Answer : For ourself, for our Family, for there better future , for our kids , for there better life , for financial independence, at last the answer comes down to Our Family.
But, before investing, do we make sure that , do we secure our family at first place against any risk and problems which may arise. You can invest in great things, whatever it is like Mutual funds, ULIPS, direct shares, gold, blah blah blah …
But what if some bad things happens to you and your family is left behind with no money at present, what is your wife, kids or your parents meet some accident and go to hospital. Is that more important or creating your wealth for future.
What is more important is to first concentrate on “Now” and if everything is taken care of, only then think about the future. How do you secure your family.
There are two things :
1. Life Insurance for yourself (assuming you are the bread winner)
2. Health Insurance for your entire family, especially if your have old parents, or going to become old in some years 🙂 .
1. Life Insurance : Read https://finance-and-investing.blogspot.com/2008/06/life-insurance-revisited-one-of-my-good.html for understanding it better .
– Robert is in his 30’s earning 5,00,000/Annam. He is married and has 2 kids .
Robert needs life insurance of around 50 lacs to secure him Family . also he should take a health cover of 4-5 lacs each .
He can take a term cover of 50 lacs for 6367 . He can also take Health Insurance of Rs 4 lacs each for him , his wife and his 2 kids (family floater plan) @Rs 5000 (Check click2insure.in for these quotes) .
Means , he can take both of these things at 21,000 / year . It comes out to be 4.2% of his yearly Income.
Now think , can you spend 5% of your yearly salary for safety and coverage of your Family ? I thing YES !!
Once you do this , you are free of any tension , and now you can use your 95% money to generate long term wealth for your family and there security . You can effectively use your 95% , only if you use your 5% for your risk management .
There can be many cases when you dont cover your family and things can go wrong, like
1. You invest heavily in Mutual funds or ULIP’s or what ever and in 2 years you die in an accident, what will happen then …
2. You invest your money in ELSS (tax saving mutual funds) for last 2 yrs and have life insurance also , but suddenly you wife meets an accident and you require 5 lacs for an operation , but you never took Health Insurance .
Investing your money is important, Covering your risks are Vital !!
Live in the moment, “now” is the truth … Keep you family happy with covering then and yourself now .
Some tips :
– Take a life cover ASAP if you have not taken it yet.
– Buy a family floater plan if your family has spouse and kids, for Parents you need to take a separate individual policy, as parents are not covered in Family floater plans.
– You can also claim tax benefit for this under section 80D.
– Don’t feel that life insurance from other companies (other than LIC) are very risky and anything like that . Insurance sector is now getting mature enough and govt is taking all measures to confirm that the companies which enter Insurance Industry are from great Business families and conform with the guidelines . But its true that LIC will always be the safest (100%) .. but 99.999% is also safe …
Summary
Its more important to cover your Life risk and family Health risks first before any investments for future , when you put your money in Insurance and Health Insurance you are already taking steps for strong invesments for future which is safety of your family , which is of supreme importance . Dont ignore it … Take appropriate cover .
Lets play a game, the name of the game is “Game of Trading”. I am stock market and you are investor. You have got 2 chances of investing you money, One time I will give you 200% return and other time I will give you -80%, or in reverse order, so it can either be
200%, -80%
OR
-80%, 200%
You have to decide in advance that how much percentage of your total capital you will invest each time (invest capital) and how much you will keep safe money (safe capital), you have to decide for both the times in the start only.
Lets analyse different cases.
Case A : You choose invest capital as 100% first time and 20% for next chance
Case A.1 : Return was -80% first time and 200% next time.
Case A.2 : Return was 200% first time and -80% next time .
Case B : You choose invest capital as 20% first time and 100% for next chance
Case B.1 : Return was -80% first time and 200% next time.
Case B.2 : Return was 200% first time and -80% next time.
You can see that at last A.1 = B.2 and A.2 = B.1 , so it means that order of your invest capital ratio does not affect your result , it both the cases it can either become 28 or 252 (depending on the return order) …
What should you do?
100% and 20% choice will always loose in long run, if you play this game over and over again for long run, Understand that in this game, you can make it “high risk high return” Game or “Extremely no risk, low return game”, And your choice of your invest percentage will decide which game is it.
Characteristic of “High return High risk game” : Its possible to make great money in short term, but in long run you will loose.
Characteristic of “Low risk, low return game” : You will Not make great return in short term, but with compounding effect, you are bound to be a winner in long run.
Let see if we can choose a ratio (invest percentage) can give us some profit irrespective of the return order.
Lets choose 25% invest capital :
Case A.1 : Return was -80% first time and 200% next time.
Case A.2 : Return was 200% first time and -80% next time.
You can see that in any case your 100 becomes 120, which is 20% return.
What if you choose 80% invest capital : In that case at last you will have 93.6 (calculate yourself). So what should be the best percentage capital to deploy each time in this game.
I tried to make an Equation, with all variables
p = profit times (2 or 200/100)
l = loss times ( -.8 or -80%/100 )
C = Capital at the start
T = Trade factor (.25 means, 25% of the capital will be invested at any time)
We want to find optimum T, given any p and l (assuming that the trade will be done 2 times)
So, If you calculate the total capital after the 2 trades (do the math), you will get
Total capital = C (1 + pT) * (1 + lT)
So our original capital is getting multiplied by (1+pT)*(1+lT), and we have to maximize this number.
lets say I = (1+pT) * (1+lT)
I = 1 + plT^2 + pT + lT
If we do some differentiation here with respect to T (people who don’t know differentiation, just leave it), and put dI/dT = 0
2plT + p + l = 0
T = – (p + l) / 2pl
So the best valeuof T is -(p+l)/2pl ..
