement. If you are purchasing a flat in a housing society, ask for the original share certificates. To double check, you can peruse the telephone and electricity bills as they are always issued in the name of the legal owner. Alternatively, you can check the housing society maintenance bill, which contains the owner’s name and property tax details. This will also highlight any pending charges that are due for the flat you want to buy. This is crucial because if the owner sells a flat without paying his dues, the society may recover it from the new owner. To avoid such hassles, ask the society to issue a no-due certificate as well as a no-objection certificate. Though this is not mandatory, you should insist on it, advises Vaidyanathan. 

 
    Any pending litigation on the
    property should also be a signal to hightail it. This is because you are bound by the result of the suit, and if the court establishes that the seller was not the rightful owner, you will have to hand over the property to the winning litigant. To check for pending litigation, go through the lis pendens registry at the sub-registrar’s office, as it will contain the owner’s name if there is pending suit. 

    Mortgaged properties are the other lemons you need to watch out for. In such cases, the original documents are sure to be with the lending institution. So, if the seller fails to show you the originals, it’s reason enough to be on an alert. If the seller claims he has cleared all debts, ask him to show you the bank’s original discharge letter. 

    Some experts are of the view that a clear title is not assurance enough and one should consider contacting past owners to rule out fraud. As a safety measure, publish an advertisement in the newspaper stating that you wish to buy the property and inviting objections. 

 
After the deal...
1 After the agreement is drawn, have it whetted by a lawyer to spot loopholes. 

2 Do not delay registration of the sale deed after signing it. 

3 Ask for the issuance of share certificates after a society is formed. 

4 If you are paying an advance without getting possession, document it in the form of an agreement or a memorandum of understanding. 

5 Contact a tax consultant to explain your tax liabilities to you. 

Source: the times of india, Sakina babvani, 03/12/2012

 

NBFC DEBENTURES CAN GIVE BETTER RETURNS THAN FDs, BUT THEY CARRY HIGHER RISKS TOO

  You can invest up to 10% of your portfolio in these debentures only if you plan to hold them till maturity,

    Investors know that the days of double-digit returns are going to be over soon. And they are busy chasing instruments that can still provide 10%-plus returns before interest rates start coming down. At the moment, NCDs of Shriram Transport, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, IIFL, Religare Finvest, among others, trading in the secondary market are on their radar – these NCDs offer a yield of 10-14%, around 1.5-4.0% higher than regular fixed deposits. For example, State Bank of India pays a maximum interest of 8.5% on FDs, whereas an NCD of IIFL – N4, which will redeem in August 2016 and pays an interest of 11.80% per annum, is currently trading at . 1,022, giving an yield of 14.10%. Shriram City Union Finance – N3, which pays an annual interest of 12.1% and matures in August2016,tradesat. 1,077,offeringan yield of 12.18%. 

“If you want to earn a higher interest on your investments and plan to hold them till maturity, you could invest in these NCDs. However, if interest rates fall, capital appreciation is unlikely due to the lower tenure of these bonds. Also, remember that they carry a lower rating than PSU bonds and hence a higher risk,” says Vikram Dalal, managing director, Synergee Capital. 

Indeed, the residual (remaining) tenure of these NCDs is low and could be anywhere between six months and four years. That means, once these NCDs mature, you may be exposed to reinvestment risk. Also, they are lower rated and could prove risky. “Since NBFCs carry higher risk, don’t allocate more than 10% of your debt portfolio to such instruments,” says Deepak Punjwani, head (debt), GEPL Capital. 

