Short - Term Products

  Short- term Products- Low Returns with Capital Appreciation

Short term goals are those less than three five years in the future. To reduce the risk of loss, holding the investment in cash or cash like vehicles is likely the most appropriate strategy. Money market funds and cash equivalent investments are conservative popular investments, as are savings accounts.

                                                     Investors with short-term money/ goals have two primary objectives.

1. Safety of capital

2. Return on capital

Money Market Funds / Liquid Schemes

Money Market or Liquid Funds are very short-term maturity. They invest in debt securities with less than 91 days to maturity. The primary source of return is interest income. Liquid fund is a very short-term fund and seeks to provide safety of principal and superior liquidity. An investor seeking the lowest risk ought to go for a liquid scheme. However, the returns in such investment are lower. Cash-equivalent instruments and money market funds are the least volatile of the investment types and are therefore ideal for people with extremely low risk tolerance.

Short Term Debt Funds

Short term funds may provide a higher level of return than liquid funds and ultra short term funds, but will be exposed to higher mark to market risks. Debt instruments are FDs, Bonds, debt based Mutual Fund Scheme such as Short Term Funds, Gilt Funds, Liquid Funds, floater etc. Depending upon the liquidity needs and taxation, the product should be taken debt category.

Fixed Maturity Plans (FMPs)

FMP's are closed end schemes that invest in a portfolio of debt securities which mature on or before the maturity of the scheme. FMP's come with tenors ranging from 90 days to 3 years. The investment horizon of the investor must watch the tenor of the scheme.

Bank Deposits

The simplest of all investment by opening a bank account and depositing money in it one can make a bank deposit. There are various kinds of bank accounts: current account, savings account and fixed deposit account. Bank offer deposits of varying time frames beginning with a minimum of 7 days.

Post Office Time Deposits (POTDs)

The Post Office Term deposits is similar to a fixed bank deposit, where you save money for a definite time period earning a guaranteed return through the tenure of deposit.

Recurring Deposits (RDs)

This is one more type of secured investment. This product is ideally suitable to those who not able to invest a lump sum and looking for monthly investment. Ideally bank offers RD of minimum tenure with 6 months to a maximum of 10 yrs. Interest received on your RD is taxable as per your tax slab.

5- Yrs National Savings Certificate (NSC)

You can invest in Postal NSC of 5 years, only if you are sure that goal is exactly at 5 years from today. You can claim deduction under section 80 C. However, the interest on NSC will be taxable.

  

Derivatives

                                         Derivatives

Derivative is a product whose value is derived from the price of some other asset commonly known as underlying. It includes wide range of underlying assets. These include: 

1. Metals such as Gold, Silver, Aluminium, Lead, Zinc etc.

2. Energy resources such as Oil (crude oil), Coal, Electricity etc

3. Financial assets such as Shares, Bonds and Foreign exchange.

Derivatives market helps in improving price discovery. It helps in transfer of various risks from those who are exposed to risk but have low risk taking capacity. For example: Investors don't want to take the risk but traders are willing to take risk.

In Indian stock market there are two types of markets: 

1. Cash Market

2. Derivative Market

Derivatives are typically used for three purposes:

a) Hedging

b) Speculation

c) Arbitrage

A) Hedging

When an investor has an open position in the underlying, he can use derivative market to protect the position from the risks of future price movements. Without selling the assets from the portfolio investor can sell it in derivative market.

B) Speculation

A speculative trade in a derivative is not supported by an underlying position in cash, but simply implements a view on the future prices of the underlying, at a lower cost. Alternatively, he can take a long position in that stock through futures market as well. In derivatives, market you got a high amount of leverage this sometimes make derivative market risky. If the market had moved against his prediction, he would have incurred huge losses compared to the spot market.

C) Arbitrage

If the price of the underlying is Rs 100 and the futures prices is Rs 110, anyone can buy in the cash market and sell in the futures market and make the costless profit of Rs 10. This is called arbitrage. Arbitrageurs are specialist traders who evaluate whether the Rs 10 difference in price is higher than the cost of borrowing. Other highly traded derivatives in global markets are for currencies, interest rates and commodities. 