For our earlier example , p = 2 , l = -.8
we get – (2 – .8)/ (2 * 2 * -.8) = .375
Which means, 37.5% of capital will be invested everytime, and with that our capital will become 122.5 and that is the max you can make without risk.
What if return = 200% and -90% , in that case p = 2 , l = -.9 , so T = 2 – .9 / 2 * 2 * .9 = 1.1/3.6 = 11/36, means investing capital will be 30.555% always and that will give us max return.
What is the point i am trying to make?
In any given situation of making money, there may be a big risk of loosing it, we should always use these kind of tools and always be safe. Don’t try to be very bold in stock markets.
People who make killing in the start often get killed somewhere on the way and people who make respectable and sufficient money with satisfaction become winner over long term.
Summary
When you do Investment or do trading, you should never put all your capital into it, one bad trade or investment and you will be ruined forever, better to risk only that much capital which can not take out of of the game, but just hurts a bit.
Take small and risk-less profits if possible, Investing and trading is all game of probabilities. Use math’s and logic to take smart decisions like discussed in this article.
“There are old investors and there are bold investors, but not both”.
One of my friend is fond of shares and options trading , from a capital of Rs.50,000 , he grew it to Rs 2,00,000 , whereas I am almost at the same place from where I had started because I do some thing called “Risk Management” … Every time I take a trade or invest in anything . This is how I go about it .
– Either I don’t take the trade
– Or I take the trade, but work on risk management, I hedge it using PUTS or invest less in that.
Because of these two things I either miss big profits or make very small profits. managing risk involves cost and that’s the cost you have to pay for trying to be “safe”.
Last week we both purchased some thing which gave him 50% return, but gave me just 7-8% return over my investment. The reason was that I also hedged my position and tried to be “smart”, which my friend didn’t Acknowledge.
There are many incidents like this, because of which I always lag behind him when it comes to performance, and I am always ahead of him in being safe which never helped until now.
Jan 7 2008 :
10:30 AM :
Markets were a bit up and things looked good , He bought Satyam’s Calls with almost all of his capital, He has good intuition of which options may work and which may not, but I tried to convince him that buying a PUT on a lower strike price will save him in case he is wrong.
But to my expectation, he was “sure” that it would work, He put SL at 175 just to show me because of the fact that he knew it wont be touched at least today.
11:30-12:00 PM :
Satyam Fiasco news came in and within no time Share was down 30-40%, No surprise that even SL was not entertained … because prices never stopped .. everyone was just in a rush … With in some time Share plunged to 60-70, My friends calls were worthless and It doesn’t look that it will now move up from this point.
In short He is dead … He is out of this game now … He has 20,000 cash and all 1,70,000 or 1,80,000 he had put in calls are not even worth 4,000 – 5,000.
Price of Satyam 120 PA Jan 29
11:00 AM : Rs.1
2:30 PM : Rs.90
Return : 9,000% in 3 hrs.
What is the point I’m trying to make?
Everybody likes to make big profits and we should but not at the cost of risk of blowing up all our capital. Its not just related to Share markets or options. It also applies to Debt market, Mutual funds.
Do everything you can do to minimize or avoid the risk. Its very true that returns comes with risk. I am not saying “not to take risks”, i am talking about “managing risk”.
“Managing Risk” is the biggest measure you should take if you are in this field.
In some of the next posts we will try to see what are the different kind of “risk management” techniques and its importance.
Following is a chart showing the list of people for whom you can claim deductions for tax exemption. For example, if you pay the LIC Insurance premium, you can claim if the got premium paid for.
Yourself
Spouse
Children
For further details … see this table … Click to enlarge it.
95% of the salaried people are rushing to invest in tax saving (India). 5% of smart people have already done it (like me). The biggest rush I know must be still for LIC policies and PPF because very fewer people in India invest in Mutual funds still.
Both of these mutual funds are long term consistent performers and come from very respected and best AMC’s in India. Both of these have always been one of the best in the category.
But time changes, situation changes :), We can analyze some numbers and see what are the future prospects for these two mutual funds in comparison to each other. We will see on what basis we can conclude that. Please read the following conversation with my friend. It should give you some idea about how to choose mutual funds and why one could be possible is better than others.
Robert: Hey Manish, need some suggestion from you.
Manish: Hi Robert, what’s up … how is life these days?
Manish: How is a job going on?
Robert: Nothing yaar, I am just busy with my tax savings, have to submit the documents ASAP, so need to invest now, I am thinking of investing in an ELSS, Any suggestions?
Manish: Hmm… See, There are two good funds I think you can invest in, SBI Magnum tax gain and Sundaram BNP Paribas Taxsaver. These are the 5 star rated funds from valueresearchonline.com. You can consider those. But if you only want to invest in one ELSS, I would say go with Sundaram.
Robert: Hmm. Can you give me how you did this analysis and why are you saying that Sundaram looks better than SBI at this moment? I thought if a mutual fund has been long term consistent performer and our time horizon is more than 3-5 years, We can invest in any good funds.
Manish: That is true, I am not saying that SBI is bad and Sundaram is the best, we are trying to see why Sundaram is a better choice for now. We will see the numbers and some charts, and we can look that Sundaram is doing much better than SBI for quite some time.
That gives us a good estimation of which one is good for investing now. So, this requires some long-duration talk, I will have to tell you the details, are you ready?
