## Everything you want to know about CRR and Repo rate – How they help !!

Today we will see what is CRR and Repo rate and how they help in combating Inflation and other monitory issues of Economy. CRR and Repo rate are nothing but the tools available in the hands of RBI to maintain the liquidity and growth.

You might know what is CRR and Repo Rate, but may not know what is there significance and how they help. Read whole article to understand.

### What is CRR Rate ?

Each Commercial Bank has to keep certain percentage from their deposit amount in the current account with the Central Bank of India i.e. RBI. This amount is called as CRR i.e. Cash Reserve Ratio. It is the ratio of deposits which banks have to keep with RBI.

Banks do not have access over this amount for any economic or commercial activity. It means Bank can’t invest the whole deposit and they can’t use the CRR money for any lending or investing purpose.

Let’s see an example – When you deposit Rs.100 to your bank, bank gets Rs.100 and now can use this money to lend others, but they have to put some part of it with RBI, if CRR is 8%, they will have to deposit 8 with RBI and they are left with Rs.92.

So when CRR is decreased, Banks are left with more money to lend and when its increased they are left with less, even though 1% decrease in CRR leaves bank with 93 instead of 92, this Rs.1 is big enough thing.

### What is Repo Rate?

When we need money, what do we do? We take loan from particular bank. And when we pay back that loan bank charges some interest on principle amount. This is called cost of credit.

Similarly, when banks need money they borrow it from RBI and the rate of interest which RBI charges on that loan on Banks is called Repo Rate or Repurchase Rate.

So if repo rate is 9%, and some bank takes loan of Rs.100 from RBI, they will pay interest of Rs.9 to RBI. This is a short term loan i.e. upto 1 to 2 weeks.

Higher the Repo Rate higher the cost of short-term money, Lower the Repo rate lower the cost of short-term money. This means at higher Repo Rate the economic growth will slow down and at lower Repo Rate economic growth will enhance.

### How is Repo Rate linked to the interest we pay for loans from Bank ?

Simple, Banks need to charge more interest than they are paying, so if repo rate is 8%, they will charge more than 8% for loans which they give, If Repo rate comes down, banks’ may also consider the interest rate they charge us.

That’s the reason why with this latest Repo rate cut, people are talking about home loans rates coming down, so what will happen is that Bank need to pay less interest for the loan they take from RBI, now because they are paying less, they may think of charging us less on the interest for the loans which we have taken from them.

#### What is Money Creation ?

How does money get created? When A gives 100 to B, Rs.100 is created for B , then when he gives this to C, 100 is again created for C, this way money creation happens for different people from that same 100.

#### How does CRR help ?

Suppose CRR is 8% you had 100, which you deposit to bank, now bank will Deposit 8 to RBI and lend this 92 to some one, This 92 will be another money which is created for someone, now this 92 will exchange hands and then come back to bank somehow, out of this 92 again bank will deposit 7.36 to RBI and then lend the rest of it to someone … and it goes on like this.

The money creation from this 100 is :

100 + 92 + 84.64 … (100 + 100*.92 + 100*.92*.92 + 100 *.92 * .92 * .92 …)
= 100 *( 1+ .92^1 + .92^2 + .92^3 …)
= 100 * (1/(1-.92)) (because 1 + x + x^2 + x^3 … infinite times = 1/(1-x) for x<1) 08 =”1250″

CRR(C) = M/C

It means that this 100 actually generates 1250 in the economy indirectly. What will happen if CRR is increased by 1%, from 8% to 9%. though it may looks like that this is a small change and it would affect a lot.

Lets see what happens now . . .

#### How much money will 100 create now?

Ans = 100/.09 = 1111 (approx)

So the same money is now generating 1111 instead of 1250, that’s 139 less or 11.12% less money in the market.

### How does Repo Rate and CRR help to ease Inflation?

Repo Rate:

When Repo Rate increases, the banks have to pay higher interest to the RBI and thus Banks also charge higher rate of interest to the common public who borrows loan from bank. Due to this people gets discouraged to take more credit from banks, because of which there is less supply of money in system and there is less Liquidity.

So on one hand Inflation is under control as there is less money to spend and on other hand growth will slow down as companies or people avoids taking loans at such a higher interest rate.

CRR:

It’s easy, if CRR is increased, banks have to deposit more money with RBI and banks will have less money to invest. So now bank will increase the interest rate on the loans which they will lend to other people.