Risk & Its Types

                                           Risk

The deviation between actual and expected returns is the risk in his investment. If the return from an investment remains unchanged over time, there would be no risk. But, there is no investment of that kind in the real world. Deviations from expected outcomes can be positive or negative, both are considered to be risky. All investment are subject to risk, but the type and extent of risk are different.

                                    Types  Of  Risk

1. Market Risk - Systematic and Unsystematic

Total risk consist of two parts. The part of risk that affects the entire system is known as systematic risk, and the part that can be diversified away is known as unsystematic risk. Systematic risk is caused due to factors that many affect the economy/ markets as a whole, such as changes in government policy, external factors. Inflation risk, exchange rate risk, interest rate risk are systematic risk. Unsystematic risk is the risk specific to individual securities or a small case of investments.

Credit risk, business risk are unsystematic risks.   

2. Inflation Risk

Inflation risk is also known as purchasing power risk. It is a risk that arises from the decline in value of security's cash flows due to the falling purchasing power of money. Inflation risk represents the risk that the money received on an investment may be worth less when adjusted for inflation.

3. Interest rate risk

It refers to the risk that bond prices will fall in response to rising interest rates. Interest rate is inversely proportional to bond price, share price.

4. Liquidity risk

It implies that the investor may not be able to sell his investment when desired, or it has to be sold below its intrinsic value, or there are high costs to carrying out transactions.

5. Exchange rate risk

It is incurred due to changes in the exchange rate of domestic currency relative to a foreign currency. When a domestic investor invests in foreign assets, or a foreign investor invests in domestic assets, the investment is subject to exchange rate risk.

Capital Markets

Capital Market is one of the significant aspect of every financial market. Capital Market is a market for financial assets which have a long or indefinite maturity. It consists of financial institutions like IDBI, ICICI, UTI, LIC, etc. A capital market is a market for securities (debt or equity), where business enterprises companies and government can raise long term funds. Money is provided for periods longer than a year. The capital market includes the stock market (equity) and the bond market (debt)

            Functions and role of the Capital Market

1. Speed up Economic Growth and Development: 

Capital Market enhances production and productivity in the national economy. It makes funds available for long period of time. It helps in research and development

2. Service Provisions:

Capital Market provides various types of services. It includes long term and medium term loans to industry, consultancy services, export finance, etc. These services help the manufacturing sector in a large spectrum.

3. Proper Regulations Of Funds:

Capital Markets not only helps in liquidity, but it also helps in proper allocation of these resources. It can direct funds in a qualitative manner.

4. Capital Formation:

Capital Market helps in capital formation. Capital formation is net addition to the existing stock of capital in the economy. It generates savings. The savings are made available to various segments such as agriculture, industry etc. This helps in increasing capital formation.

Capital Markets can be classified as:

1. Primary Markets

2. Secondary Markets

Primary Market:

Primary Market is a market to raise money from public through IPOs (Initial Public Offerings). Companies need money to expand their businesses and public helps the company by subscribing in the shares offered by the company. By investing in the share capital of the company, investors become part owners of the company. Primary market is also known as "new issue market" (NIM).

              Features of Primary Market

The primary market is the market where the securities are sold for the first time. The securities are issued by the company directly to investors. The primary market performs the crucial function of facilitating capital formation in the economy. The financial assets sold can only be redeemed by the original holder.

Secondary Market:

Secondary Market is vital to an efficient and modern capital market. The secondary market is simply a place where existing securities are bought and sold. The secondary market is further divided into equity and debt markets. Stocks are traded in the equity market, while corporate bonds are traded n debt market.

CREDIT RATING

Credit rating is primarily intended to systematically measure credit risk arising from transactions between lender and borrower. Credit risk is the risk of a financial loss arising from the inability of the borrower to meet the financial obligations towards its creditor.

In India, it is mandatory for credit rating agencies to register themselves with SEBI under SEBI Regulations 1999. There are 5 SEBI registered credit rating agencies in India, namely, CRISIL, ICRA, CARE etc which provide a rating on various categories of debt instruments.

Credit rating agencies assess the credit quality of debt issuers, on the basis of a number of quantitative and qualitative factors.

                            Rating Symbols

The ranking of credit quality is usually done with the help of rating symbols, which broadly classify instruments into investment grade. CRISIL'S credit rating falls under three categories: long term, short term and fixed deposit ratings.