NO CAPITAL APPRECIATION “If you are looking to play the interest rate cycle and make a capital appreciation in the process, short- tenure bonds will not work for you,” says Vikram Dalal. That means you should invest in these bonds only if you are prepared to hold them till maturity. This is because bonds are expected to make capital gains when interest rates fall, but these bonds may not make any gains because of the short residual tenure.
“Interest rates are expected to go down by 50 to 100 basis points (1%=100basispoints)inthenextone year,” says Deepak Punjwani. When interest rates fall, bond prices of long-tenure and higher-rated papers will move up much more than shorter-tenure papers. So if interest rates were to fall by 100 basis points, a 15-year bond will appreciate by . 10, while a 10-year bond will appreciate by . 7, and a bond with tenure less than5-yearswouldshowtheleastappreciation of . 3 to . 5. So, the 8.3% NHAI 2027 bond, which trades at . 1,078 and has 14 years to mature, could show an appreciation of . 10 and trade at . 1,088. As compared to this, the IIFL- N4 which trades at . 1,011 and matures in August 2016 may give you an appreciation of merely . 3. 

KEEP THE TAXATION ANGLE IN MIND If youbuyabondwhichhaslessthan a year to go for maturity and is in the hightaxbracket,youwillenduppaying short-term capital gains tax on the same, which will bring down your post-tax returns. For example, Muthoot Finance – N2 matures in September 2013. The NCD pays 12% interest and trades at . 1,011, giving youayieldof 13.86%.Now,if youpay 30.6% tax on this, your ultimate return will be only 9.62%. 

BEWARE OF THE RISKS These NCDs which offer you yields ranging between 10% and 14% are from NBFCs, which carry higher risk and have a lower rating as compared to PSUs. Some of them are into single businesses like gold loan financing. 

“Some NBFCs offer financing to real estate developers. In today’s real estate scenario, this is particularly risky as security against these loans is quite illiquid.” says Kunal Pawaskar, founder of Capital Orbit. He advises investors to read the risk factors in NCD prospectus, learn about thebusinessandthentakeadecision on whether to invest or not. 

He advises investors to allocate only 5-10% of their portfolio to such NBFC NCDs. “Due to their small issue sizes, these NCDs are illiquid and witness thin trading volumes. Hence investors should buy them with an objective of holding till maturity,” says Deepak Punjwani.

Source : Prashant Mahes, Times of India, 07/12/2012

KEEP YOUR FINANCIAL DOCUMENTS IN ORDER TO AVOID INCONVENIENCE

Apart from documentation, keep your family members informed about investments & insurance policies,

    What is your net worth?” This simple question from a financial advisor totally stumped a Mumbai-based businessman. He had two cupboards full of papers — documents related to real estate agreements, fixed deposits, insurance policies and premium receipts, income tax filings, mutual fund investments and share certificates. He definitely knew that he was worth something, but he just couldn’t put a number to it. He just didn’t have any idea of the worth of his investments or his liabilities to arrive at a ballpark figure.
The amused advisor gave the businessman six folders, one each for insurance, income tax, real estate, shares, mutual funds and fixed deposits, and asked him to sort the documents accordingly. Yes, finally the businessman figured out his net worth; but only after hours of hard work. 

According to investment experts, many individuals have documents scattered all over the place, some in office, some at home, some in a locker, some in some drawers. A part of it may be sorted systematically, and the remaining work is left for another day. Such attitude can spoil all the hard work, say financial experts. What is the use of an insurance plan if it doesn’t help the dependents to cope with the loss of the breadwinner? Or what is the use of investments if you can’t liquidate just in time? Financial advisors can recall many instances where the family came to know about the existence of an insurance policy or valuable investments accidentally after the death of the head of the family. 

“Arrange your documents into two sets. One, where you need to store physical documents like PAN card, passport, insurance policies, and physical shares. The other set could include documents like mutual fund statements, bank statements, where retaining physical copies is not important,” says Mukund Seshadri, partner at MS Financial Planners. “Involve your family and keep them informed about your investments so that it can be passed on to them with ease in case there is a need. Check your documents for accurate names tallying with your PAN card and nominate a person if you have not done so,” says Vishal Dhawan, chief financial planner at Plan Ahead Wealth Advisors. 

