Don’t Bank on Them

To grow, banks constantly need capital. That is bad for shareholders. Choose your bank stocks by following these principles

In any rapidly-growing economy, the financial sector leads the way. This seems logical since, to build any business, you first need capital. Also, with    rising disposable incomes, spending by individuals and, therefore financial transactions, increase, thus benefiting...

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  • FMPs Loose Shine

    In our March 29th issue, we argued that bank deposits are better than fixed maturity plans (FMPs) which were being pushed aggressively by mutual funds because the returns from an average FMP is no better than bank FDs. After interest rates on bank deposits started surging since late last year and after the Budget
    of 2007-08 reduced the tax attractiveness of FMPs, it made even less sense to go for FMPs.

    A couple of readers criticised this argument. They pointed to the high post-tax returns of FMPs as an argument in their favour.
    This is the most common trap that investors fall into: assuming that the recent high rate of returns will continue. It is called the “recency effect”. One writer even suggested that we were singing the praises of FDs and dishing FMPs at the behest of banks.

    FMPs are income schemes mostly of a closed-end nature that invest in fixed-income paper like bonds, government securities and money market instruments. Banks today offer anywhere between 9%-10% on fixed deposit schemes of up to 18 months. How were some FMPs able to beat that return in the past? Will they be able to offer, say, a 12% tax-free return, keeping their recent lead over FDs?

    This is the abridged version of the print article. In order not to miss the original, use the subscription option.

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    Forecasting Blunders

    “Prediction is very difficult, especially if it’s about the future,” said Nils Bohr, Nobel laureate in Physics. A recent study shows that finance heads, who confidently forecast stock movements, are often wrong

    Sometime in 1997, Ratan Tata invited all the major Telco suppliers to Lucknow to share his vision of where the industry was headed. He announced that Telco was going to double its...

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