My thoughts on equities, fixed deposits and gold

by Manshu on August 26, 2011

in Opinion

This week has seen a lot of unusual activity along different asset classes and has continued to add to the environment of uncertainty that was prevailing earlier (and I’m only talking about economic environment here).

Wednesday saw the NCD of India Infoline list at a big discount of 8%, which hasn’t happened before, and gold fell quite a bit in the US markets that day as well. On Thursday, gold fell about 5% in a day in India, which is very unusual for it, and to the best of my knowledge has never happened in India.

The same day saw a fall of 1.7% in the German index DAX, and other stock markets globally aren’t exactly having a peachy time either.

In this context, Kartavi Dave wrote a very interesting comment and I thought I’d write a full post detailing a response to it.

First, the comment.

Manshu, we are awaiting your new post.
Please also keep in mind following points:
In India, What General (Middle Class) ppl should do ?
• Interest rates on Bank Deposits are around 10% .
• Gold Prices are rising like any thing. one article says that it will rise for 2 to 3 years and thereafter the GOLD BUBBLE may burst and may show bottom. So, long term investor should avoid GOLD.
• Some News Paper articles said that this year share market (and hence Mutual Funds) will not give better return than Prevailing Fixed Deposits ( around 10% )
A small investor cry out … Aare bhai…. Kare to Kya kare ? !!
1. Should one ( in India) Sell out all our M.Funds / Share holdings and invest in Bank Fixed deposits.
2. Should one go for a SIP for Gold ETF (purchasing fixed units every month) for 10 Years for a good purpose (say child marriage or mere investment).
3. Should one buy a house (for investment) ?
My humble request to address all above points in your next post.
With regards.
Kartavi.

 

In terms of the big picture, I don’t feel that anything has happened that should change the fundamental approach of an investor towards savings and investments. In the past decade we have seen several very bad crashes due to the great recession, real estate bubble, 9/11 and dot com bubble, and all these events tanked the market, but at least the Indian markets have continued to grow in that period. I feel that even if we hit a global double dip recession – India will come out of it better than other countries.

In terms of the specific items listed in Kartavi’s comment – I think it’s a really bad idea to sell all stocks or mutual funds and move into fixed deposits only.

You should have a balance of both, and if you have SIPs with good mutual funds then you should continue those regardless of the market uncertainty. Volatility is in the nature of the markets, and I wouldn’t let these wild mood swings change my approach to investing.

No one knows what the bottom of the market is so you can’t wait for the fall to play out as that’s like catching falling knives. This is essentially the same thing I wrote in October 2008 (of course there weren’t many people reading then), and if you remember the uncertainty surrounding the economy at that time – it was way higher than today.

Stick to your SIPs and equity investments, and don’t let the market movement scare you out of them and sell at a deep loss.

But all your money shouldn’t be there either. You should have fixed income instruments, and I think it makes sense to look at NCDs in addition to fixed deposits also.

A lot of them have launched and some are even trading in the market for a discount. Today I saw that Religare Invest has also filed its papers with SEBI for the launch of a NCD so that’s another one that’s coming up. I think it makes sense to buy a few of these from the stock market when they are trading at a discount in addition to fixed deposits.

A point about both these things is that a lot of you will invest in 80C investments during the tax season – you can think about those now itself and see if you want to buy some ELSS mutual funds, or do tax saving fixed deposits etc.

On the point of gold, regular readers know my aversion to gold, and I have been writing about this since at least March 2009. Gold has risen by about 100% in the time, but if anything, my aversion has become stronger in the last few days looking at all the activity in it.

For a brief period this week the world’s biggest gold ETF – SPDR Gold Shares became the world’s biggest ETF as well, and it owns more than 1.1 million kilos of gold! In contrast the GoldBeES – India’s prominent gold ETF must own about 8,500 kilos of gold. This should show you where the trading market of gold really is, and also drive home the fact that gold prices will move in tandem globally.

I’m going to sit at the sidelines as far as gold is concerned, but if you do want to buy it then buy it systematically, and don’t let it become more than 5 or 10% of your portfolio. I see a lot of folks saying very proudly how gold is the biggest component of their portfolio so even though the market has crashed they have made money, but the question is what if they are wrong about the future of gold?

