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'Government should fix a fair price for stocks'

The stock market work on the free market principle. So, it is almost impossible to fix a price for the stocks. The investors who want to play it safe can always go for debt instruments such as fixed deposits, National Savings Certificates and the Public Provident Fund.

     Print Edition: November 27, 2008

In the story on blue chips (10 Blue Chips you Can Now Afford), you have highlighted 10 stocks to buy. But given the current volatility in the equity markets, should one buy stocks now? No one is sure when the markets will stabilise and the stock prices may go down further.

— Prakash Chugh, Jamnagar

It’s true that the markets are in a state of flux and it is difficult to predict where they are headed. It isn’t wise for retail investors to speculate or time the markets. That is why we have picked 10 stocks to invest in. You may not profit in the short term by buying these stocks, but they could give significant returns in the long run.

One of the articles in the mutual fund series (What’s in an NAV? ) explained how the net asset value is calculated. However, it did not mention the accretion that takes place in the form of dividends, rights issues, bonuses, etc., with respect to the securities in which the mutual fund schemes invest. Since the investments are made on behalf of the unitholders, all such accretions come to them and should form a part of the NAV. Please clarify.

— V.N. Bhat, Mumbai

You are correct. Dividends, rights issues and bonuses of a security increase the net assets of a mutual fund, thereby increasing the NAV. When you redeem the mutual fund units, you will get the benefit of these accretions.

Most investors are not able to judge the fair price of shares or the levels of the Nifty and the Sensex. So they tend to become confused while buying or selling stocks. The government fixes a fair price for commodities such as wheat and sugar as the maximum retail price or MRP. Why is this practice not followed in stocks or indices?

— Vinod B. Chatwani, Ahmedabad

The stock market and the indices work on the free market principle. So, it is almost impossible to fix a price for the stocks. The investors are aware of the risk they are taking while dabbling in stocks, but they do so in the belief that equities will give the best returns in the long term. The investors who want to play it safe can always go for debt instruments such as fixed deposits, National Savings Certificates and the Public Provident Fund, where one knows the returns one will get after a fixed period of time.

In the story on choosing your salary (How to Redesign your Pay Structure), you have mentioned some components as ‘no FBT’ and some as ‘with FBT’. The fringe benefit tax is paid by an employer, so how does it affect the employees?

— Manjunath, Bengaluru

The FBT is tax that is paid by an employer on certain perks that are provided to the employees. In many cases, the FBT is passed on to the employees by including it in their cost-to-company (CTC) packages. This may not always be disclosed by the company, so one should ask for the details of the CTC before joining.

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