@Leisure - Vol-13 | srei

@Leisure - Vol-13

Newsletter
 

The crash of the Dot Com rush

In the mid 1990s, there was a mad rush by investors to put their money in dot com companies. Globally there was a boom in the use of the Internet, and suddenly every Tom, Dick and Harry had a new business idea that could be implemented over the World Wide Web. Some of these ideas came from fresh college graduates, some from first time entrepreneurs and some from students who were still in the middle of graduate courses.

They took their ideas to rich venture capitalists and investment banks, who in their desire to increase profits saw only the ideas and not the soundness of the business plans. There was a blind belief in the power of the Internet, and soon there was a wave of new dot com companies being opened. When these companies went public, speculators on the stock exchanges bet heavily on them and the share price of the start ups began booming.

This Internet boom saw software engineers and computer wizards from India and China make their way to the United States in what was regarded as a modern day gold rush. This was also the time when countries like India and the Philippines hit upon the outsourcing model of doing business.

The investors wanted the start-ups to grow quickly, become giants and start yielding results quickly. But this was not possible when the business strategies were not sound. Towards the end of the 20th century, many of these companies began folding. They spent millions in venture capital funds and yielded no results. As dotcom upon dotcom began folding, the stock markets crashed, with the Nasdaq Composite losing 78% of its value between 2000 and 2002.

Millionaire techies had to close down their lavish lifestyles and return to humble living with the collapse of their companies. Many technology professionals returned to their homes in India and China with the collapse of these firms.

The Internet boom has since returned with investors becoming smarter by only investing in ideas they understand. New start-ups are taking their time to grow rather than rush to become tech giants. Indian tech companies which were based on strong ideals withstood the pressures of the bubble and continued to develop their outsourcing models.

The dotcom crash is a lesson that Internet start-ups should be examined just like other businesses before investing in them.

 
 

Taxation of NCDs

At a very basic level, NCDs operate similar to a fixed deposit,that is, your money is lent for a specific period to a borrower who pays out specified interest (coupon) payments periodically for the agreed tenure on the completion ofwhich repays you the principal. The similarity between the two ends there. While deposits are not traded in the secondary market, NCDs are. In other words, NCDs are bought and sold among investors at the prevailing market prices which may result in a gain or loss. So an NCD holder’s investment return comprises two components, namely, the coupon receipts and capital gains. But if the NCD is held till maturity, there is no possibility of capital gain or loss.

Also these two components are taxed differently as explained below:

  • Taxation of coupon receipts: Coupon receipts (i.e. interest income) are fully taxable in the hands of the NCD holder unless the NCD is issued as a tax-free instrument by the government or its authorized institutions. Coupon receipts are simply added to your total income and taxed according to your slab rate. For example, if your coupon receipts for 2014-15 amount to Rs.1 lakh and you are in the maximum tax slab of 30%, you will have to pay a tax of Rs.30,900 (inclusive of 3% education cess) on your coupon receipts.
  • Taxation of capital gains: A capital gain is nothing but a gain made on the price of the NCD while it is traded in the secondary market. Suppose you hold an NCD issued by ABC Ltd whose face value is Rs.1,000. In case you sell it before its maturity at say Rs.1,100, your gain of Rs.100 is your capital gain. You may also incur a capital loss if you happened to sell the NCDbelow its face value, say at Rs.900. The gain or loss from the sale is treated differently from the coupon receipts.

    Taxation of capital gains is based on the holding period. Holding periods of one year and above are treated as LONG TERM and below one year as SHORT TERM.

    • Taxation of LTCG: Long Term Capital Gains are taxed at a concessional rate of 10.3% of the gains. Suppose your LTCG is Rs.1 lakh, your tax liability would be Rs.10,300.
    • Taxation of STCG: Short Term capital Gains are simply added to your other taxable income and taxed at your applicable tax rate. Effectively, the tax treatment is same as that of the coupon receipts illustrated earlier.
  • Tax treatment of capital loss: Any loss incurred on the sale of NCD may be utilized to neutralize a similar capital gain,that is, a Short Term Capital Loss (STCL) may be adjusted against a STCG and a Long Term Capital Loss (LTCL) may be adjusted against an LTCG either in the same financial year or in the next eight financial years.