What if they are wrong like the people who owned real estate stocks were wrong, and the people who owned IT stocks before them were wrong?

If you truly own so much gold, and find that prices go back to where they were two years ago – that will destroy your portfolio.

Do you really want to take that chance?

The last point in Kartavi’s comment is about a house, and that’s the thing that is more emotional than financial for a lot of people, and is a very personal decision. I would personally never take a loan that puts me so deep under debt that it takes me 20 years to repay that and it leaves nothing else to do, and I wouldn’t advise anyone else to do that either. Unfortunately, at today’s prices a lot of deals do exactly that. I understand that a house means more than money to a lot of people so it’s for you to decide, but I myself wouldn’t stretch to buy property at today’s prices.

This is how I view the current situation, the way I would behave myself regarding my finances. By now, it should be clear to most regular readers that this is driven by a very long term outlook on the markets, and hasn’t changed at all since I first started writing. This is what I would do, and I’ll be happy to hear what you make of the current situation and if that has changed your outlook in any way.

{ 52 comments… read them below or add one }

Ashish August 26, 2011 at 6:47 am

Hey Manshu,

Nice post and I second your opinion on all points. A quick question for you. I have been trying to google to understand how does the trading of NCD works but didn’t quite find much. I want to understand if I buy a NCD at 980 whose face value is 1000, how does the interest component work. I’m assuming it is still paid on 1000. Is that correct?

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Manshu August 26, 2011 at 8:49 pm

Yeah that’s right – you get paid the interest on the NCD regardless of the price you have paid. I have written a basic intro post on NCDs, and wrote a part 2 which is lying in drafts and is already over a 1000 words. Will publish that next week and then a part 3 which should take care of all these questions.

You had any other specific questions? I can include them in the post as well.

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Ashish August 26, 2011 at 8:50 pm

Then why would anyone buy a NCD at premium from the market if the interest is always paid on face value?

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Ashok August 28, 2011 at 3:28 pm

@Ashish,

If the interest rates fall, people would be interested to buy the NCDs at a premium.

An NCD yielding 12%, for e.g. is more valuable at Rs.1050/- than another newer NCD of face value 1000/- yielding just 10%.

That is why bond prices go up when Interest rates come down, and consequently it is a good thing to invest in Bond/Income funds when interest rates start dropping.

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Ashish August 30, 2011 at 8:42 am

@Ashok

Thanks for responding Ashok.
Assuming the NCD is for 1000/- with a 12% interest. That means an annual interest of 120/-. Now subtracting the cost of bond which is 1050/- net gain is only 70/-

Whereas in the other case you mentioned the net gain is 10% of 1000/- which is 100/-.

Is my assumption correct?

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Ashok August 30, 2011 at 9:35 am

@Ashish,

I gave an approximation. Didn’t do much rigourous math on the example. But you get the drift.
The bond/NCD price may not increase to 1050/- as I had incorrectly put, but it will increase to say 1015/- where there is a net gain compared to a bond of 1000/- yielding 10%.

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Vijay August 26, 2011 at 7:22 am

Dear Manshu, just thought that i would add my ten cents worth of personal take on the issue and tell you what i have done. Having become ‘financially wise’ for the past one year (after being enlightened by blogs like yours and some magazines), what i have done is to start small SIPs in MFs (majority being large cap, equity diversified, five / four star rated, good record, AUM etc), SIP in GOLD BEES (1 unit / month), lock up a decent chunk in FD (>9%) & an FMP (>1 year) in Feb (to avoid double taxation). Converted my Salary account to a Sweep in FD. Having invested in an apartment last year (thanks to teaser loans offering 3 year fixed rate), i am continuing with my EMIs (and have done a prepayment to bring down the interest component). I agree with you that 1.Given the possibility of a property bubble 2.Rising inflation and 3.Absence of good ‘teaser rates’ offering fixed rates for 3 years, it is not a good option to go for a house in the current scenario (unless it were a steal and you have the wherewithal). Given the uncertainties of the market, i am a bit wary of NCDs…… I feel one should stay away unless they are AAA rated…. FD’s seem to be a better option for me. Although i have been equaly wary about Gold as an asset class, i felt that i should not miss out on a good run either and i thought that it is not a bad idea to do so in a disciplined manner with an SIP in a Gold ETF. I feel that, for the average middle class investor (which includes me), one should have eggs in all the baskets and never go overboard with any one asset class. Do let me know your views.