SORTING THE DOCUMENTS Keep the originals of documents related to your life insurance policy, medical insurance policy, PAN card, passport, driving licence safely. Not having original copies of these may cause a lot of inconvenience. “Keep these documents in one separate folder. You could also get them scanned and store them in your computer or on a pen drive,” says Vishal Dhawan. 
 
If you hold physical shares, get them dematerialised immediately through a depository participant like a bank or a broker. “Today you cannot sell physical shares. In case you need the money, you would be stuck. Hence get them dematerialised at the earliest,” says Sumeet Vaid, founder, Ffreedom Financial Planners.
Having a demat account also helps to take care of your dividend warrants. All the dividends coming in for such shares will electronically be credited to your bank account, and hence there is no risk of losing them. In case of mutual fund investments, there are multiple statements which you receive. There is a quarterly statement from the registrar and an annual statement from the mutual fund you have invested in. Storing all statements in physical form is not essential. “Your last transaction statement will give you details of all the investments in your folio,” says Vishal Dhawan. If you are comfortable, try storing them electronically. “We suggest investors open a new e-mail ID and register that with mutual funds. Once this is done, all your transaction statements will go to this mail ID, and it will be easier for you to locate them when required,” says Lovaii Navlakhi, founder and CEO, International Money Matters. 

While sorting the physical documents, you must also ensure that the documents are in order. For example, ensure that in a mutual fund statement the names of the holders should match that on the PAN cards. In case you have investments in a single name, ensure that you nominate a person. 

You can also scan important physical documents and store them electronically. Many firms like ICICIdirect, oneassist and Perfios, among others, offer you electronic lockers to store your financial documents. The facility serves as a backup and retrieval tool for important documents. It can be used to store electronically scanned copies of important documents like legal agreements, policy documents, degree certificates and bank statements. “In case you were to lose any physical copy of any document or need a printout and you are not carrying one, you can always access these copies from anywhere in the world,” says Hariharan M, vicepresident, ICICI Securities. 

KEEP YOUR FAMILY INVOLVED Don’t keep your investments and insurance policies as the biggest surprise for your family after your death. Keep at least one member of the family in the loop, so that the person can do the needful. “At least one person close to you should be aware of your finances. In case people are hesitant to talk about numbers with their family or children, we ask them to share details with a close friend or a family member,” says Harshvardhan Roongta, chief financial planner, Roongta Securities. You can also inform your family about these matters without giving them the numbers. For example, you can casually mention that you have a life insurance policy from XYZ company. Or you have invested in some mutual fund schemes. “Whenever we make a financial plan or review it, we always insist that both partners are present for each meeting. In case a person is single, another family member must be present,” says Mukund Seshadri. 

Source : Prashant Mahesh, The Economics Times, 7/12/2012

IS IT THE RIGHT TIME TO INVEST IN PUBLIC ISSUES?

  Though you may be tempted by the IPOs, it is important to consider the reason for the issuance as well as the company’s valuation and fundamentals before investing in one. 

   After remaining dormant for several quarters, the primary market is showing signs of revival. A slew of public issues is slated to come out in the coming months, much to the delight of the market participants. “The revival of the primary market is a positive sign because it reflects the improving sentiment. If any of the bigger issues turns out to be successful, it will enhance the sentiment further,” says Vibhav Kapoor, group CIO, IL&FS.

    The forthcoming public issues can be broadly classified into three categories. The first lot includes IPOs of companies that were waiting for the sentiment to improve before tapping the market. Among these are some mega IPOs, including Bharti Infratel. If the company manages to raise around 4,500 crore as planned, it will be the biggest IPO since the Coal India issue in November 2010. Besides the IPOs, there are follow-on public offers (FPOs) and rights issues from the existing companies, which want to raise funds for specific needs.

    The next set has PSUs that have been put on the block by the government. The disinvestment proceeds will be used to reduce the fiscal deficit. The third category comprises private-sector companies with a very high promoter holding. These companies have been asked by Sebi to reduce their promoter holding to 75% before June 2013. They may launch FPOs or take the new offer for sale (OFS) route offered by Sebi.