People will avoid taking loan because of higher interest rate and it results in less money creation in economy, and hence people have less money to buy things and they will think twice before paying higher price for something. Due to this prizes will fall because of low demand.

## A conversation with friend on avoiding financial responsibility

In this article I’m going to tell my conversation with one of my friend about investment and different investment tools. We have discussed on both advance and traditional investment tools.

Read this chat conversation with one of my old classmate in Graduation.

“Manish : So where are you going to invest you money this year?

XYZ : May be PPF or Bank FD

Manish : But do you think they would give you good returns? also they would be locked for a long time, don’t you need that money in near future?

XYZ : Not exactly!, actually I can leave that money invested for more than 5 yrs, or may be 7-8 yrs too ..

XYZ : also, But I would like to invest some money in mutual funds … around 20k, May be I need some money to send to my brother for his MBA coaching ….

Manish : hmm.. But I think you should do exactly reverse. Invest this 20k in FD and Rest money in Mutual funds + PPF or only mutual funds.

XYZ : No no, I cant !! I have already lost 50% in mutual funds this time, I cant take risk now, I am fine with less return but a secure one …

Manish : hmm… I told you don’t put all money in lump sum. You never heard !!

XYZ : I invested because I trusted you, I thought you know more than me, but it fell so much … you gave wrong advice at wrong time.

Manish : Don’t you think it was your desire for high returns which made this happen? Equity are risky? I told you this too !!

XYZ : Whatever …

Manish : ok .. np … Consider what I said … good night … 🙂

XYZ : Good night

### What is the problem of these people?

First they need high returns, then they cant wait for long term to get that kind of return. They just hear that equity are risky but don’t believe it, they will make you feel that you are responsible for the crash. They just don’t take responsibility for what they did !!

#### What I actually told her?

I told her that its OK to invest at these high levels but don’t invest in Tax saving mutual funds as they will be locked for 3 years, also invest less and that too through SIP (What is SIP?), so that it can eat up the volatility and insure less losses if things go wrong.

But the only things on her mind was:

• It will save her tax
• Will give superb returns like it did during 2002-2007 (these are the people who don’t read “Equity investments are risky and passed performance is not guarantee for future performance”)
• If she does SIP and markets goes up and up, she will be buying less units.

This is a classic example of “Overestimating Returns and Underestimating Risk”

### How should you do your tax planning for the year?

First thing, if you have not done your tax savings yet, its a bad thing. It should be done at the start of the year itself, at least planned.

If you need money for short term goal, don’t invest in Shares or mutual funds !! Put it in some assured investment instruments like FD.

“Return of investment” is more important than “Returns from investments”.

If you have money which you can invest for long term, invest in Shares or Mutual funds (but only for long term). As per your risk taking capability choose combination of Debt and Equity and invest for the long term …

### Why Equity?

Do you know that most of the stocks have beaten down so much that they have come down below than the price they deserve, There value has exceeded there price (Read about Value Vs Price).

Unitech : One of the largest and most respected Real Estate companies has fallen down to levels which are unimaginable !! from 532 to 40-50.

Tata Motors : Nano will be manufactured in some months, every thing looks so good, but people just sold it because of Singur tension (It was fine to sell it , but now its oversold).

There are countless examples like this in current market. Things will go fine, but with patience.

## 5 Elements of a well-planned financial portfolio management

Everyone is concern when it comes to investment. But lot of investors does the mistake of focusing on investments only and not on their portfolio. Having a good financial portfolio is also as important as an investment.

This article will talk about 5 things every financial portfolio must have and we will see that it should be good for almost every type of investor . We will try to judge it over the important parameters discussed in my one of the earlier Article : Pillars of Success

## What is mean by a financial portfolio?

Financial portfolio is a road-map which you can use to achieve your future financial goals. It is build up by considering your risk appetite and investment objectives. You can handle your own financial portfolio or you can also take help of the professional financial managers which will make it easier for you to reach your financial destination.

Your investments alone can not help you to build a healthy portfolio, there are some other elements also which are important as much as your investments.

Let’s see the Five most important and must have things that each and every financial portfolio must have:

### 1. Life Insurance

Each and every person who has financial dependents must have a good Life cover through Term Insurance. This must be taken at an early stage of life for the longest term possible.