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Manshu August 26, 2011 at 8:56 pm

Congratulations on your house, and I see you have spent a considerable thought on your investment process – I think that should be a post in itself!

Only observation I have about NCDs are that some of them are offering good yields in the range of 13% or so, and admittedly these are the lower quality ones, but one should keep them in the radar.

Thanks for your comment!

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Manshu August 29, 2011 at 8:49 pm

Dear Vijay,

I had a question I was hoping you would be able to answer. Does your broker charge STT on your gold ETF purchase?

I think they shouldn’t be, but I’ve read some posts online about people saying that STT is being charged, so I wanted to check with you since you have done these transactions in the past.

Thanks!

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dev August 26, 2011 at 8:37 am

Hello Manshu,

Can you guide me how NCD at a discount when listed are better than the listing time subscription ?

I think no other site has disclosed this. If you could put some light to it, that would be really helpful 🙂

Thanks
Dev

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Manshu August 26, 2011 at 8:57 pm

As Ashish said earlier, the interest you get is still on the whole thing so its like getting an instrument for Rs. 900 when the price was Rs. 1000, and that effectively pushes the yield higher. I will do a full post on this in the coming week.

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harinee August 26, 2011 at 9:16 am

Hi
When you talk about FD I think people should look at Post Office schemes also.You can get a decent return above 10% if you put your money in MIP and have the interest in recurring deposit.PPF also offers a fairly good interest rate for the period.
As for real estate its an impossible situation for the common man. You cant wait till you save the money to buy a house because it seems to go only way that is up.Realty in India is very much different from Western countries, you cannot apply same laws here. The population ensures that the demand remains ahead of supply and realtors will sit on a property for an infinite period than bring down the rates.
A US-like situation will not happen here so waiting to invest in a house will keep you waiting endlessly.
Again Gold may continue its march upwards if US really gets into double-dip recession which looks very likely.

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Manshu August 26, 2011 at 9:03 pm

Yeah, Post Offices are also good, but with some other banks giving 10+% rates I’ve seen that prefer people banks to post office because of the better service levels.

But yeah, definitely a good point to bring up.

I disagree with your view on real estate in India – and I heard a lot of similar views about real estate in the US. Now, there are some similar or even crazier things going on in Chinese real estate, and to me it just doesn’t look like this can go endlessly.

I guess we should agree to disagree on this point 🙂

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Paresh August 27, 2011 at 2:45 pm

Yes.There are concerns about post office investment. My fathers one of the NSC was expired some time back and we went to post office..they forced to make follow ups for our own money and then only we get money back.

I have never seen complete face of postmaster sitting behind a narrow window…..what service one can expect??

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Kartavi Dave August 27, 2011 at 6:28 pm

Bank Deposit compunds quarterly, Post Office (NSC etc) compunds Half yearly and PPF compounds at yearly rest.

I think before concentrating mere on interest rate figures, this should be also in mind.

About Real Estate, I agree with Manshu and like to add that…

a middle class person can do either of two.

ONE : pay EMI for 20 years and have a house.
OR : have a SIP/RD of the amount of EMI and have handsome chunk of fund after 20 years.

But there is eternal question : which one will be proved better ?

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Paresh August 27, 2011 at 6:49 pm

Please do not forget one thing.
Home is a among the basic need.
We can’t measure each and every things with respect to returns and investment.

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Ashok August 28, 2011 at 3:37 pm

I would agree with Manshu here. But rather than comparing with US, I would compare India’s situation now with Japan in the 1980s – Fast growing economy, urbanization, lack of space (in the cities) etc. But then it went into bubble zone and then crashed.

As more financial literacy kicks in, people will start to realise that “owning” a house is a millstone around the neck.