Robert: ok
Manish: So, Let me first tell you that Since Inception returns for SBI has been 16.67% and for Sundaram its 19.35%, Which is highly respectful .. Let us also look at the following chart of NAV of both mutual funds for last 3 years.
Green: Sundaram
Red: SBI
Blue: Sensex
Manish: You can see that in the last 3 years, Sundaram has outperformed SBI Magnum and also was less volatile than SBI, when it comes to being consistent with Sensex. Also, we must see the last year charts of these two in isolation.
Manish: You can see that Sundaram has taken over SBI around Jun 2008 and has performed better than SBI. You must keep in mind that NAV and index values have been rebased to 100, for comparison purposes only.
Robert: Hmm.. that is fine, I understood that we have some charts which try to prove the point, But there must be other numbers also which favors Sundaram over SBI.
Manish: Yes, let me tell you some things which you can use for comparison purposes.
1. Sharpe Ratio:
Generally, people judge mutual funds performance by the returns only, whereas the better parameter is Return with respect to the risk taken. The Sharpe Ratio of a fund measures whether the returns that a fund delivered were commensurate with the kind of volatility it exhibited.
This ratio looks at both, returns and risk, and delivers a single measure that is proportional to the risk-adjusted returns.
So, the Sharpe ratio is noting but risk-adjusted returns, So the higher Sharpe Ratio is better. Currently, in the Mutual fund’s industry, Sundaram Tax saver and Canera Rebecco mutual funds have the highest Sharpe ratio of 15. SBI has 0.0.
2. Alpha Ratio:
This is a very important ratio in mutual funds. Alpha is a measure of an investment’s performance on a risk-adjusted basis. It takes the volatility (price risk) of a security or fund portfolio and compares its risk-adjusted performance to a benchmark index.
The excess return of the investment relative to the return of the benchmark index is its alpha.
Simply stated, alpha is often considered to represent the value that a portfolio manager adds or subtracts from a fund portfolio’s return. A positive alpha of 1 means the fund has outperformed its benchmark index by 1%.
Correspondingly, a similar negative alpha would indicate an under-performance of 1%. For investors, the more positive an alpha is, the better it is.
Alpha for Sundaram: 3.35
Alpha for SBI Magnum: -1.18 !! (Bad)
3. R-Squared:
R-Squared is a statistical measure that represents the percentage of a fund portfolio’s or security’s movements that can be explained by movements in a benchmark index.
Higher the R-squared Value, closer the mutual fund to the index, what it means is that it will behave like Index funds up to that percentage, which means what if a mutual fund has r-square value of 100, its nothing but an index fund, then why to buy the mutual fund and pay high managing fees, A mutual fund should have a balance in R-square it should not be more than 90 and less than 80.
A mutual fund with less than 80 R-square shows that they have more tendency to be volatile and be close to the index benchmark. forbes.com says: Mutual fund investors should avoid actively managed funds with high R-squared ratios, which are generally criticized by analysts as being “closet” index funds.
In these cases, why pay the higher fees for so-called “professional management” when you can get the same or better results from an index fund.
Robert: Great !! those ratios are really important parameters while judging the mutual funds. Btw, I understood these things. Any thing regarding holdings?
Manish: Definitely, Ratios are important, but we should also look at simple things like its holdings in different types of companies. See below –
Sundaram Portfolio
[su_table responsive=”yes”]
      Market Capitalization
       % of Portfolio
      Giant
       56.17
      Large
       17.10
      Mid
       24.88
      Small
       1.85
      Tiny
          —
[/su_table]
SBI Magnum
[su_table responsive=”yes”]
      Market Capitalization
       % of Portfolio
      Giant
       46.07
      Large
       21.48
      Mid
       25.52
      Small
       6.91
      Tiny
       0.01
[/su_table]
If you compare the investments by Sundaram, it has a high concentration in Giant companies and has avoided investments in Small and Tiny Companies, which helps in avoiding Risk (also returns can be affected, but more important is managing risk).
Also in the future when Markets improve and start rising, front line stocks (big companies) will be the first to move up.
Robert: Any other small things to consider?
Manish: Other things you should see are
Expense Ratio (lower the better) : Sundaram : 2,.24 , SBI : 2.5
Market Turnover
PE Ratio: Lesser is better
PB Ratio: Lesser is better, SBI is better in this Market Capitalization There are many other,
Robert: That is fine, but I can see that SBI is ranked 1st when you consider 5 yrs return and Sundaram is 2nd, I saw it on Value research online site.
Manish: True, But did you see its 3 yr Rank also? Its 5th !! and did you see 1 yr rank: its 12th for SBI Where as Sundaram is 2nd in 5 yrs, 1st in 3 yrs and 2nd in 1 yrs return category, which gives an indication that Sundaram is taking over as one of the best funds available over SBI slowly.
Robert: Hmm.. that makes sense, Great !! I would really consider these points, this helped a lot. Manish: My Pleasure !! But please understand that there is no guarantee that Sundaram will outperform SBI next year or from now on. There is just a high possibility for it, because of our analysis.
Question: Guys (and gals) … Do you know who is Robert and Manish 🙂 Ans: Both are Me … :), I just created this talk to present the article and learning in a different way and to make it practical and enjoyable .. I hope you all liked it.
Note: Please note that the views and analysis are personal, there may be some error, if someone finds any please, let me know. I will correct it. But I am sure there is no mistake or error in data.