High Investment Grades

AAA - (Triple A) Highest Safety

Debentures rated 'AAA' offers highest safety of timely payment of interest and principal. Though the circumstances can change the degree of safety.

AA - (Double A) High Safety

Debentures rated 'AA' offers high safety of timely payment of interest and principal. They differ in safety from 'AAA' issues only marginally.

Investment Grades

A- Adequate Safety

Debentures rated 'A' are judged to offer adequate safety of timely payment of interest and principal. However, changes in in circumstances can adversely affect such issues more than those in higher rated categories.

BBB - (Triple B) Moderate Safety

Debentures rated 'BBB' are judged to offer moderately safety of timely payment of interest and principal for the present; however, changing circumstances are more likely to happens and weakens the capacity to pay interest and repay principal than for debentures rated in higher rated categories.

Speculative Grades

BB (Double B) Inadequate Safety

Debentures rated 'BB' are judged to carry inadequate safety and principal, while there are less chances of default as compared to other speculative grades debentures in the immediate future.

B - High Risk

Debentures rated 'B' are judged to have greater susceptibility to default, while currently interest and principal payments are met. Circumstances can change and can leads to the lack of ability or willingness to pay, interest or principal.

C - Substantial Risk

The timely payment of interest and principal is possible only if favourable circumstances continue.

D - Default

Debentures rated 'D' are in default and in areas of interest or principal payments or are expected default on maturity. Such debentures are extremely speculative. 

Investment Plans

Investment plans generally refers to the services that the funds provide to investors offering different ways to invest or reinvest. Investment Plans are generally the different methods by which investor can invest in a fund. The famous amongst all investment plans are SIP(Systematic Investment Plan).
Some of investment plans offered by mutual funds in India are:

1. Automatic Reinvestment Plans (ARP)
2. Systematic Withdrawal Plans (SWP)
3. Systematic Transfer Plans (STP)
4. Value Averaging Investment Plan (VIP)
5. Systematic Investment Plans (SIP)

          Definitions Of Various Investment Plans

1. Automatic Reinvestment Plans (ARP) -  Mutual Funds generally offer two options under the same scheme - the Dividend Option and the Growth Option. The Growth Option or the Automatic Reinvestment Plan allows the investor to reinvest in additional units the amount of dividends or other distributions made by the fund, instead of receiving them in cash. Reinvestment takes place at the ex-dividend NAV. The ARP ensures that the investor reaps the benefit of compounding in their investments.

2. Systematic Withdrawal Plans (SWP) -  It provides the benefit of a regular income. It allows the investor to make systematic withdrawals from his fund investment account on a periodic basis. The investor must withdraw a specific minimum with the facility to have withdrawal amounts sent to him. The investor is usually required to maintain a minimum balance in his fund account under this plan. Investors should note that SWPs are different from Monthly Income Plans.

3. Systematic Transfer Plans (STP) -  These plans allow the investor to transfer on a periodic basis a specified amount from one scheme to another within the same fund family - meaning two schemes managed by the same AMC and belonging to the same fund. It is necessary for the investor to maintain a minimum balance in the scheme from which transfers are made. The services allows the investor to manage his investments actively to achieve his objectives. Many funds do not charge any transaction fees for this service.

4. Value Averaging Investment Plan (VIP) -  Value averaging is a technique of adding to an investment portfolio to provide greater return. Value averaging is a formula based investment technique where a mathematical formula is used to guide the investment of money into a portfolio over time. In periods of market declines, the investor contributes more, while in periods market climbs, the investor contributes less. After the investment has over-performed, the investor will be required to buy less or sell high. After the investment has under-performed, the investor will be required to buy more. Some research suggests that the method results in higher results at a similar risk, especially for high market variability and long time horizons.    

Is Personal Financing Only About Investing Money?

                        Scope Of Personal Financing

In our country, people think personal financing is only about investing the money or management of the portfolio. Personal Financing is taking about all the decisions in your financial career at a various stages in your life correctly. It guides you to take your financial decisions like (Buying A Second Home, Insurance According To Your Needs, Taxation, Reverse Mortgage). Scope of Personal Financing includes:

1. Insurance Planning.

2. Retirement Planning.

3. Estate Planning.

4. Tax Planning.

What is Insurance Planning?