For India :

• Aegon Religare Life Insurance
• SBI Life Insurance
• Max New York Life Insurance
• LIC (Jeevan Amulya)

For Other countries :

Please search for your respective countries and find out which term insurance is the best one.

### 2. Health Insurance

This is extremely important to have a health insurance now a days, because of rising health-care expenses. A Family must be covered with a Family Floater plan for a good amount (Rs 5 lacs/\$10,000) depending on your budget .

### 3. PPF

Each and every financial portfolio much have debt exposure and PPF (for India) is an excellent investment product for anyone, backed by government , its 100% safe and one of the most efficient and tax efficient products available , with post-tax returns of 8% , its a must have in each portfolio .

### 4. SIP in Mutual Funds (for long term)

For long term investments, its hard to beat this . For long term investments Equity must be the route and for systematic and disciplined investing , SIP is the best way to channelize your money . Considering the undebatable growth for Indian economy , no can afford to miss Equities for long term investments.

### 5. Contingent/Emergency Fund (Cash + Liquid Funds)

Each and every financial portfolio must have good amount of cash and liquidity to meet unforeseen and emergency expenses. Other wise you will have to liquidate and break you investment products which may attract penalties and may not give you enough cash at the time of requirement which can create problem .

Better to have money equivalent to 3-4 months of expenses in emergency fund . You can also put 1-2 months expenses as Cash and rest into Liquid funds which may also provide you some returns .

## Analysis

Understand that these 5 things are a list of things one would have for sure , but its not an exhaustive list . Depending on your profile and requirements you should have other products as well. but i would say this will solve 90% of the problem . Let looks how a finanacial portfolio consisting of this 5 things passes on 4 parameters called Pillars of Success ?

1. Capital Appreciation :

With SIP in mutual funds and PPF , the capital appreciation should happen to a great extent , PPF would provide stability and assurity or returns , where as Equity will gives exceptional returns .

2. Liquidity :

We have already covered that Contingent fund should be able to provide good Liquidity.

3. Risk Management :

Term Insurance and Health Insurance will take good care . SIP will take care of the market volatility. some other techniques like Hedging using Derivatives and being well informed will manage extra level of risk .

4. Goal Oriented :

Each and every product is for a specific and important goal , as described above .

Hi all , the article is specifically with Indian context , but article is helpful for each of you , please find the similar products in your country .

### Conclusion

Each and every financial portfolio can be different and should match the requirement of the investor , But these 5 things are such that it can be for any kind of investor . Just like we have master key for any kind of lock , we have these products for any kind of investor.

If you have an query ask us in the comment section.

## 7 tips to loose money in Stock market

Tips for Disaster

1. If a stock is in limelight and rises a lot and keep rising in front of your eyes , jump into it and buy them .

2. If you have small losses , try to be emotional and never accept that your decision was wrong .

3. Sell as soon as you start making profits and keep the stock with you which start loosing.

4. Treat a stock like your relative , be emotional with it .

5. Don’t see other factors like Economic , political and global situation , say to yourself that they don’t matter.

6. Try to beat the market and think yourself as supreme.

7. Put 100% of your money in trade at a time .

8. Put tight Stop prices when markets are volatile .

Disclaimer : There is no Guarantee that your will loose money using this steps . Take these as recommendation only .

## Traits of an excellent financial portfolio which makes it better

What makes an Healthy financial Portfolio? There are some good traits of portfolio which makes it better than others. A good and strong portfolio has some strong elements or parameters which it must meet. These are the Pillars for a strong Portfolio or Investments.

Important Elements are :

1. Capital Appreciation
2. Liquidity
3. Risk Management
4. Goal Oriented

Lets take each of these points one by one :

### Capital Appreciation

This is one of the biggest reason to invest. Isn’t it very obvious? Yes, it is. But the main point is not just its growth in numbers but its real worth. We are talking about Post-tax and post inflation returns.

The real return of Plain Fixed Deposits in these high inflation days are negligible when you factor out Inflation and tax. The best investment must be robust and good enough to provide appreciation in real worth over long period of time. Real Estate and Equity (Long term) can generate good returns.

### Liquidity

Another important aspect of a good financial portfolio is that its provide enough liquidity, so that in case of need, you can get the money.

What is Liquidity? Liquidity is how fast and easily asset can be sold and you can get cash. For example Mutual funds and Shares are highly Liquid, If you have them and want to sell, you can get the money soon. Where as Real estate is not a Liquid asset. So if you need urgent cash, you might not find right price and or buyer.