Hi Friends, Happy New Year to all of you. As this new year is coming, Let us discuss some things, they are:
1. Financial Resolutions for 2009
2. The outlook of Asset Classes in 2009 and onwards.
Financial Resolutions for 2009
Let us all make sure that we will do better than the previous year and make some changes.
#1. Adopt the attitude of Expenses = Salary – Savings instead of Savings = Salary – Expenses
#2. Learn more and more about investing to at least up to a level, where I can take my decisions without any help of others and also be able to help someone else.
#3. Learn all the basic taxation rules and investing rules.
#4. Not take decisions whose Risk/reward ratio does not suit me, even if there is no risk in some investment, its return should at least match your goals.
Person 1: Person not investing his money in any thing (just putting it in the bank) and having a desire of getting a 15% return and risk appetite of the same.
Person 2: Another person investing in Equity for a return of 50% in a year, but he actually requires and can be fine with a 15% return.
Both the people here are wrong and are not doing correctly. They must invest in a way that satisfies both there return/risk ratio.
#5. Will not get trapped in useless products just because someone else thinks so, we will do our own analysis, take suggestions from reliable sources and people with knowledge and only then invest our hard-earned money.
Outlook and suggestions for Asset classes in 2009
Let us see some asset classes and let’s have a quick view of it.
#1. Mutual Funds: The situation now is little under control, with a downward bias for the first quarter, but things should be good by the year-end and then we can see a good rally there after. Better to invest though SIP only.
#2. Direct Equity (shares): Make sure you buy shares only if you have long term view and do not want to speculate for short term .. You can buy some very good shares now and hold it for the next 5-20 yrs, and I am sure they will return fortune. The best time after 2003 is NOW !! But better buy on dips …
If you want to invest 100, make sure you break it in 3-4 parts and invest on dips … its like following SIP on our own. Metals (safe) and Real estate (little risky for short term) can be a good bet for long term investments.
#3. Real Estate: No comments … There are still chances of further correction … But people who do not want to buy it for investment can still invest if it suits there requirement and budget.
#4. Bank FD’s: People looking for short term investments like 6 months – 1.5 yrs can put their money in FD’s… The interest rates offered are good and with inflation coming down, it will be a fair investment.
#5. Derivatives (Futures and Options): There are many people who are now trying these instruments, do not understand the risk associated, Please understand very clearly that these are Atom bombs in the Finance field … You can either kill yourself with it or make a Killing out of it …
If you want to do it .. better learn about it .. prepare heavily and only then enter .. Else defeat is almost certain. Some of the biggest financial companies have gone bankrupt over night because of derivatives.
See:
The use of derivatives can result in large losses due to the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset’s price. However, investors could lose large amounts if the price of the underlying moves against them significantly.
There have been several instances of massive losses in derivative markets, such as:
The need to recapitalize insurer American International Group (AIG) with $85 billion of debt provided by the US federal government[4]. An AIG subsidiary had lost more than $18 billion over the preceding three quarters on Credit Default Swaps (CDS) it had written.[5] It was reported that the recapitalization was necessary because further losses were foreseeable over the next few quarters.
The bankruptcy of Orange County, CA in 1994, the largest municipal bankruptcy in U.S. history. On December 6, 1994, Orange County declared Chapter 9 bankruptcy, from which it emerged in June 1995. The county lost about $1.6 billion through derivatives trading. Orange County was neither bankrupt nor insolvent at the time; however, because of the strategy, the county employed it was unable to generate the cash flows needed to maintain services. Orange County is a good example of what happens when derivatives are used incorrectly and positions liquidated in an unplanned manner; had they not liquidated they would not have lost any money as their positions rebounded.[citation needed] Potentially problematic use of interest-rate derivatives by US municipalities has continued in recent years. See, for example:[6]
#6. Gold: Gold has lost its shine a bit now and can not be considered the best investment you can make … Still a small part can be in a portfolio, but not more than 5%.
#7. Debt Mutual Funds: People can invest in these debt funds also if their investment horizon is less than 1 yrs (invest for short term goals).
#8. Insurance: Any one who has still not taken insurance and still finds that he/she needs to take it .. please take is ASAP. There should not be any delay in taking Life Insurance ever.
Some Notes on Inflation:
Inflation may go down below 0% in 2009, because of speedy fall in commodity and crude prices.
India may see some effect of job losses and slow down in 2009 … Corporate results are expected to be devastating in the first and second quarters of 2009 at least … But still, India is among the top growing economies in the world. So we must not concentrate on the short term. India’s future is Great and unquestionable.
Summary: 2009 will be a good year, it is an excellent year and we will not do mistakes if we have done in 2008 and before. we will learn more and use our money in a better way from now onwards.
Let me take one by one each line and do some analysis and raise some questions.
A)Death Benefit:
On death during the first policy year: Basic Sum Assured with Guaranteed Addition.
On death during the policy term after the first policy year, excluding last policy year: 1/3rd of Basic Sum Assured with Guaranteed Addition.
On death during last policy year: 1/3rd of Basic Sum Assured with Guaranteed Addition along with loyalty addition, if any
Some points here to consider:- Your risk cover will be 6 times your investment and just 2 times for the rest of the duration + some loyalty addition if any. So, in a nutshell, it as good as saying your Cover is just 2 times your premium …
– What does it mean? you will get double our initial investments if you die after the first year.
This is the case when you die …
B)Maturity Benefit:
On maturity, the Maturity Sum Assured along with Guaranteed Addition and Loyalty Addition, if any, shall be payable.
Maturity Sum Assured shall be 1/6th of Basic Sum Assured.