    Will this supply of new shares suck out the liquidity and bring down the overall market? Perhaps not, at least not in the near term. Experts believe there is no rush. “There is a pipeline of issues, but this can’t be called a rush. The companies are still deferring the issues because they are not able to get the right price,” says Prithvi Haldea, chairman and managing director, Prime Database.

    However, this does not apply to PSUs and companies that have been asked to reduce their promoter holdings. The decision to go public has been forced on these companies and they have to act in a time-bound manner. The government has already announced a divestment target of 30,000 crore for this fiscal year and PSU issues will flood the market before March 2013. Sebi, too, has not shown any inclination to extend the deadline. “If all the promoters come to the market close to the deadline, it will result in a pressure on the market,” says Kapoor.

    The increased supply may bring down the prices of individual stocks. Consider the impact of the OFS announcement by Hindustan Copper. The floating stock of the company (shares available for trading) was only 0.41% of the total equity. Its shares were quoting at 260 when the government decided to keep the minimum bidding price at 155. The additional supply could not be absorbed by the market even at this lower price and, finally, the issue was bailed out by LIC and some PSU banks. The Hindustan Copper shares hit the lower circuit for the next three days, and are currently trading below the floor price of 155.

    Experts believe the story may not be repeated with other PSU scrips that are expected to hit the market soon. “The proper price discovery did not happen at Hindustan Copper before the OFS issue because of lack of enough liquidity. However, this price discovery is already happening in the case of NTPC, SAIL, etc, and, hence, the issues may be successful if the government is ready to give a reasonable discount to the current market price,” says Kapoor.

Invest or leave?

For investors, the big question is whether to invest in the new issues. Though there is a lot of hype surrounding public issues, the IPOs that have come out in the past two years have not impressed with their performance, with the BSE IPO Index underperforming the broader market (see chart).

    Theoretically, the best time to invest in a stock is when it is about to start with its growth trajectory. So, IPOs give you an opportunity to participate in the growth prospects of that company. However, the reality is that investors can lose heavily if they put their money in overhyped IPOs.

    Why do investors get excited about IPOs? First, unlike other stocks that are already listed in the market, IPOs are pushed by the company’s management, merchant bankers and brokerages. So, there is a concerted effort to market the shares. A lot of positive news and analyses are floating around during the launch of an IPO. Second, some recent IPOs have given excellent returns, even though several others have failed to live up to the expectations (see table). A good IPO can turn around your portfolio and, therefore, the hope that the next one turns out to be good attracts gullible investors to the primary market.

    The problem is that when stocks are doing well, a lot of IPOs flood the market, and it is important to separate the chaff. If you consider the IPOs that have given good returns, most of them are driven by the consumption theme. The consumer product companies have been leading the market rally for the past 2-3 years and, therefore, it is natural that those like Tribhovandas Bhimji Zaveri and Lovable Lingerie feature in the list of winners. The pharma sector is another hot sector now and this explains why Aanjaneya Lifecare is in the list.

    A good IPO is one that is priced reasonably, leaving enough on the table for the investor. Coal India was one such issue, which created wealth for investors despite the sectoral and regulatory headwinds faced by the company. So the rules for evaluating an IPO are no different from choosing a stock in the secondary market. “Investors should only go with companies that have quality management, high growth rate, good profitability and are offered at reasonable valuations. After all, these IPO stocks are part of the same stock market,” says Kapoor.

