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Showing posts from February, 2011

Fixed Maturity Plans (FMPs)

  Fixed maturity plans or FMPs are closed-end in nature and it does not really protect them against risks including market, credit and liquidity risks. But the two significant risks to which FMPs are exposed to are interest rate risk and credit risks.   FMPs are designed to immunise investor against interest rate risk. However, as a plan is launched and money is collected, interest rates can fall before the money is invested and the funds will have to be invested at a lower rate. The non availability of a forward rate market in India is a chief contributor to interest rate risk in a FMP.   The credit portfolio in the plan can suffer in case of downgrades by rating agencies. Downgrades bring down the price of the securities as investors demand a higher risk premium on the asset leading to higher credit spreads. If the fund manager is forced to liquidate the security if it crosses a threshold rating levels, the scheme will suffer capital loss.   Hence, FMPs have the potential f

First step to effective financial planning

One very simple tool is a Financial Scorecard — the first step to effective financial planning. It captures total financial information in one page and comprises the four squares of A.       Income, B.      Expenses, C.      Assets and D.      Liabilities A) The Income square has two subheadings of Ø       Income from active sources and Ø       Income from passive sources. Active sources include employment salary, professional income and business income. Passive sources include property rent, interest on deposits, dividends and capital gains from stocks and royalties. Deductions of taxation, pension contribution and any other source will provide the net monthly income. B) The Expense square divides methodically expenses into various categories, like food, clothing and housing. These are followed by children, health and transportation related expenses. Appliances replacement costs and discretionary expenses are also added. EMIs for various loans will also be

All About Mutual Fund Investing

Mutual Funds are increasingly being touted as the retail investors' investment vehicle. But the key challenge is to choose the right fund. But it's simple. It only requires a bit of discipline and little time - hardly a cost for a secure financial future. Following are some rules to help invest better and attain your financial goals. Know Yourself: The first step towards achieving your goals is that you must know yourself. Try to get an idea of how much risk you can handle. Do a tolerance test for yourself. If your Rs 10,000 investment turning into Rs 6,000 upsets you--even though it could subsequently bounce back--an aggressive equity fund is not for you. Reality Check: What are your goals? If you need to turn Rs 10,000 into Rs 50,000 in two years, a medium term bond fund may not be the right answer. Work on setting realistic expectations for both your goals and your funds. Know What You Are Buying: Once you discovered yourself, spend some time for a close understanding

Right Investment can counter high inflation

Here's how you can offset the impact of soaring prices and aspirational lifestyles on your long-term savings    EVERY week, newspapers talk about rising or falling inflation. It could be just Wholesale Price Index ( WPI ), Consumer Price Index ( CPI ) or food inflation. In economic jargon, inflation, which is usually measured in percentage terms, refers to a sustained rise in prices of goods and services. There are various aspects to this simple economic indicator which reflect the value of money as of today. For example, you could buy a movie ticket for 20 paise in the 1960s, which will cost you 200 today. That's the effect of inflation which has reduced the worth of your money by increasing the cost of the ticket.    In India, inflation data is announced by the Union ministry of commerce every Thursday. India is possibly one of the few economies that still follow WPI instead of CPI, which has less relevance today. You should look at the components such as at primary artic

When to go for term plan over whole life insurance

A term insurance plan is suitable for young people, the reason being it offers high-risk cover at a very low cost   LIFE Insurance is essentially a long term financial arrangement to provide financial security to dependents. Various products are available in the market. Among them, term insurance is the purest form of life insurance. Life insurers have over the years observed that it is very difficult to market a financial product under which no financial benefit accrues to the person who pays the price. Therefore, products like endowment plans and Ulips have been devised. Though term insurance policies do not provide any return to the person who pays the premium, they offer mental peace and comfort about the future of spouse and children. Term insurance does not have any saving component and, hence, it is the cheapest insurance product. When a young man starts his career and family life, he suddenly finds himself committing to several obligations towards his children, spouse

Debt Mutual Funds: Returns similar on dividend, growth options of debt funds

Dividend distribution and capital gains taxes may impact returns   AT THE time of investing in debt funds it is not uncommon for investors to get confused when choosing between the growth option and the dividend option. The main area of investors' concern is the affect on returns considering the key differences between the two. An FCRB analysis, based on Capitaline NAV database, of the returns from the growth and monthly dividend options of 12 shortterm income funds, which provided both these options to investors, starkly brings out a negligible difference between the two in all the 12 funds (see table). The returns analysed, however, did not account for taxation. Dividend option provided for periodical payments (daily, weekly, monthly and quarterly) from the scheme's assets, which are either paid out to the investor or redeployed as fresh investment in the scheme as per the investor's choice. The fund manager sells a part of the assets to pay the dividends and net