– Means, if your premium is Rs 1,00,000, then Basic Sum assured is Rs 6,00,000 and hence, Maturity Sum Assured is Rs 1,00,000
C)Guaranteed Addition:
The policy provides for Guaranteed Addition at the following rates:
Rs. 100 per thousand Maturity Sum Assured per year for a policy of 10 years term.
Rs. 90 per thousand Maturity Sum Assured per year for a policy of 5 years term.
– Means, if your premium is 1,00,000, then your Guaranteed Addition is Rs 10000 (10 yrs) … Means, You will get Rs 1,00,000 as Guaranteed Addition in 10 yrs .. and along with your original capital, you will get back Rs 2,00,000 back after 10 yrs.
D)Loyalty Addition: Depending upon the Corporation’s experience the policy will be eligible for Loyalty Addition on death during the last policy year or on the Life Assured surviving the stipulated date of maturity at such rate and on such terms as may be declared by the Corporation
This may or may not be there.
Now, let’s take a real like example.
Ajay takes a 6 lacs policy over a 10-year term.
Jeevan Aastha Premium = 96,960
The amount he would get if he dies in the first year: 6,00,000
Amount on Maturity : 97000 + (10*10000) = 197000 (loyalty bonus is not assured , so not adding it)
from what angle do you think this policy makes sense. You are maximum doubling your money in 10 yrs and nothing else. And the best time to die after taking the policy is the first year itself .. then you can get a little benefit (but still at a big cost).
I don’t understand why people complicate things .. LIC plans to collect Rs 25,000 Crores from this policy, and I am sure they will succeed. Because there are many people in our country, who don’t understand the effects of Inflation, compounding and get confused with all those confusing statements.
Now if you are a regular reader of this blog .. then you should be able to utilize Rs 97,000 to generate better returns than Jeevan Astha.
Let us do this …
1. Insurance for the cover of 6 lacs, not just for the first year but for all 10 years .. Simple: Take a term Insurance of Rs 6 lacs for 10 yrs, it’s around Rs 9840 (single premium, SBI life insurance for a 26 yr old ) …
2. After this, you are left with around 88,000, which you should invest in Equity Diversified mutual funds either one time or through SIP for 10 yrs … Even if we take a 10% return. It would be 2,28,000.
When it comes to Investing, just Keep it Simple, Stupid (K.I.S.S) … 🙂 UPDATE (28 AN 2009 ): Shyam Pattabi (writes for HINDU) also shares his similar thoughts on this product at http://www.shyamscolumn.com/2009/01/guaranteed-return-schemeanyone.html ( i am glad I made correct analysis) Update (Jan 19, 2008): On NDTV Profit, Monika Halan has given comments that “Jeevan Astha” should be the last product you should look for and only if you have cash to put nowhere, They have given “Don’t Buy” rating to this product and they also said that this product has lots of hype got created. Monika Halan is Editor of “Outlook Money” and One of the most mature and best personal Finance advisor I can think of.
Disclaimer: The above analysis is based on my study and should not be taken as investment advice or discouragement from advice, use your own analysis to take your decisions. I will not be responsible for your investment decisions.
During the last 5-6 months GILT funds have given returns like Equity funds … Something around 20-40% in last 5-6 months … And they are almost safe on downside … Lets see more on this Read : 5 mistakes of my first trade
What are GILT Funds ?
A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt.
To have a look at different GILT Funds see : http://www.moneycontrol.com/india/mutualfunds/gainerloser/17/15/snapshot/dlong/ab Risks factors
Gilt funds have different kind of risks associated with it .. Once of them is interest rate risk … There returns are inversely proportional to the interest rates and the reason for the exploding returns given by most of these GILT funds or other Debt funds are the result of “interest risk drop in last 6 months because of the measures taken by RBI” .
However, there are some negatives too to these funds. Bond yields carry a higher credit risk than G-Secs and in bad times ratings can go for a toss. Some retail investors don’t understand ratings and are also not aware of which corporate debt these investments are made in to. Read about “Why you need Contingency Funds”
In the link http://www.moneycontrol.com/india/mutualfunds/gainerloser/18/03/snapshot/op1/ab/option/dlong/sort/yr1 , If you see the 6 months returns and 1 year returns , they are 41.2% and 41.8% , Think about what was the return during the 6 months period before 6 months (Dec 07 – May 08) .. The last 6 months have been exceptional for our Economy because of drastic decrease in interest rates in short period of time . This happens rarely .
To get a good idea of actual performance of these funds , you should see long term returns like 5 yrs returns or Since Inception returns .
Now if you see http://www.moneycontrol.com/india/mutualfunds/gainerloser/18/09/snapshot/op1/an/option/dlong/sort/yr1for annualized returns , No fund has crossed 12% returns CAGR , and most of the top funds are in range of 7-8% Except the out performers with 10.3 and 12.4% .
http://www.valueresearchonline.com/funds/newsnapshot.asp?schemecode=1921 Shows the snap shot of a fund from the list .. you can clearly see that the risk Grade is HIGH for this fund , because of the risk associated with interest rates . (try to click on Portfolio part and see risk return chart) .
What you should do now ? Should you invest in Them ?
Don’t get fooled by the past returns for these Funds , because now there is no charm left in these funds now . They were excellent funds before 6 months and those who anticipated the interest rates drop made most of it . So next time where you anticipate there is going to be fall in interest rates , then you can consider these funds for your DEBT part of portfolio … These are still good funds if you don’t believe in Equity investment in these troubled times, but from my side “Equity Investments are best as of now ” considering your time frame is 4+ years .