    Since most IPOs will hit the market with a lot of hype, it is possible that retail investors get carried away. Choose a wrong stock and it could kill your portfolio. Here are some danger signs to watch out for: Exit strategy for promoters: Be careful if the IPO is an exit strategy for the promoters, private equity investors and venture capitalists, since most of them will be waiting for an opportunity to dump the stock on gullible investors. Study the offer document to know how much stake is being offloaded through the public issue. If the percentage is very high, it is a red flag for investors. Flavour of the month: Avoid low-quality companies trying to ride the theme of the month. Market veterans will recall how several finance companies added ‘infotech’ to their names before coming out with IPOs during the dotcom boom. Valuation is key: The pricing of the IPO is of utmost importance. Even a good quality company at a high price is a bad investment. The Reliance Power IPO was priced at a much higher valuation compared with several listed power generators, such as NTPC and Tata Power. Make sure that the stock is not priced higher than the other stocks in the sector. Compare the PE ratios of the company with those of its peers.

    The list of IPOs in the pipeline is very long, but experts think that only a few of these will prove to be worthwhile investments. “Except the Bharti Infratel

    issue, which may hit the market soon,

    there is nothing much for retail

    investors,” says Haldia.

Should you sell on listing?

Given the losses from IPOs, a lot of investors in the primary market book profits on the listing

    day itself. However, this is not a

    recommended strategy because the listing day price is very volatile and often manipulated. Even good IPOs can have a shaky start. Tribhovandas Bhimji Zaveri lost money on the listing day, but recovered later. If you had exited at a loss on the listing day, you would have missed out on the opportunity to earn 139% returns.

    Even so, many investors swear by this method. Of the 59 IPOs in the past two years, 34 (or 58%) would have generated positive returns if you had sold them on the first day of trading (computed on a closing basis, because the first quote is mostly manipulated and it is almost impossible for anyone to get out at that price). Some of the big losers like Birla Medispa and Inventure Growth & Securities had generated handsome listing gains.

FPOs & OFS   

 The follow-on public offerings are easier to evaluate because the stock is already listed in the market and the data is readily available for the past several years. Besides, you know about the aptitude of the management, as well as the growth prospects of the company. The only thing to watch out here is the manner in which the company intends to use the proceeds. Is the money being raised to expand the business or just offload shares held by promoters?

    As mentioned earlier, most of the FPOs and OFSs are not business decisions but have been forced by circumstances. The PSUs are coming out with public issues because the government needs the money to bridge the fiscal deficit. Some of the private-sector companies that need to bring their promoter stake to 75% are also coming out with FPOs. Though bad for the company, forced issues are good for the retail investors because they are a great investment opportunity. Those who had bought the shares of MNCs, which were forced to go public in 1977, will vouch for this because many of them have made fortunes from them.

Source : Narendra Nathan, Times of India, 03/12/2012

 

FORMATING OF TRIANGLES

These patterns are created when the market interest and the volume of a stock start falling.

    After dealing with several major patterns, we shall now consider the minor ones. Since most of the former occur at the end of a sustained bull or bear market, these are also known as ‘reversal’ patterns. On the other hand, most of the minor formations occur in the middle of an uptrend or downtrend and, therefore, are usually clubbed as ‘continuation’ patterns. However, traders should note that some minor patterns may act as reversal as well as continuation, depending on the place at which they occur and the manner in which the final breakout takes place. The triangle pattern is the best example of this.
    Triangles are formed when the market loses interest in a counter. The market activity in any stock usually reduces when the direction of the move (up or down) is not clear. During this sideways movement, the volatility, or the trading range within which the price moves, also comes down. This explains why the triangle is the widest during the formative stage and narrows as time progresses. Since triangles are formed when the market’s interest in a counter falls, the volume also usually falls during this period. There are three types of triangles: symmetrical, ascending and descending. Since each has distinct properties, let us consider each one separately. 