Every portfolio must have some element of Liquidity, as per the requirement of the investor.

### Risk Management

Every portfolio or investment must be to some level insured or have element of risk management

What do we mean by this? A good investor is one who sees beyond what an average investor cant see. Average investors concentrate very well on Profits, How good an investment can be, High returns etc.

An exceptional investor goes beyond that and takes care of Worst case Scenarios and situations which may cause damage. He is the real investor.

Some of the steps to be taken are :

• Adequate Insurance to be taken .
• Proper monitoring of performance of investment.
• Getting out early in a bad investment and accepting that you made a wrong decisions.
• Keep your self updated with news, laws, things which can affect you investments.

Risk management is not buying some product for managing risk but being aware of things and taking right and logical decisions.

### Goal Oriented

“A good investment is one which has a purpose”

Each and every investment should be done because of a strong reason. I see people who take Insurance policies to save tax at the last rush hour of the year !!! Better loose the tax benefit and don’t take that policy.

That kind of investment is nothing more than a waste or burden. On the top of it these people don’t even need insurance !!!

#### When someone asks you the reason for making a investment, you should know why you did it?

Some of the bad or idiotic reasons for doing investments are :

• I can save tax by that
• My friend did it and recommended me
• Everyone is doing it .. why shouldn’t I?

Every time you take a decision ask yourself some questions like :

• Do i really need it at this point of time?
• Can i afford it?
• Do i understand it well? Can i protect myself if people make me fool?
• What is the purpose or goal of this investment?

If you get satisfactory answers go for it else take an expert advice.

### Sample Portfolio Analysis.

#### Sample Portfolio 1

Robert is a married person earning 40,000 per month. He is the sole Earner of the family and and has 2 kids. He is not a risk taker and his portfolio looks like.

• 50,000 invested in NSC (opened before 3 years)
• An endowment policy with 10 lacs cover and 40,000 premium for 30 yrs, with maturity benefits.
• 1,40,000 in a Tax saving mutual funds (investment 70k for 2 years for tax saving)
• Home (Rs.30,00,000)
• Cash : 20,000
• Car : worth 5,00,000
• Jewelry worth 80,000

Lets rate his financial portfolio on all the parameters on the scale of 5 stars

Capital Appreciation : A small portion in Equity, and that too for a wrong reason of just tax saving, Saving through Endowment policy is another wrong decision, the returns are too less.

Liquidity : None of the assets are Liquid and Cash available is not enough to meet emergency requirement.

Risk Management : No Risk management, What if he dies after 10 days, What if he meets an accident, What if suddenly he requires 1,00,000, what if he looses his Job.

Goal Oriented : * (The reasons for investment in most of the things looks like they are for Tax saving, or some one suggested )

#### Sample Portfolio 2

Ajay is married and has 2 kids and parents who are all dependent on him, He earns 40,000 per month.

• Long term investments in Tax saving Mutual Funds (Rs.4,000 per month)
• Term Insurance of Rs.80,00,000 (80 Lacs)
• Health Insurance of each member up to 3,00,000 – 4,00,000 (Family Floater Policy)
• Yearly Contribution to PPF (Rs.50,000)
• Invested 1,00,000 in Liquid Funds
• Home loan taken by him and his Wife Jointly (Along with Home Loan Insurance)
• 30,000 invested in Gold ETF and some good shares.
• Rs.25,000 Cash

Lets rate his financial portfolio on all the parameters on the scale of 5 stars

Capital Appreciation :  Appropriate investment in Equity with long term view, and some money in Debt.

Liquidity :  Has good amount of money in Liquid funds, Cash and Gold ETF, which have good liquidity and can provide him Money quickly in case of requirement.

Risk Management :  In case of any type of Eventuality, He is properly covered. He is protected well against Death, Health Issues, Home related issue, Emergency issues.

Goal Oriented :  Most of the investments have strong and valid reasons.

Like Term Insurance is required for Financial Cover, Mutual funds investment was for Long term Wealth Creation, PPF investment for Wealth Creation with Debt Route and safe investment, Joint Home Loan with wife for Tax benefits, Health Cover for Tax benefits and cover against Health Issues, Gold Investment in ETF because of Diversification and Liquidity, Cash for instant requirement, Liquid funds investment for Liquidity along with some returns.

Note : Both the financial portfolio’s are created just for the illustration.