Summary
GILT funds are mainly DEBT products , the normal long term returns expected should not be more than 8-10% on average … But still short term opportunities exists when drop in interest rates are expected … To read more articles : Go to the blog directory (Click Here)
Planning your financial life does not mean planning for your long term financial needs only, It will be incomplete unless you keep an emergency fund for the unexpected emergency situations.
In this article i will tell you why it is important to keep emergency fund and how much of this fund you should keep aside.
What is Emergency fund?
Emergency fund is the money that you should keep aside, so that you can use it in case you meet up with some sudden financial surprises, for example –
Emergency funds are not to satisfy the daily expenses and basic needs, it is a support that you will have when you really need it in your hard time.
Why is is essential to have an emergency fund?
Having an emergency corpus must be the priority for everyone while planning for a great financial life. Let’s see some of the impacts of having emergency fund on your personal and financial life.
1. Helps you to keep your stress level low
When your know that you have an emergency fund, you can live a stress-free and relaxed life. Because you know that you have a backup plan and so if any emergency pop-ups you are already ready to face it.
2. No need to take an emergency loan
Taking a loan or asking for money in your hard time can sometime hurts your pride. Having an Emergency fund will be helpful not only to solve the problem but it also protects your self-esteem.
3. Don’t have to redeem from your future savings
Your savings are related to some very important future goals of yours. Contingency fund will help you to protect those dreams of yours by satisfying your today’s emergency need.
4. No need to cut your essential expenses –
It happens with most of the people, they have to sacrifice their expenses though they are important, to collect money for their unplanned or emergency expenses. Having an emergency will be a helpful hand in those difficult times of yours.
Why it makes sense to have an Emergency fund?
With the global slowdown, there are many cases of unexpected job losses in the field of Finance, IT, Manufacturing and many others. You never know when you will be without job.
Lets take two scenario when you loose your job and you either had Contingency funds and you did not, Let us see what happens in these two cases.
Case 1: You do not have contingency Funds: Put yourself in this Situation, Close your eyes and try to think about this situation, How do you feel?
Your Family depends on you, all your family expenses are met with you salary, now you loose your job!! What if you don’t find another job soon? In this situation you have a heavy pressure on you to anyhow find a new job as soon as possible, You need a JOB !! and not a “good” or “appropriate” or “Dream” JOB.
If you find a job, but you don’t like it or wanted to do it .. still you will have to take it because of the pressure of “finding a JOB because of others depending on you” …
You compromise on Salary, Company and your wishes. Why does this happen? This happens because you cant wait, because you don’t have the to survive of another 1-2-3 months. You know that you can wait a little more and find a good job suitable for you, but you cant wait.
Case 2: You have Sufficient Contingency Funds: This case is just the opposite of what we discussed above. When you have sufficient CF, you have a relief in mind that you have sufficient time to find a good job without compromising your family needs.
You don’t feel the pressure to get the job ASAP. Though you have to find a good job soon, its not necessary that you take any shitty job which comes your way …
See this Video too …
How to start saving for Emergency fund?
1. Pre-decide your monthly expenses –
Plan your monthly expenses. Try to control your expenses as much as possible, so that you can save money to invest in your emergency fund. Today’s unnecessary expenses can have a bad impact on your savings for your contingency fund.
2. Set an auto deduction towards emergency fund –
When you set an auto-deduction for your emergency fund at the start of the month, you will not have any regret at the end of the month for not saving anything for your unexpected emergencies.
3. Don’t touch the emergency fund for quick needs or smaller crisis –
Lot of people do this mistake, they use their emergency corpus for the some very small emergencies which they can handle with their routine expenses also. You should criticize the situation and
4. Save for emergency before investing in long term goals –
You long term investments are related to your specific goals. So it is obvious that you have as emotional attachment with those investment and you don’t want to touch that money for any other purpose. If you have an emergency fund, then you don’t need to use the money you have invested for your future dreams.
Besides, some long term investment have lock-in period, so if you want to redeem your money before completing the maturity time period, you will have to pay some penalty charge.
Where to have Contingency funds?
As per the name, it can be seen that this amount is required at the time of unforeseen situation which can happen anytime,so it must be parked at some liquid avenue like Bank account or Liquid funds.
If you are keeping 4 months of funds as CF, then you can keep 1 month money in Cash and rest 3 months money in Liquid funds.
Summary: Contingency Funds are the part of Risk management. And risk management is something no one should avoid. People realize its importance only when they plan for it and get trapped in a situation which demands Contingency funds. ..
So now its your turn. Plan for it, be ready for unplanned emergency, and secure your future.
What do you feel after reading this article? Do you agree with this?
do let us know what do you think about the concept of emergency fund and also your view on this article in our comment section.
This is a time when long term investing should be done. If you have spare cash for long term, Equity is for you. But how do you do it? How do you choose them? What are the important things you should look at while buying shares for long term?
There are some key things we will have a look at today, these are the key ratios discussed in book Profitable Investment in Shares, by S.S Grewal and Navjot Grewal.
But, before reading them understand that they are ratios which good indication of share prospects and are not guarantee about share price rise in long term, Share markets always run on Emotions and perspective which can change anytime…
Also periodic review is necessary, just buying today and looking after 10 years is not the idea… Buying is always the first step, Periodic review is the next.
8 Ratios to look before buying a share
1. Ploughback and reserves
After deduction of all expenses, including taxes, the net profits of a company are split into two parts — dividends and ploughback.