Insurance Planning is the protection of your family, your loved ones, your assets, business, your home against various peril and hazards. It is the basic component of a personal financing. To choose an appropriate plan for the client by analysing all the risks is the most important thing. Insurance is a device transferring risk from an individual to a insurance company and reducing the uncertainty of risk via sharing with others. Insurance eases financial burdens that can occur when disaster strikes.

What is Retirement Planning?

Retirement Planning is the planning of life when one's paid work ends, not financially but in all aspects of life. The various aspects include lifestyle choices such as how to spend time in retirement, where to live and several other things. Previously, retirement planning is about setting aside enough money for retirement but now people also have a dreams in their eyes which they want to accomplish after retirement. In retirement phase, decades of your saving are paying out. To plan this phase of your life and make it supremely happy is an important task for a financial planner in personal finance.

What is Estate Planning?

Everyone has a estate. Your estate is comprised of everything you own- your car, home, saving accounts, investments, life insurance etc. You can't take it when you die. You need to plan all this and this is called estate planning. Estate Planning is for everyone. It is the care of your loved one's, family when you are not actually there to take care of them. You should do this by considering a proper person in this field whom you can trust and expect best advice and guidance.

What is Tax Planning?

Tax Planning plays a vital role in all aspects of finance. The purpose of tax planning is to ensure tax efficiency. The selection of investments and types of retirement plans must complement the possible deduction of tax. It includes taking the maximum advantage under various tax reductions given by the government. It includes timing of income, size, timing of purchases and planning for expenditures or engaging in tax gain-loss harvesting.

 

Role Of A Financial Planner, Fees Structure & Charges

                                  Financial   Planner

A financial planner is an educated person who uses his financial planning skills to enable the client to achieve his desired financial goal. Financial Planner does the risk profiling and put his clients amongst the three categories. 

1. Conservative

2. Moderately Conservative

3. Moderate

4. Moderately Aggressive

5. Aggressive

    

                         Categories of Potential Client

1. Young Adult (21-25)

2. Young Family(25-40)

3. Mature Family(40-50)

4. Empty Nesters(50-55)

5. Pre-Retiree/ Retiree(55-65+)

People in the different age group have different goals, liabilities, financial responsibility. Financial Planner makes a financial plan for you to achieve them. 

                         Process of Financial Planning

1. Knowing your client is one of the most important and basic things amongst all the other things to do in financial planning. Financial Planner takes the interview in a little bit informal way so that the client can talk about  it's financial problem & financial issues.

2. Collecting client"s information in various means like the short term goals, medium term goals, long term goals, about his assets and liabilities. Financial Planner is your friend. A relationship of trust is very important. 

3. Data collection forms are also there in which you need to fill the information required by your financial planner correctly.
4. Agreement on the next step if client agrees with financial planner and allows him to make his financial plan.

                       Fee Structure Of A Financial  Planner

Certainly, there is not a definite fee structure. It varies client to client. Sometimes, the client may charge a pre-defined fee to make a financial plan. Accordingly, they may charge a percentage to make a financial plan depending upon the corpus of the client. The fee to review & renew the plan is not very high and it's generally pre-defined mentioned in the agreement.

                           

             

Public Provident Fund

                Publc Provident Fund

PPF Account is a favourite tax saving option in our country. Deposits made in PPF accounts up to prescribed limits are eligible for relief under section 80C of Income Tax Act. PPF accounts are EEE means Exempt, Exempt, Exempt from every tax. The maximum amount can be deposits up to 1.5 lac per annum in a maximum of 12 installments in a financial year. The maturity period of the PPF account is 15 years, but actually It is 16 financial year. The nomination facility is available.

  

     Features of Public Provident Fund

Interest rates keep on changing as per market interest rates. The interest is compounded annually. A PPF account cannot be transfered from one person to another. A depositor can avail of loan facility in the third financial year from the financial year in which the account was opened. Premature closure of a PPF account is not permissible except in the case of death of the depositor. A depositor can make partial withdrawl once every year from his PPF account after expiry of five years.

According to me PPF account is not the best option for long term purpose. Instead of investing in PPF account I would suggest to invest in ELSS because  it also provides relief under section 80C of Income Tax Act. The return given by ELSS is far more than the return given by the PPF account till maturity.