As for me, I cleared off my 4 year old loan as I had some extra funds and I was not able to deploy it efficiently. So I preferred to prepay my home loan. The bank manager did his best to trap me into some other “high-yield ULIPs”, but then I am a reader of Manshu’s blog 🙂 !!

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Manshu August 29, 2011 at 5:16 am

hahaha, great last line 🙂

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Siddharth August 26, 2011 at 10:37 am

A trivial question perhaps. But where can I see the listing and price of the India Infoline NCD? I entered the market this month after a long time (I was paying off my home loan!! :)) and everything I bought just tanked.. even the NCD! 🙂

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Manshu August 26, 2011 at 9:06 pm

I struggled a lot to find that info myself until Shiv helped me with it. Here is the link he gave me.

http://www.nseindia.com/live_market/dynaContent/live_watch/get_quote/GetQuote.jsp?symbol=IIISL&series=N4

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Patrick August 26, 2011 at 10:43 am

Dude where’s the view ??????

You have only suggested an asset allocation exercise which is very important but are’nt supposed to stick your neck out as well when you have such fan following and give some direction !!!

Here’s what I think :

Gold it is for me 3000 $ to an ounce by Diwali.

Buy financial stocks ( SBI / AXIS / HDFC ) and some Infra stocks ( REL/ L&T etc.) , folks you will not get such prices for a long time to come.

NCDs…. look up on the secondary market, there are TATA Steel 10 year perpetual bonds making rounds for 11.8 and 11.5 percent, in 18 ~ 24 mths they will trade at a significant premium once the interest rates go down, the net returns could be well over 15% under that circumstance !!!

But asset allocate all along….. !!!

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Manshu August 27, 2011 at 4:26 am

On the contrary – I think that whatever little readership this blog has is because I don’t engage in punditry and prediction.

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Radhika August 26, 2011 at 10:45 am

Good one Manshu!

>>I would personally never take a loan that puts me so deep under debt that it takes me 20 years to repay that and it leaves nothing else to do,
But how else can one build a shelter for themselves in this high price real estate market? The recession of 2008 did not see steep fall in real estate prices. Just that the market was a bit dull. But it’s back to business now. For those whom home is not for investment but for living, what is the strategy?
Looking forward for your suggestions.

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Furqan August 26, 2011 at 3:32 pm

Harinee & Radhika have raised a valid point here.
Unless ofcourse one inherits some property its indeed almost impossible to get a shelter on one’s own resources. Proper planning and investment by parents in the early age of child is the only way out.

If parents are responsible enough to create a corpus for the child and then the child starts to add to it early in his life when there are no burden on his/her shoulder , will help him/her own a decent house.

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Manshu August 27, 2011 at 4:38 am

Hi Radhika,

I recently had a conversation with a friend about this, and the “problem” in his mind was that you can’t buy a house in Delhi (I think its true anywhere in the country right now) without getting neck deep into debt if you are a regular middle class guy.

And my thought on that was if the problem is that you can’t buy a house right now without getting neck deep into debt, and if your solution to that is take so much debt and buy a house that your life revolves around the EMI then your solution is worse than your problem.

I would hate to live a life that is dictated by EMI payments, and personally I think I will have a more meaningful life if I just focused on saving money, investing it and building wealth. I would much rather live on rent and do that for a very long time than take so much loan that my whole life revolves around it.

I don’t see how this situation can continue endlessly, and I also don’t see the urgency to buy a house. Either salaries will rise to match this, supply of housing will increase or prices will correct making them more affordable.

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austere August 26, 2011 at 12:05 pm

Spot on!
And FMPs?
I’m hanging on, did in 2008 too despite major – read major- pain.

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Manshu August 27, 2011 at 4:42 am

Sure, FMPs are also pretty good.

So, what was the cause of the major pain in 2008, and how is it looking for you now? Just curious to know how your investment strategy shaped over the years.