#### Summary

Each and every person portfolio should be strong on all the areas, it should pass all the criteria to some extent. A portfolio should pass all the parameters for different requirements. If you have a financial portfolio ask yourself all these questions :

• Is it good enough to provide stable and good returns over long term. Is capital appreciation happening in Value or just numbers are growing, but post-tax and post-inflation returns are negligible.
• If i require instant money within 2 hrs, 2 days or 5 days, Is my portfolio smart enough to provide me.
• Is my portfolio good enough to provide protection to me and my family against calamities or any unexpected events . Do i review my Portfolio in regular basis to cut out the losers.
• Is my portfolio a result of my Needs and requirements or Greed, Ignorance and Hearsay and emotional Buying? If that’s the case, take action !!!

## A reply to one mail

This post is most probably the one on which i didnt worked hard . This is just an email reply from my side to one of my friend who queried me regarding his Endowment Policy package which an agent has created for him .

The policy looks like this … 15 small polices of 1,00,000 each which will mature one by one every year after 27 years and will act as yearly pension in his old age

His mail :

>>>

On Wed, Oct 15, 2008 at 9:37 AM, ajay patel wrote:

15 policies of Rs. 1 Lakh each, starting from sept 2007, first policy matures in 2034 and others follow every year from there on.
Cover of 15 Lakh is for life time. There is an extra Rs 500,000 accidental insurance along with it till the age of 70(2053) (if the world exists till that time).
Annual premium of Rs. 42,000 till 2034, a total amount of 3,400,000 will be received from maturity of these policies.

Say after ten years, I see myself earning around 2.5-3 lacs per month. with one child (if i get married :))

OK

now lets see some of the facts for you to ponder .

Starting from 2007 you are paying 42,000 each year till 2034 (for 27 years) . You will receive money starting from 2034 – till 2049 (15 years , each policy matures) .

Points to note :

– You are paying 42,000 and then its locked for 27 years
– You are getting maturity value of each policy per year , just like a annual income(around 2.25 Lacs/year ie : 34/15 , which is not taxable (you keep all the money).
– You are getting Tax exemptions under sec 80C for this.

I think these are the points you have to agree , because they are not opinion , they are facts .

Some of the flaw or issues with this plan are following , which you never considered at the time of taking this .

– The premium you are paying each year equals to your current monthly salary , also you said that you see your self earning 2.5-3.0 lacs (6 times , your current) per year just after 10 years from now . i am not sure what kind of figures will it be after 27 years . At that time , the money which you get from the policy should not last even 2 months . Considering your expenses currently at 25,000 per month (considering you are married and have children) . the same expenses will rise to 1.2 lacs assuming 6% inflation (also remember that the expenses will keep rising each year ie : 1.66 , 1.77 , 1.9 … 4.2 lacs , whereas the money you get each year will be around constant 2.25 lacs only , this may look unimaginable , but ask your father to grandfather about the monthly expenditure of family before 25 years , i am sure it should be 5% of current, people always forget inflation).

– The insurance provided by this policy is so less that you are highly under insured . What can your loved one do with 15 lacs today ? Will it be sufficient to replace you ? If you consider time after 10 years (when you think you will earn 2.5-3 lacs / month , will the insurance money be sufficient to cover the dependents ? When you will be of age 60+ , the insurance amount is able to meet not more than 9-10 months expenses .

Having this policy is as good as not having it . The issue is not that Can there be policy better than this? ,The main problem is what kind of value is this giving to you . Is the benefit provided by this policy after 27-42 years is much less than than the pain you are getting by paying hefty premium now .

With the same money (42,000) , let me see what can i plan for you with same money .

Lets first take a most conservative way (which is undebatabely safe).

You take an insurance of 50,00,000 (50 lacs) for 30 years and pay a premium of just 10.5k per year . You are left with 32k per year which you put in

1. PPF account

In PPF the money 32k @8% will become 2,55,000 in 27 years and you will get this money every year (total 38 lacs till end) , till age 66 ( In Endowment policy it was 2.25 lacs)

2. In MF considering 12% return

32k invested will become 6.83 lacs in 27 years , so you invest every year 32k and get 6.83 lacs just after 27 years of payment . so it can provide a regular income of 6.23 lacs after 27 years for continuous 15 years till you are 66 .

3. In Mutual funds considering 15% return

The amount would be 13.93 Lacs , every payment of 32,000 will become 13.93 lacs.