You as an investor would do well to understand the NCD taxation and pick your options in such a way that your tax impact is minimal so that you can maximize your investment returns.

 
 

Lipstick and cosmetics can gauge economic health

Leonard Lauder, the chairman of Estee Lauder, the famous cosmetics company, found that their sales of lipsticks increased every time the economic situation got a little rough. He proposed that recession and lipstick sales are interlinked, and sale of cosmetics could be an economic indicator, since women tend to substitute lipsticks for more expensive indulgences during times of economic recession. As an example, in the month following the 9/11 attacks, lipstick sales approximately doubled.

Human Behaviour

During recessions, people purchase cheaper productscompared with times of boom when people rarely restrain their spendthrift ways. People tend to be more profligate when they know that a steady stream of income is assured, and vice versa. Lipstick, being one of the cheapest cosmetic products, sees a hike in its sale during tough times, thereby proving to be a good indicator of the economic situation. The same concept also holds true for other less expensive cosmetic items, the underlying principle being that people will prefer cheap items to luxury during recession.

Nail polish may be the new lipstick

The "lipstick index" theory doesn't always work though, as lipstick sales have been on the decline since 2007 irrespective of the declining economy.This may be due to the entry of celebrity endorsed/celebrity branded lip wear. However, interestingly, nail polish seems to fit in the trend now. But still renaming the "lipstick index" as "nail polish index" won't work either because it is not about lipsticks or nail polishes; the underlying idea being thatduring difficult times people prefer smaller luxuries. Anyway, there may be no correlation between a single cosmetic product and recession, because lipstick and nail polish sales are known to grow even during prosperous times.

Makeup for good times and bad

It is always advisable to save and invest, whether good times or bad, to ensure that life runs without any major financial hiccups. There is a tendency to overspend during the good times, only to find that there is not enough savings available when bad times arrive. Savings and previous investments made during good times can largely affect the standard of life during a recession and other economic hardships. In very rough economic times, it is always better to save money by reducing extraneous expenditure and putting the money to good use.

Build a foundation

Setting long term goals and living up to them would ensure that you do not have to worry about such indices or the health of the economy, because if you had been saving and intelligently investing consistently over a period time, you would have already built a very firm financial base to support yourself even through the extended rough times.

Conclusion:

Whether you follow economic indices or not, always spend where you absolutely need to spend and save as much as you can. As far as lipstick is concerned, it is a small luxury, which you can indulge yourself with now and then.

 
 

Buddy Jokes

1. Son: Dad, there is a small get together in school tomorrow. Please come.
Dad: What do you mean by SMALL… Who all will be there?
Son: Only YOU, ME & PRINCIPAL…

2. An apple a day will keep anyone away, if thrown hard enough.

3. The human brain is the mostoutstanding object in world.
It functions 24 hours a day,365 days a year.
It functions right from the time we are born,and stops only when we enter the examination hall.

4. To be a “good professional”,always start to study late for “exams”.
Because it teaches how to manage “time”and tackle “emergencies”!

5. Who was the world’s first stock broker?
Noah – He floated his stock while the world was in liquidation.

6. What leads most people into debt?
Trying to catch up with people who are already there.

7. What’s the best way to get in touch with your long-lost relatives?
Win the lottery.

8. Human Resources Officer (asks a young engineer fresh out): And what starting salary are you looking for?
Engineer: In the region of $125,000 a year, depending on the benefits package.
Interviewer: Well, what would you say to a package of five weeks vacation, 14 paid holidays, full medical and dental, company matching retirement fund to 50% of salary, and a company car leased every two years, say, a red Corvette?
Engineer (sits up straight): Wow! Are you kidding?
Interviewer: Yeah, but you started it.