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Kartavi Dave August 26, 2011 at 7:29 pm

……. such a clear-cut and to-the-point guidence. A lot of Thanks to you, Manshu.
It will help so many middle class / small investors like me.
I have decided to follow all your advises meticulously, as below:
1. Not to move to fixed deposits by selling all stocks or mutual funds
2. To Stick to SIP and present equity investment.
3. To maintain a balance of FD, PF/PPF and MF (40%, 30% and 25% of the portfolio respectively)
with a goal like Child-Education, marriage, retirement.
4. 80C investments :
a. not to sell ELSS even after lock-in period is over
b. Instead, To switch the ELSS (after lock-in-period is over) to growth from dividend, since
1. it will considered as new investment for this year
2. after DTC, growth option will save tax
3. We will not out of investment from mutual funds.
c. To go for tax saving FD also.
5. To buy GOLDBEES (1 unit every month) for next 10 yrs, for child-marriage purpose.
6. Not to buy any GOLD for investment purpose.
7. Not to buy a house for an investment purpose, at this price.
8. To buy a few of NCDs from the stock market when they are trading at a discount in addition to fixed deposits.
9. To review these investments once in a year.
Manshu, am I correct?
If not, please correct us.
Once again thanks and regards,
Kartavi.

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Vijay August 26, 2011 at 11:10 pm

Just adding to your list Kartavi (if i may), to consider a Term Insurance Plan, Family Floater Mediclaim, think of purchasing a few Gold coins (for easier liquidity) as well.

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Manshu August 27, 2011 at 4:51 am

Kartavi – sounds reasonable to me, as you do have most of your money in safe instruments I think about 70% or so that’s a good portion of that protected with reasonably good yields.

The ELSS portion forms the equity part I’m guessing so that gives you some immediate returns in the way of tax savings and that’s good as well. I would guess that for about 80% of your money you won’t have to worry about return *of* capital and that’s generally a good thing.

Since you are giving so much thought to this you might also consider hiring a financial planner who can really spend time with you and who is up to date on all financial products.

I say that because I don’t even know how old you are, and what you do, how much you make etc. and it’s virtually impossible to judge what you are doing without even knowing such basic things. A good planner can spend the time, and be useful in this respect.

Just something to keep in mind.

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Kartavi Dave August 27, 2011 at 5:33 pm

Thank you very much Manshu. I will keep in mind you view on about Fin. planner.

But still some questions arises in mind (as usual, a small investor’s mind !!)

Since last 6 months all funds going down and make their 52-wk lows every day. Is it correct to add new SIP from now onwards, for next 12 months OR better to invest in Bank F.D. ?

And still confused on choosing Tax Saving FD or ELSS, for 80c this year.

Though you are saying that it is not possible to predict which one will give better return, we can not stop to ask you.

Please give your views, which have always proved valuable to many of us.
Regards,
Kartavi.

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Manshu August 29, 2011 at 5:37 am

Well, what I did during the last downturn is continue buying stocks, and I’m fairly certain that I’m going to continue investing in shares even in this downturn. So, that’s what I would do, I know that I won’t need the money I invest in shares for a few years for now, so I’m comfortable even if the market is subdued for a year or two, something that I sometimes hope for also.

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Kartavi Dave August 27, 2011 at 9:42 am

thanks vijay.

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dev August 26, 2011 at 8:53 pm

On the other hand, why would anyone buy NCD at listing when they are available at a discount on the exchange ?

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Manshu August 27, 2011 at 4:44 am

Because you don’t know if they will list at a discount or not, IIIFL was the first one that listed on a discount and before that they were listing at a slight premium.

Also, there is no way to tell if a future NCD will list at a discount or not.

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austere August 27, 2011 at 6:47 pm

My two paisa worth on the house conundrum– if you know you are going to be in a city for a prolonged period– buy. I was stupid, I disliked Mumbai on shifting in 1998, never bought and ended up buying very tiny apartment at astronomical cost in 2011. Better decision would have been to buy then, even a small place, so you ride the curve and can sell or upgrade later. But get your foot in the door.

Kartavi- PO MIS has quarterly compounding. And I’ve found the staff courteous, maybe because non-metro town.

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Ashok August 28, 2011 at 4:00 pm

On the house conundrum: This goes to the 25-35 year olds, who are the majority of buyers. My advice – Do NOT buy a house. Why?