Question: How realistic are these mutual funds returns ?
Answer : Over the history no asset has returned more than equity over long term . India Equity markets have returned 17.5% CAGR annually (since inception) . 15% is a very realistic return considering the money is invested for long term like 15+ years . Equity investments risk are inversely proportional to tenure of investments .

After 30 years you will not even need Insurance , because this money will be available every year . and i am assuming that you will earn enough till than that you don’t need insurance .

Some other things to ponder are :

Investing in your Endowment policy does not give you any flexibility of stopping or missing your premiums . In case of PPF or mutual Funds , you can be very flexible and stop for 2 years if you want money to be utilized some where else .

The plan which i told you has everything which you had in that endowment policy , even more than that . its like Buying Nokia 2600 @20,000 when you have iPhone available at same price , you just didn’t knew where you can get it 🙂 . Ok , i know that was pathetic analogy , but i need some platform to show that i can think .

So better stop those policy and take the loss of premiums which you paid , anyways you are not going to be affected now , and life will be normal as it was .

I have done nothing extraordinary here , but some calculation based on some common sense , which is not common .
disagreements are welcome .

manish

– Show quoted text –

Manish Chauhan
Bangalore
https://finance-and-investing.blogspot.com/

Lets understand some basic things here . No matter what people tell you or design things for you , Always calculate and apply the simple formula’s which will give you certain numbers, which can be used as benchmarks by you .

Some must know formula’s : https://finance-and-investing.blogspot.com/2008/09/3-most-important-formulas-you-should.html

## An ideal portfolio for Someone in this market

What should be the ideal portfolio for someone in this market for long term ?

As far as i think , A good portfolio now will contain stocks which are beaten down because of panic selling , but still they are fundamentally sound .

My Recommended portfolio would be:

For Safe Investor (assuming time horizon of 3+ years)

Infosys
Tata Motors
ICICI Bank
DLF
– Reliance Communications

For Risky Investor (assuming time horizon of 5+ years)

ICICI Bank
Jaiprakash Associates
Chambal Fertilizers
DLF
Praj Industries

People who want to trust someone more experienced and more knowledgeable should read Sudarshan Sukhani recommendation at https://tt-wealth.blogspot.com/2008/10/portfolio-for-safety.html

Sudarshan Sukhani is a well know and respected Technical Analyst of India and often talks on CNBC .

To get a better view on markets read my earlier article : https://finance-and-investing.blogspot.com/2008/10/current-situation-of-stock-market.html

Manish

## Term of the Day Archives

This page contains all the “Term of the Day” posted on this blog earliar .

1. Short Selling

Short Selling : Short Selling refers selling of shares without owning them . If you short sell a stock , you first sell them at higher price and later you buy them (cover them) back at lower price .Lot of times you feel that markets will go down , at that time you short sell a stock . People who deal in Derivatives can either Sell the Futures or Buy PUT options . Short Selling can offer tremendous returns in short frame , because bear markets are markets fall with much speed and momentum compared to rising market . Read more

2. Derivatives

Derivatives : Derivatives are contracts whose value depend on value of some other thing. Examples are Futures and Options . Value of Stock is independent , But value of Futures or Options depend on the movement of Stock . Derivatives are dangerous Instrument and not recommended for Starters . In India People are attracted towards Derivatives because of its Return potential , but they underestimate its Risk potential and its ability to paralyse investor or trader financially , Better to learn first and then enter in Derivatives. Read more

3. P/E Ratio

P/E Ratio : P/E ratio is a reflection of the market’s opinion of the earnings capacity and future business prospects of a company. Companies which enjoy the confidence of investors and have a higher market standing usually command high P/E ratios. This ratio indicates the extent to which earnings of a share are covered by its price. If P/E is 5, it means that the price of a share is 5 times its earnings. In other words, the company’s EPS remaining constant, it will take you approximately five years through dividends plus capital appreciation to recover the cost of buying the share. The lower the P/E, lesser the time it will take for you to recover your investment. Its one of the most imortant Ratios you can look at .

Price/Earnings Ratio (P/E) = Price of the share / Earnings per share

4. ETF

ETF : ETFs are a basket of securities which tracks an underlying and are traded on a recognised stock exchange. Examples are Nifty Beas (this tracks Nifty) and Gold ETF’s (this tracks Gold prices) . Read More

Soon there will be Silver ETF’s in India .