Dividend is that portion of a company’s profits which is distributed to its shareholders, whereas ploughback is the portion that the company retains and gets added to its reserves.
The figures for ploughback and reserves of any company can be obtained by a cursory glance at its balance sheet and profit and loss account.
Ploughback is important because it not only increases the reserves of a company but also provides the company with funds required for its growth and expansion. All growth companies maintain a high level of ploughback. So if you are looking for a growth company to invest in, you should examine its ploughback figures.
Companies that have no intention of expanding are unlikely to plough back a large portion of their profits.
Reserves constitute the accumulated retained profits of a company. It is important to compare the size of a company’s reserves with the size of its equity capital. This will indicate whether the company is in a position to issue bonus shares.
As a rule-of-thumb, a company whose reserves are double that of its equity capital should be in a position to make a liberal bonus issue.
Retained profits also belong to the shareholders. This is why reserves are often referred to as shareholders’ funds. Therefore, any addition to the reserves of a company will normally lead to a corresponding an increase in the price of your shares.
The higher the reserves, the greater will be the value of your shareholding. Retained profits (ploughback) may not come to you in the form of cash, but they benefit you by pushing up the price of your shares.
2. Book value per share
You will come across this term very often in investment discussions. Book value per share indicates what each share of a company is worth according to the company’s books of accounts.
The company’s books of account maintain a record of what the company owns (assets), and what it owes to its creditors (liabilities). If you subtract the total liabilities of a company from its total assets, then what is left belongs to the shareholders, called the shareholders’ funds.
If you divide shareholders’ funds by the total number of equity shares issued by the company, the figure that you get will be the book value per share.
Book Value per share = Shareholders’ funds / Total number of equity shares issued
The figure for shareholders’ funds can also be obtained by adding the equity capital and reserves of the company.
Book value is a historical record based on the original prices at which assets of the company were originally purchased. It doesn’t reflect the current market value of the company’s assets.
Therefore, book value per share has limited usage as a tool for evaluating the market value or price of a company’s shares. It can, at best, give you a rough idea of what a company’s shares should at least be worth.
The market prices of shares are generally much higher than what their book values indicate. Therefore, if you come across a share whose market price is around its book value, the chances are that it is under-priced. This is one way in which the book value per share ratio can prove useful to you while assessing whether a particular share is over- or under-priced.
3. Earnings per share (EPS)
EPS is a well-known and widely used investment ratio. It is calculated as:
Earnings Per Share (EPS) = Profit After Tax / Total number of equity shares issued
This ratio gives the earnings of a company on a per share basis. In order to get a clear idea of what this ratio signifies, let us assume that you possess 100 shares with a face value of Rs.10 each in XYZ Ltd. Suppose the earnings per share of XYZ Ltd. is Rs.6 per share and the dividend declared by it is 20 per cent, or Rs 2 per share.
This means that each share of XYZ Ltd. earns Rs 6 every year, even though you receive only Rs 2 out of it as dividend.
The remaining amount, Rs 4 per share, constitutes the ploughback or retained earnings. If you had bought these shares at par, it would mean a 60 per cent return on your investment, out of which you would receive 20 per cent as dividend and 40 per cent would be the ploughback.
This ploughback of 40 per cent would benefit you by pushing up the market price of your shares. Ideally speaking, your shares should appreciate by 40 per cent from Rs 10 to Rs 14 per share.
This illustration serves to drive home a basic investment lesson. You should evaluate your investment returns not on the basis of the dividend you receive, but on the basis of the earnings per share. Earnings per share is the true indicator of the returns on your share investments.
Suppose you had bought shares in XYZ Ltd at double their face value, i.e. at Rs 20 per share. Then an EPS of Rs 6 per share would mean a 30 per cent return on your investment, of which 10 per cent (Rs 2 per share) is dividend and 20 per cent (Rs 4 per share), the ploughback.
Under ideal conditions, ploughback should push up the price of your shares by 20 per cent, i.e. from Rs 20 to 24 per share. Therefore, irrespective of what price you buy a particular company’s shares at its EPS will provide you with an invaluable tool for calculating the returns on your investment.
4. Price earnings ratio (P/E)
The price earnings ratio (P/E) expresses the relationship between the market price of a company’s share and its earnings per share:
Price/Earnings Ratio (P/E) = Price of the share / Earnings per share
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.
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.
For example, blue chip companies often have P/E ratios that are as high as 20 to 60. However, most other companies in India have P/E ratios ranging between 5 and 20.
On the face of it, it would seem that companies with low P/E ratios would offer the most attractive investment opportunities. This is not always true. Companies with high current earnings but dim future prospects often have low P/E ratios.
Obviously such companies are not good investments, notwithstanding their P/E ratios. As an investor your primary concern is with the future prospects of a company and not so much with its present performance. This is the main reason why companies with low current earnings but bright future prospects usually command high P/E ratios.
To a great extent, the present price of a share, discounts, i.e. anticipates its future earnings.
All this may seem very perplexing to you because it leaves the basic question unanswered: How does one use the P/E ratio for making sound investment decisions?
The answer lies in utilizing the P/E ratio in conjunction with your assessment of the future earnings and growth prospects of a company. You have to judge the extent to which its P/E ratio reflects the company’s future prospects.
If it is low compared to the future prospects of a company, then the company’s shares are good for investment. Therefore, even if you come across a company with a high P/E ratio of 25 or 30 doesn’t summarily reject it because even this level of P/E ratio may actually be low if the company is poised for meteoric future growth.