For a 15-20 year timeframe, you cannot predict where your career will take you. You cannot predict which part of the city your job will always be. You cannot predict where your spouse’ work place would be. You cannot predict where your kids school/college will be.

In short it is HIGHLY LIKELY, that you will have to shift to a rented house (in another city, locality) while you have to rent out your flat. Rental yields in India are 2-3 %.

What do you get when buy a small 2-BHK flat when you are 30?
1. Peace of mind for a couple of years
2. Some social brownie points amongs friends and relatives.
3. Longer commute times either for you or your spouse… You most likely will not get a house near to your office or your office itself will shift.
4. 2-3% rental if you shift out and rent out your own flat.
5. You will perpetually live in a 2-bhk flat in a crowded area/city for the rest of your life (including retired life).

Instead stay in a rented apartment and save aggressively. Get the flexibility to shift localities or cities for better career opportunities. Earn more. At the age of around 50, think about where you want to live your retired life. This most likely would be out of the rush of our crowded cities. Buy a big house/ flat quite away from the city (which will be cheaper) or in a tier-3 city and enjoy your retired life!!

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Manshu August 29, 2011 at 5:16 am

I love those thoughts, and they really resonate well with my own thought process as well.

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harinee August 28, 2011 at 7:05 pm

How does one buy listed NCDs? I dont see such an option in ICICIDirect.

Thanks

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Manshu August 29, 2011 at 5:14 am

You can buy them in the equity option itself Harinee. Just go to that section and search for quotes or start typing and it will suggest you names. So if you search for quotes starting with SBI – you will see that it comes up with a bunch of options and the NCDs are towards the bottom of the list.

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Harinee August 28, 2011 at 7:16 pm

I still don’t agree on the housing part.Applying scenarios of Japan and US to Indian market doesn’t seem right to me.Japan has a aging population and US has too much of land.Neither of this applies to India.Agree to disagree 🙂
Post office I have a good experience always. In fact last time my NSC was overdue by 2 months.The PO guys were nice enough to pay interest for that period also without my asking.And I live in a city.

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Paresh August 28, 2011 at 8:56 pm

You received the interest for overdue period of NSE.It is not about courtesy of PO but its as per rules stated for NSC.

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harinee August 28, 2011 at 9:36 pm

Agreed on rules but as I said the overall experience was good.

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Paresh August 28, 2011 at 10:08 pm

You are lucky then.

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austere August 30, 2011 at 11:05 am

No STT on Gold ETF. My broker cut by mistake and reversed the entry later.

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Manshu August 31, 2011 at 4:52 am

Yes, that’s exactly the kind of thing I wanted to know about. So it did happen and they did reverse it – great – thanks for leaving that comment.

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Radhika August 30, 2011 at 11:45 am

Thanks Manshu and others for detailed explaination.

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Sunil September 14, 2011 at 6:21 pm

Hi All,
I really appreciate for all the thoughts mentioned over here. But still I feel that we are missing a point here which has been a deep thought for me for more than an year. Why dont we buy a high/medium dividend yielding stocks.
If we do this we can acheive all the desires of
1. yearly dividends.(like FD’s)
2. Getting the advantage of bull market.(so investing in shares is done)
3. Tax free returns on profit or loss(which can be shown as tax free).(so no need to wait for 5years as such in ELSS or other 80C things)
What do you say on these?
If you got a similar idea, can you post some stocks that have these or is there any MF scheme available which serves this?

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Manshu September 14, 2011 at 6:27 pm

What’s a yield that you would consider high / medium?

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Sunil September 14, 2011 at 10:41 pm

Some thing which is in par of FD’s or equivalent of it…

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Manshu September 18, 2011 at 10:56 pm

No, I don’t think there is any share that gives around 10% dividend yield which is what banks offer right now. You can’t have your cake and eat it too I guess.

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Manshu September 18, 2011 at 10:58 pm

Sounds like magic to me 🙂

To the best of my knowledge there is no instrument that helps you do all of this at one go. If you want a higher return, you will need to take a higher risk.

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