5. FMP

FMP :
FMP’s are close ended mutual funds , similar to FD’s but much more tax efficient and with marginally superior returns , but they have there own risks . The returns offered by FMP’s is indicative and not guaranteed. They come from 1 month maturity to 1 yrs maturity . In year 2008 , FMP have done very badly because of defaults . Read here for more

6. Technical Analysis

Technical Analysis : A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. It is generally used by people who want to take advantage of short term price movement. Technical Analysis can make you a better than average Investor

7 . Demat Account

Demat Account : Demat account is an account where shares are stored electronically . Just like Bank account deposits money , Demat account deposits your shares . Now a days , you cant hold shares in physical form , every share has to be in physical form . A person can only hold a single Demat account (trading account is different) .

Trading Account : Trading Account is an account through which you can buy and sell things on stock market . Dont confuse it with Demat account , Demat account is just a place of storage . Trading account is a platform which provides you a service of buying and selling things . You can have multiple trading accounts , which will all be connected with your single demat account .

9. Futures

Futures : Futures are the contract which gives you a right to buy or sell a specified commodity of standardized quality at a certain date in the future, at a market determined price . For Example, If you buy Reliance Futures for June series, you will get a right to buy specific number of Reliance shares at a fixed price on last Thursday of June . The future date is called the delivery date or final settlement date . Read more

10. NAV

NAV : NAV is a price of a mutual fund unit . You can see it just like a share price of company . Mutual funds invest the money in market and its tracked by NAV , if investments goes up , NAV goes up and vice versa . Generally NAV value starts with Rs 10 .

There is a myth among investors that low NAV mutual funds are better than high NAV mutual funds, which is totally wrong .

11.

## Price Vs Value – The difference between Price and Value by investment perspective

A Rose can be of more value than a Dress to your Wife or Girlfriend on Valentines Day. Even though that Rose was very less in Price compared to a Dress.

Today we will discuss things about investment products from a different perspective – Value and Price.

## What is Price and Value?

Price : Price is the amount of money needed to purchase something.
Value : Value is the worth or Importance of something.

An Example

We pay Rs.8/Kg (20 cents/Kg) for Salt as part of our Groceries, Will we stop using it if its price rises to Rs.100/Kg or even Rs.400/Kg. May be not !!! Why ? Because the Value of Salt even then will be Very high, compared to the price we pay for it. Considering that, its a very cheap product.

As a personal Example, I recently bought a second hand mobile (Nokia 6610) to keep at my home as a land line just for Rs.800 (worth 8,500 at time of buying, excellent condition). The price i paid for it was much much less than the value it would provide to me. So i consider it as one of the best investments made till date.

#### By cheap I mean its Price vs Value is very high.

Cheapness (P) = Value provided by P / Price we pay for P.

The same way there can be things for which we pay high amount, they don’t have high value for us.

Please understand that it depends on individual where something is of great value or not. For example for me, an expensive Mobile set with 134 different things costing Rs.10,000 is low in value and high in price. I don’t buy things like that, but a digital Camera worth 12K a value buy for me (because of my interest in Photography)

#### So, in short we can say “Price is What we pay actually, and Value is what are ready to Pay”

We understand this in our daily Life, but we forget this simple rule when it comes to money and investing. Most of the time we invest in things which we should not because of this basic rule, but we are carried away by emotions or simple stupidity.

Let us now see Some of the products which are really High Value, Low price

### Term Insurance :

Term Insurance is one of the best example for this.

“How much are you ready to pay as yearly premium for Rs.50,00,000 Cover for 25 yrs tenure?”.

This is a question I ask a lot of my friends in there 20-30’s. And I am amazed to see that even with a miser mind they tell me at least twice the amount what it really costs. Everyone said 2k/month or min Rs.20,000/year. The actual cost is not more than 13-14k, in fact the best price is 10,112 for 30 yrs tenure from AEGON RELIGARE Life Insurance (Click Here to read more on this).

This clearly shows that it cost way less than the expectations of people and what people are ready to pay for it. The value offered by Term Insurance is more than what it costs.