RICH DAD POOR DAD

This book RICH DAD POOR DAD is all about financial literacy and it's importance. A person can be highly professional, skilled as well as financially illiterate. It tells you how to be rich, how to handle your money. 

The simple formula to become rich is you need to buy only one thing in your life i.e. ASSETS but what people always buy is LIABILITIES. Generally, the expenses of a normal person is directly proportional to it's earned income. They buy LIABILITIES and pays the EMI which I think is the biggest and a only barrier to be rich.

Several Rules To Become Financially Literate & Rich.

1. Rich don't work for money they work to learn. Don't let your pay check decides your growth, earnings in your life. Don't get trap in that RAT RACE. Don't only run for higher salaries, job security, promotions instead of that work to learn so that you can make money. Don't earn it make it.

2. Financial Literacy is amongst the most important things to learn. It tells you the importance of investment, management of money, priorities your choices at various stages of your life & career.

3. Don't try to own  things try to have controll over them. The main difference between rich and poor is poor buys the things and rich controll the things. They use it not purchase it.

Financial Assets

                              Asset

Asset is every investment which helps us to generate income. As an example we can say investment in bonds, equity, debentures, treasury bills, mutual funds etc all are considered as asset. The wealth of an investor are it's asset.

  

                      Asset Allocation 

In investment planning whenever we make a portfolio the asset allocation is the main task for any fund manager. Portfolio is divided into different asset classes. Generally, there are four asset class.

1. Equity.

2. Debt.

3. Cash.

4. Precious Metal.

The risk and return features of each asset class are distinctive. To decide which asset class will constitute of how much percentage in the portfolio depends upon the various factors like risk taking power of a client, time horizon, goals of a client and various other factors. Return and risk attributes decides the asset allocation. Different asset classes have different expected rate of return. 

Mutual Funds

                  Mutual Funds

Mutual fund is a way through which we can invest in equity market, debentures, bonds.

Mutual funds offer a range of products to investors. These products are used to fulfill various investment objectives

1. Risk and return expectations.

2. Investment horizon.

3. Investment Strategy.
Mutuals funds are managed by the fund managers. Fund managers are those person who are highly skilled, educated and knows how to manage the money of a common people. Generally, we use the term that mutual funds gives a higher amount of return in long term. Long term means the time horizon of more than 5 years but now-a-days there are mutual funds specially for short term purposes. Investment for less than 1 year of period are also available in mutual funds.

              Types of mutual fund

There are basically 7 types of mutual fund

1. Money market funds.

2. Fixed Maturity Fund.

3. Index Fund.

4. Fixed Funds.

5. Speciality Funds.

6. Equity Funds.

7. Funds of funds.

    

       How to invest in mutual funds?

Generally, there are two ways prefer by the common investor. SIP and Lumpsum investment. Generally common people do SIP
because it deals with the psychology of an investor and it helps the investor to invest for long term. Now- a- days large institutions, private banks, public sector banks also invest in mutual fund but they use lumpsum form of investment and generally they invest for short term to get higher returns from people's money. I personally suggest that never invest directly in the equity market if you don't have the knowledge of it. It's better to invest in the stock market through mutual funds. You can choose mutual funds which invest more than eighty percent of their money in equity market if you want large exposure of your money in equity market.

 # Mutual Fund Sahi Hai.

Reverse Mortgage

                  Reverse Mortgage

A reverse mortgage is the opposite of a conventional home loan. It is an ideal option

for senior citizens who require regular income. For senior citizens who don't have financial support from their children or their children live in abroad and they don't want to live there. This policy is only for senior citizens. Generally in India people don't take reverse mortgage because they are emotionally attached with their property instead of using their property for regular income they choose a low standard life. As an example we can see the  senior citizens of rural sector how they live their life because they don't have money but they have property and they don't use it.

    How does reverse mortgage work?

Firstly, bank estimate the price of the property depending upon the various factors. The periodic payments also known as reverse EMI 

are received by the borrower over fixed loan tenure. The borrower continues to reside in the property till the end of his life and receives a periodic payment on it.

    

        Guidelines for reverse mortgage

Maximum loan amount would be up to 60% of the value of the residential property.

Life of the property should be minimum 20 years

Property should be the permanent primary residence of the individual.