Balance Your Portfolio to maximize your returns

   As a financial planner, my prayer to the Lord is that everyone should get one good jolt early in life with respect to their finances. That will ensure that they realise what money is and be more careful with it. Many people have wrong conceptions about money. They confuse speculation with investment. And God forbid, if they taste success early on, they continue to make blunders. And they keep increasing their stakes, just like a gambler, till one fine day it all crashes down like a pack of cards.    Balance is difficult to achieve. In one of the movies, a drunkard rummages through his kitchen for something valuable to sell and support his addiction and starts picking up spoons and ladles, as all other valuable things had been sold. Some are addicted to equity shares. For them, investments start and ends there. For them, investment means buying in the morning and squaring off in the evening. Many others do that several times during the day. There is no question of diversification.

Investing In Stocks Before They Hit Market

Investors like Deepak Mehta swear by this investing strategy. It sounds simple, as well. Buy an unlisted stock through wealth managers or brokers for a discount, and exit at a profit after one year. Mehta has reasons to be happy. Last year, he invested in Oil India shares, prior to the company's listing at ` 700 a share. And, the stock was trading at ` 1,433 on Thursday — over a 100 per cent profit in slightly more than a year. Primarily, companies look at pre-initial public offering ( IPO ) placements to fund their working capital requirements. There are other reasons for placements as well. They may want to improve their market image by roping in big names in private equity ( PE ) or investors. How to go about it? Such deals are mostly routed through investment banks, entrusted with pre-IPO collection mandates. The banks, in turn, approach interested private equity (PE) funds or individual investors, mostly ultra high networth individuals ( HNIs ). The ticket size of thi

Mutual Funds: Sectoral funds

The three popular categories of equity mutual funds — Equity-linked savings scheme (ELSS), Sectoral funds and Thematic funds   Sectoral funds. These schemes invest in a particular industry or sector to benefit from its growth. For instance, an information technology (IT) fund would invest only in IT stocks. The fortune of a sectoral fund depends entirely on the sector it invests in.   Sector funds are the riskiest funds in the equity funds space as their fortunes hinge on the performance of a particular sector. They outperform the broader market in good times, but fall faster during unfavourable periods. Go for these only if you are confident of a sector's future performance.

Company Quarterly results – What to look for?

Make sense of the reams of numbers that companies publish every quarter to sharpen your stock-picking skills    WHEN it comes to investing in the stock market, investors emulate other investors who, in turn, copy other investors and so the cycle continues.    John Maynard Keynes, the most famous economist of the twentieth century, equated this phenomenon to what average opinion expects average opinion to be.    Keynes, an avid stock market investor himself, compared stock market investors to the readers who participated in newspaper beauty contests, which were extremely popular during the time Keynes lived (essentially first half of the 20th century). Such contests required readers to pick up who, they thought, were the five prettiest women from a long list. The choices made were aggregated and the five prettiest women were picked up from the lot. Those readers whose list matched with the five prettiest women were rewarded by the newspaper. So, for the readers, to be anywhere clo

Mutual Fund dividend is your own money being returned to you

Take the growth option if you want your investments to grow    ON NOVEMBER 25, 2010, the net asset value ( NAV ) of the growth option of Reliance Growth fund was 491.56. On the same day, the NAV of the dividend option of the same fund was 60.26 or nearly 88% lower. Similar is the case with HDFC Equity Fund. The NAV of the growth option of the scheme was 292.07, whereas the NAV of the dividend option was 82% lower at 53.68. What explains the huge difference? The reason is simple but important. While in the growth option the NAV keeps on growing, in the dividend option, a part of the profit made is given back to you as dividends which leads to a fall in the NAV. The dividend from a mutual fund scheme, unlike stock dividend, is your own money coming back to you. Why The NAV Slips: MFs give out dividends by selling the shares they hold against the investments made by investors. This leads to the NAV of the scheme falling. So, let us say the NAV of a scheme is 12. The MF decides to

How to Increase your loan eligibility?