Symmetrical Symmetrical triangles are formed when neither the bulls nor bears have an upper hand in a directionless market and can be identified when the stock makes lower highs and higher lows. If you connect these lower highs, you get a falling trend line. This resistance line is also known as supply line. Similarly, the uptrend line that is formed when you connect the higher lows is also known as support or demand line. As is evident from the HDIL chart, both these trend lines form a symmetrical triangle. The time taken to form this pattern is very important and usually takes 1-3 months. If it is formed in a smaller time frame, say 10-15 days, it is called a ‘pennant’.
    Though a symmetrical triangle is commonly considered a continuation pattern, there are instances when it acts as reversal pattern and, hence, one needs to wait for the final breakout—when the price goes above the resistance line or falls below the support line—to identify the direction of next move. For instance, a breakout on the upside when the market is in an uptrend, can be considered a continuation pattern. However, a downward breakout after an uptrend should be considered a reversal pattern. Similarly, an upward breakout after a downtrend is a reversal pattern, while a downward breakout after a downtrend is a continuation pattern. The symmetrical triangle formed in the HDIL chart is a continuation pattern and the price continued to drop after the downward breakout.
    Since the trading range comes down during the formation of a symmetrical triangle, the chance of a false breakout is high (any increase in volatility can result in the price going above or below these lines). To avoid this, one needs to introduce strict breakout rules. First, the breakout has to occur on the basis of closing, which means that any intra-day penetration of lines is usually ignored. Some traders also apply the price-based rule, that is, the price should move at least 3% above or below the breakout point; or the time-based rule, that is, the price needs to close above or below the breakout points for three consecutive days. Like any other trading pattern, the breakout should be supported by volume, especially when it is an upward breakout. An accelerated price movement, gap formation, etc, can also be considered as breakout confirmation. Once the breakout is confirmed, the next step is to identify the possible target price. This is arrived at by measuring the widest distance of the symmetrical triangle and adding/deducting this value to/from the final breakout point. 

Ascending Unlike a symmetrical triangle, the resistance line is almost horizontal here, which means that the highs need not be at the exact price and are close to each other. The lows, on the other hand, keep on increasing on a successive basis. This hint at the bulls slowly gaining control, though they are not able to break the resistance level. As is evident in the Canara Bank chart, an ascending triangle is usually formed in the middle of an uptrend and, therefore, can be considered a bullish continuation pattern. However, investors need to be careful about its appearance even in the middle of a downtrend because it can signal a possible trend reversal. Irrespective of the place at which it is formed, the ascending triangle indicates accumulation and, therefore, has a definitive bullish bias even before the breakout occurs. However, the downward breakout is not ruled out and, hence, traders should take positions only after an upward breakout is confirmed. The other rules mentioned for a symmetric triangle are applicable here as well. 

Descending A descending triangle is a mirror image of the ascending triangle and is formed when the supports are at the same level but the highs keep coming down, that is, form a falling resistance line. Descending triangles are formed when a group of investors wants to sell a large quantity, but only above a certain price level. Since these investors stop selling once the price goes below the threshold, this level acts as a support. There may even be instances of these sellers buying small quantities at that price to support the counter from falling below it. Once the sellers finish their quota, they withdraw the artificial support and the price starts tumbling. The descending triangles are usually formed in a downtrend and, therefore, are treated as a continuation pattern. However, one should pay attention if one notices a descending triangle in an uptrend because it can act as a trend reversal signal (see ABB chart). Irrespective of where it is formed, a descending triangle is a distribution pattern and, hence, has a bearish bias even before the breakout. However, it is better to wait for a final downward breakout before assuming trading positions. The other rules about volume, target, etc, are also applicable here. 

Next: Flag, wedge
    and pennant

Source: Narendra Nathan, The Economics Times,  26/11/2012

HOW TO AVOID BEING CHEATED

Ask and write down answers to important questions to ensure your financial safety, says Uma Shashikant. 

  Alot of people want to know about simple things they can do to protect themselves from fraud. They want to make informed decisions, but wonder if it means learning too many complex concepts and grappling with jargon. I would propose a simple approach. Before making a financial decision, take a sheet of paper and write down the answers to a few important questions. Do it yourself, or engage your adviser to provide the answers. Keep it brief, to the point. 