### Endowment Policies :

I am not sure if its my hatred for Endowment Policies or they really deserve my criticism every time, Or may be there are both the reasons. We pay so heavy price for Endowment polices and the value provided by them is almost nothing. Its a product designed for Wealth Creation, but wait … not for investor but for the Insurance company. (Click here to read more on Badness of Endowment Policies)

The other products I would rate in category of Cheap and Expensive are :

#### Cheap financial products:

• Term Insurance
• SIP investments in Equity Mutual Funds
• PPF
• Good Stocks in low markets (Like current markets, Buy Reliance, Infosys and Jaiprakash Associates for Rs. 1,00,000 each today and your retirement planning is probably Done !! If you are around 25 and retiring at 60)
• An interest free loan given to a close or a very good friend. (even if you don’t get any interest, you get some emotional satisfaction or valuable relationship which is more important).

#### Expensive financial products:

• Endowment Policies
• Bank FD (at the time of High inflation)
• NSC
• Most of the stocks in High Markets ( not true for all stocks but most of them) – A high interest loan given to someone whom you don’t trust much. (Even if you get good interest, there is risk of loosing money)

Every time you invest your money its important to understand the price of it and value of it. If you find that its cost is less than what you are ready to pay, consider it cheap and go for it and not in the other case. Price and Value depends on Situation, time, age and other factor, don’t forget it.

### Stock Market Investments

Most of the successful investors become one because they invest in stocks which are trading at price lower than they deserve, which market eventually finds out later. Currently In this markets Reliance is trading at 1400 (Oct 11, 2008), the it was trading at 2300 before a month, and has lost almost 40-50% in a month.

Considering it is going to start its OIL exploration and other things, its a good stock to own and at an excellent price. Its price is less and its value. Which makes it a good investment regardless of what is going to happen next month or next quarter. Sooner or Later it will turn out to be a good investment and reward its investors.

Same is with Jaiprakash Associates, ICICI Bank, DLF, Ranbaxy and other similar blue chip stocks.

Summary

When you analyse some product, stock, mutual fund, Home (Real estate) or anything for investment matter or even for general shopping, always consider value and price for it.

## Situation of Stock Market on Oct 9, 2008

### Bloodbath in Stock Market

As I write this article on Oct 9, 2008, Sensex is below 11000 (10850) … Most of the Mutual fund investments returns (since peak of Dec 2007 – Jan 2008) must be down by 40-50% (lump sum investment) and 25-35% (if SIP). Looks like Sensex is heading towards it original value of 6000 or 7000 which will bring losses to 60+%.

Though most of the investors know in theory what to do in these situation, most of them will still not buy, Now the physiological investing problem happens, For long term investors its the best time to invest, but no one will take the plunge after burning there hands so badly.

#### Do Indian Markets have many reasons to Decline further?

Remember, the global markets are looking bad, not Indian. Indian markets are just following US and European markets because they are the “Big Boss”.

The US markets and European markets are the culprit for the global slowdown. The sub-prime crisis related issues will have deep impact on US and global investment banking firms. India or other Asian countries are just bearing the pain along with global stock markets.

Yes we are in Bear markets, in fact every country stock markets are, but the bearishness of markets are exaggerated because oh high oil and US sub-prime crisis and subsequent Bank Failures.

#### India is not short of its local good news like

• Nuclear deal
• Stable growth of more than 8% p.a
• Inflation now coming down from its high (and as Oil comes down, the inflation will come down further)
• Strong Corporate Earning and Many companies on the verge of setting global standards (Reliance starting its oil production soon, etc etc)

Once things are in control (should be soon, but no one can be sure), another bull market should be more exciting than the last one. Prices will move like rockets and people who will benefit most will be one who will do investments in these down markets.

### Is it the right time for investments?

This questions was answered by many pundits when Sensex was around 15,000-16,000. Some said YES, some said NO. People who did investments must be thinking why they did it and people who did not must be happy for not investing that time. The scenario could have been exactly opposite if markets would have gone up.

#### So what do you do now?

The best idea is to invest a part of the money now, If the markets go down from here, You still have another part of your money in hand which you can invest later and again invest more if it goes down further. It will ensure that your average cost is not very high, and a decent run in markets will result in profits.

If markets go up after you buy some mutual funds or shares, you at least are in profit and not LOSS. which is a privilege now a days in Market. Once there is a good confidence that markets are stable and wont fall further, you can then do rest of your investments.

Remember, Don’t try to make profits in stock markets, just try to avoid losses and make sure that you preserve your capital. If you can do that much, profits will be at your feet.

As Warren Buffet said “We need to take very less correct decisions in Life, as far as we make sure that we don’t take many wrong ones”