On the other hand, a low P/E ratio of 4 or 5 may actually be high if your assessment of the company’s future indicates sharply declining sales and large losses.
5. Dividend and yield
There are many investors who buy shares with the objective of earning a regular income from their investment. Their primary concern is with the amount that a company gives as dividends — capital appreciation being only a secondary consideration. For such investors, dividends obviously play a crucial role in their investment calculations.
It is illogical to draw a distinction between capital appreciation and dividends. Money is money — it doesn’t really matter whether it comes from capital appreciation or from dividends.
A wise investor is primarily concerned with the total returns on his investment — he doesn’t really care whether these returns come from capital appreciation or dividends, or through varying combinations of both. In fact, investors in high tax brackets prefer to get most of their returns through long-term capital appreciation because of tax considerations.
Companies that give high dividends not only have a poor growth record but often also poor future growth prospects. If a company distributes the bulk of its earnings in the form of dividends, there will not be enough ploughback for financing future growth.
On the other hand, high growth companies generally have a poor dividend record. This is because such companies use only a relatively small proportion of their earnings to pay dividends. In the long run, however, high growth companies not only offer steep capital appreciation but also end up paying higher dividends.
On the whole, therefore, you are likely to get much higher total returns on your investment if you invest for capital appreciation rather than for dividends.
Watch this video to know more detailed information about dividend and yield :
In short, it all boils down to whether you are prepared to sacrifice a part of your immediate dividend income in the expectation of greater capital appreciation and higher dividends in the years to come and the whole issue is basically a trade-off between capital appreciation and income.
Investors are not really interested in dividends but in the relationship that dividends bear to the market price of the company’s shares. This relationship is best expressed by the ratio called yield or dividend yield:
Yield = (Dividend per share / market price per share) x 100
Yield indicates the percentage of return that you can expect by way of dividends on your investment made at the prevailing market price. The concept of yield is best clarified by the following illustration.
Let us suppose you have invested Rs 2,000 in buying 100 shares of XYZ Ltd at Rs 20 per share with a face value of Rs 10 each.
If XYZ announces a dividend of 20 per cent (Rs.2 per share), then you stand to get a total dividend of Rs 200. Since you bought these shares at Rs 20 per share, the yield on your investment is 10 per cent (Yield = 2/20 x 100). Thus, while the dividend was 20 per cent; but your yield is actually 10 per cent.
The concept of yield is of far greater practical utility than dividends. It gives you an idea of what you are earning through dividends on the current market price of your shares.
Average yield figures in India usually vary around 2 per cent of the market value of the shares. If you have a share portfolio consisting of shares belonging to a large number of both high-growth and high-dividend companies, then on an average your dividend in-come is likely to be around 2 per cent of the total market value of your portfolio.
6. Return on Capital Employed (ROCE), and
7. Return on Net Worth (RONW)
While analyzing a company, the most important thing you would like to know is whether the company is efficiently using the capital (shareholders’ funds plus borrowed funds) entrusted to it.
While valuing the efficiency and worth of companies, we need to know the return that a company is able to earn on its capital, namely its equity plus debt. A company that earns a higher return on the capital it employs is more valuable than one which earns a lower return on its capital. The tools for measuring these returns are:
1. Return on Capital Employed (ROCE), and
2. Return on Net Worth (RONW).
Return on Capital Employed and Return on Net Worth (shareholders’ funds) are valuable financial ratios for evaluating a company’s efficiency and the quality of its management. The figures for these ratios are commonly available in business magazines, annual reports and economic newspapers and financial Web sites.
Return on capital employed
Return on capital employed (ROCE) is best defined as operating profit divided by capital employed (net worth plus debt).
The figure for operating profit is arrived at after adding back taxes paid, depreciation, extraordinary one-time expenses, and deducting extraordinary one-time income and other income (income not earned through mainline operations), to the net profit figure.
The operating profit of a company is a better indicator of the profits earned by it than is the net profit.
ROCE thus reflects the overall earnings performance and operational efficiency of a company’s business. It is an important basic ratio that permits an investor to make inter-company comparisons.
Return on net worth
Return on net worth (RONW) is defined as net profit divided by net worth. It is a basic ratio that tells a shareholder what he is getting out of his investment in the company.
ROCE is a better measure to get an idea of the overall profitability of the company’s operations, while RONW is a better measure for judging the returns that a shareholder gets on his investment.
The use of both these ratios will give you a broad picture of a company’s efficiency, financial viability and its ability to earn returns on shareholders’ funds and capital employed.
8. PEG ratio
PEG is an important and widely used ratio for forming an estimate of the intrinsic value of a share. It tells you whether the share that you are interested in buying or selling is under-priced, fully priced or over-priced.
For this you need to link the P/E ratio discussed earlier to the future growth rate of the company. This is based on the assumption that the higher the expected growth rate of the company, the higher will be the P/E ratio that the company’s share commands in the market.
The reverse is equally true. The P/E ratio cannot be viewed in isolation. It has to be viewed in the context of the company’s future growth rate. The PEG is calculated by dividing the P/E by the forecasted growth rate in the EPS (earnings per share) of the company.
As a broad rule of the thumb, a PEG value below 0.5 indicates a very attractive buying opportunity, whereas a selling opportunity emerges when the PEG crosses 1.5, or even 2 for that matter.
The catch here is to accurately calculate the future growth rate of earnings (EPS) of the company. Wide and intensive reading of investment and business news and analysis, combined with experience will certainly help you to make more accurate forecasts of company earnings.