  Lenders compute loan eligibility to ensure that the borrower can comfortably repay the loan amount, and reduce the probability of default. Factors having a bearing on loan eligibility: Ø        Applicants with a stable income and steady job are preferred over people who switch jobs often Ø        Those close to their retirement years may find it difficult to get a long tenure loan. Younger borrowers are preferred by lenders Ø        If an applicant has a history of defaulting, his credit score is likely to be poor. Ø        Borrowers who have defaulted on their previous loans may find it very difficult to get a new loan sanctioned Ø        Education and financial position also have a bearing on eligibility   Enhancing eligibility The simplest way to enhance loan eligibility is by clubbing your income with that of your spouse, father, mother or son. Joint loans enhance loan eligibility. If a husband and wife apply together, their combined income could be double, making th

How to gauge the risk profile of your mutual fund portfolio?

MUTUAL funds are considered to be an investment option for those who do not generally devote a lot of time to monitoring and managing their portfolios. Investors experience both good as well as tough times as far as mutual fund investments are concerned. But while evaluating the portfolio of their equity mutual fund holdings there are a few points that one should check to know about the level of risk that they are facing. Often there are situations where there is a higher risk than what was estimated initially. Here are a few ways to evaluate various risk levels. Individual holding exposure : The portfolio of the equity fund where one has invested or plans to invest needs to be scrutinised to see whether the risk levels are such that could lead to a larger volatility in the holdings. Depending upon this factor and the risk taking ability of the investor the choice about a particular fund as an investment should be made. One key point to watch out is whether there is a large ex

The costs associated with loans

Individuals often find it tough when they have to wade through the fine print to get the desired information. You encounter this problem when you go for a loan as it is not easy to know all the information about various conditions as well as charges. The Reserve Bank of India has asked banks to display various details such as the cost of loans on their websites and also to inform customers about it so that they are able to make correct comparisons.   Here is a look at the various details one should take note of: Loan processing fees: There are several items that will constitute the total cost that has to be paid for a loan and one of the starting point is the processing fee. This is the time when various documentation related to a loan has to be completed. There are several charges that will have to be paid by the borrower, including the cost of stamp papers, processing fees and others. The lender is supposed to clearly mention these to the borrower. Refundable fees: There are f

Some strategies for investors in volatile market conditions

   Currently, the stock markets are showing very erratic movements. The contrast in the market behavior between the first half of November and the second could not have been more. Around Diwali, the stock markets were cruising along, confident of reaching new highs. The 'Obama vote of confidence', combined with positive economic data, created positive market sentiments, which gave the impression nothing could go wrong with the domestic markets. But in a matter of two weeks all that confidence has evaporated.    Triggered by global factors such as the Chinese rate hikes, the markets fell steeply by almost 10 percent. Suddenly, the picture seems a little less rosy. Despite analysts' inability to pinpoint the exact reasons for the fall, one factor stands out. The markets were highly volatile and this back-and-forth action showed that volatility is central to stock markets.    Why is this volatility so pronounced now?    The uncertainties on the economic front increased la

Keep a check on your Expenses

Income should not be confused with wealth. Whatever an individual's income, if his expenses take up all or a larger portion of his income, there will be no surpluses left and as a result, no wealth creation. It is only when our surpluses are invested that wealth is generated. Expenses are, hence, also critical. Two people, despite earning the same income can end up looking very different in a few years - the difference would be as a result of their expenses and their investment. Hence, having a laser-like focus on just the amount of income is misplaced. Financial planners use various ratios to ascertain the health of their clients wealth. They consider the savings to income ratio, liquidity ratio and the debt to asset ratio of a person. However, intriguingly, even financial planners will leave expenses out of the calculus. SAVINGS TO EXPENSES RATIO This is a very important indicator of financial health. Let us say, Ram earns Rs 50,000 per month. He spends Rs 30,000 out of

PFC infra bond hits market today, targets Rs 5,300 crore

  POWER Finance Corporation (PFC), a government of India undertaking company, plans to raise Rs 5,300 crore from the public issue of infrastructure bonds. The issue will open for public subscription on February 24 and closes on March 22, 2011. The issue will not be more than 25 per cent of the incremental infrastructure investment made by the company during 2010-11. India Infrastructure Finance Company (IIFCL), IDFC and L&T Infrastructure Finance are the some of the other infrastructure finance companies that have launched public issue of infrastructure bonds in recent days. While IIFCL is raising Rs 1,200 crore, L&T Infrastructure Finance is raising Rs 400 crore, which includes green-shoe option. PFC's bond will be of a face value of Rs 5,000 and would be listed on the Bombay Stock Exchange. "We are in a position to take advantage of strong growth in power sector," Satnam Singh, chairman and managing director, said at a press conference. Investors can a
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