    First, ask for the name of the entity whose product you plan to buy. I have met savvy, smart investors fumbling when asked the name of the issuer. A close friend insisted that the insurance he had bought was actually a mutual fund product by the same promoting bank. However, when he went through the papers, he sheepishly found out the truth. Many stock operators do not have membership with exchanges. Refuse to deal with them unless you find out about the registered broker in whose name your trade will be executed, so you know who you are dealing with. Ensure you have this name for all your papers, contract notes, documents or whatever you receive as proof of investment. 

    Second, ask if the entity is accountable to any regulatory authority. The answer has to be Sebi, RBI, Irda, PFRDA or the government. If only the investors in Stock Guru had asked for this piece of information. There are elaborate laws on the type of firms that can raise money from the public and under what conditions. Unfortunately, none of the financial regulators have the resources to monitor and prohibit mushrooming operators. These fraudulent entities have to be checked by local police and booked under criminal law, even if they engage in financial frauds. The best recourse is to ask for the regulator’s name. It is mandatory for them to show you proof of their registration if you ask for it. 

    Third, ask for the document that carries the name of the product and proof that it has met with approvals from a regulator. Do not go by printed pamphlets, advertisements, hand-outs, or presentations. Demand a copy of the offer document, an information memorandum, a detailed formal offer that has the name of the entity you have listed above. You don’t have to read the legalese, you don’t need a copy of this voluminous document, but you need to know it exists and that the scheme is not a concoction. Ignore messages that tell you to invest an amount, earn an assured sum, and save taxes. Ask for the name of the product, and ask for confirmation that it exists, and was created by an entity you can identify and confirm. 

    Fourth, ask how your money will be used and how it will generate returns. Do not accept generalities. If it is an IPO, ask for the business of the company that is raising money. If it is a mutual fund, write down where it will invest. Will it be equity, debt or gold? If you bought a bond of a finance company, write down its main business. If your money is being used to offer other loans, you know that your return will depend on the quality of those loans. You also need to ask how you can find out what happened to the money. 

    Fifth, write down your obligations in full. If an insurance agent tells you that you have to pay a single premium, or for only five years, put it on paper. Then ask the agent to show you where it is written that you should pay only this much. Know the fee you have to pay. If the stock broker tells you that you can buy stocks worth 10 lakh when your bank balance is 2 lakh, ask how the balance will be paid and when. If it is a futures contract, ask about the likely margin and how often you will have to pay. Sixth, ask what you will get, in 

 
    complete detail. Do not accept any assurance from anyone. If the answer is that your return will depend on the market value of your investment, make a note. Ask how often you will know what the said market value is, so you can evaluate how the investment is doing. If there is a dividend, pen it down and remember that dividend is a discretionary payment. If it is bond, there are multiple variations of the payment you will get and how. So make sure you understand these choices and are able to note, in rupees, how much interest will be paid to you and when. 

    Seventh, insist on knowing what can go wrong. Several relationship managers are keen sellers and may only talk to you about the positives for the fear of losing you as a client. Kill this fraud by asking upfront about what can go wrong. If you are buying an IPO, you need to know that the share price may be lower than the purchase price. If you are taking a bond, you need to know that the credit rating might change. If you are investing in a mutual fund, you need to know that the returns depend on the market, and can be more or less than the market indices. Write down what you should look out for and ask where you will get the information. Make sure you know what happens if you do not pay the premium. 

    Eighth, ask if you have to stay with the product for any specific period of time. What are your options if your situation changes? What happens if it does not? Does your credit card have a charge after the first year? Does your loan enable you to pay it earlier? Does your insurance policy allow you to draw some of the funds? Does your mutual fund allow you to redeem money, when needed? Write down this detail in brief, simple terms that you understand. 

    Review this sheet with your financial adviser. If you invest in a team—which is a good idea—pool your sheets and review it. Product literature is filled with jargon; take your time to figure out the product on your terms, in your language. In this process, you will either understand the investments better, or you will be able to evaluate how competent and honest your adviser is. Either way, you win.

Source: by Uma Shashikant, The Economic Times, 26/11/2012