INSIDE STORY o Eyeing the Real Estate Dynasty ; Vidushi Bisani o Money Sweeter Than Honey ; Puja Bhowmick o Mutual Funds – Why Diversification ; Simi Gopalakrishnan 215th ISSUE FINSTREET, IBS HYDERBAD
TEAM IBS TIMES Samriddhi Bhatnagar (Editor in Chief) Rahul kumar G S (Managing Editor) Supriya Panse (Associate Editor) Bidisha De (Associate Editor) Achintya Saraswat Krishma Mohanan Narayan Tripathi Akanshi Bargava Simran Abhichandani Jagdish Samudrala Kartik Bhardwaj Anisha Jose Revathi Menon Shreya Jariwala Utkarsh Ranjan Neha Thampi Vidushi Bisani Puja Bhowmick Nithin Abraham Sandra Maria Babu Simi Gopalakrishnan Harshada Mahindrakar Preethika Sampath Priyanka Tiwari Vikram Leo Singh Designed by: Samriddhi Bhatnagar Bidisha De
EDITOR’S LETTER A nation’s productive capacity depends on a healthy capital formation. Robust savings rate coupled with good capital movement are the key macro-economic variables, which play a significant role in economic growth. A nation's savings and investment and Per Capita Income in India has been on the rise since all of the last decade. With growth in the Income, savings and investment in the country too has shown a northbound movement. At the same time, there has been a phenomenal rise in the youth population A variety of different investment options are available that are bank, Gold, Real estate, post services, mutual funds & so on much more. Investors are always investing their money with the different types of purpose and This young work force is expected to drive the engine of growth. The 215 th issue of IBS Times discusses the growth of investments that the start of this new decade brings forth and what young investors should have their eye on as tools of investments. As an editor, it gives us immense pleasure to hear from our readers. We intend to improve ourselves on every way step of the way and would like you to invite our readers to support the same. Keep following us on www.finstreetibshyd.wordpress.com as well. Please write to us become a part of the discussion. Email ID: editor.ibstimes@gmail.com Samriddhi Bhatnagar (Editor-in-Chief) POC, Team IBS Times FinStreet
CONTENTS Eyeing the Real Estate Dynasty Investment in Annuities Money Sweeter Than Honey Not Just Letters: Investments in Post Office Mutual Funds: Why Diversification Bonding With Money Don’t Delay- Invest in Equities Today Derivatives: The Risk Management Tool Fixed Deposits: Understanding Risk free Investment PPF: Employer Piggy Bank is it?
EYEING THE REAL ESTATE DYNASTY -Vidushi Bisani
It is well known that our great ancestors and many kingdoms have fought battles over acquiring a priceless land, and even though today kingdoms don't exist, the demand for land remains exceedingly high. Naturally, mostly every household in our country dreams of having their own house, a house which they can proudly call their own, it not only gives an emotional satisfaction but also a monetary joy, but the real question is, is investing in real estate a viable option considering there are a hundred other investment options available today? Real Estate as a sector is huge. It is quite obvious that the wherewithal required to invest in this sector is also huge. As one might expect, when the scale of investment is so large, there also comes along with it a lot of burning issues. Given a spiraling demand and the shortage of land in our country, real estate owners often have an upper hand while making a deal. There are a lot of issues concerning transparency, delays, and malpractices. To curb all these loopholes in the system, the UPA
government launched RERA (Real Estate Regulatory and Development Act) to protect the interests of the buyers. Now, buyers who are firsttimers are given more security, there is better assurance for timely possessions, quick remedies in case of any disputes and digitalization of all records. RISKS INVOLVED AND DOWNSIDES The best things come with a little pinch of salt too. Just like everything in the world, investment in real estate too has its perks and drawbacks. One of the biggest issues with putting your money in a property is its illiquidity. Selling land for the right price that it deserves is a very tedious and lengthy process. Moreover, if you need cash on an immediate basis, it's almost impossible to offload the investment in a pinch. Investing in a bad property or signing up wrong or an undervalued deal is yet another risk. Location is a key factor while investing in a property and if chosen wrongly, it can pull your receipts down. Almost every time, there are issues related to structure and foundation, defects and delayed repairs that buyers face after purchasing the house, and the best thing one can do to avoid these issues is to inspect, inspect and inspect. Interest rates, a word that spreads chills the financial sector can also leave a buyer with tremors. Since investment in real estate requires a large sum of hard-earned money, it is
not quite a surprise that many property buyers prefer taking a loan on their investment, and with the rise in interest rates, it can take a huge toll on the buyers. Now, I am going to mention a risk that almost everybody knows. A risk which is very primary but can leave the entire economy in havoc- the risk of any natural calamity. RETURNS INVEST
AND
REASONS
TO
It cannot be denied that the competitive risk-adjusted returns in real estate investment are quite high. Based on July 2018 data from the National Council of Real Estate Investment Fiduciaries (NCREIF), private market commercial real estate returned an average of 9.85% over the past five years. This credible performance was achieved due to its low volatility compared to other high volatile investments like bonds and equities. Also, investment in real estate is considered a great option for portfolio diversification. Real estate has a very negligible or sometimes even negative correlation with other asset classes. Thus, investing in real estate lowers the total portfolio risk and also provides a higher rate of return. The best and the most interesting aspect of investing in real estate is that it is positively correlated with inflation. Inflation is generally considered an ugly word. Who likes to rise in prices? It is quite amusing how prominent economists and almost everyone gets alarmed by inflation, but it is a real celebration for real estate owners. The icing on the cake is the tax benefits and the long term financial security that this investment provides. One can always rent out the land for any residential or
business purpose and enjoy a steady income for life. With all these benefits, it is no wonder why so many hearts are set on real estate investment. Interest rates, a word that spreads chills the financial sector can also leave a buyer with tremors. Since investment in real estate requires a large sum of hard-earned money, it is not quite a surprise that many property buyers prefer taking a loan on their investment, and with the rise in interest rates, it can take a huge toll on the buyers.
BEST TIME TO BUY AND SELL According to me, the best time to buy a property is when the economy is on the darker side and people desperately require cash. During bad times, there is always a lot of uncertainty and panic amongst people. Use that and the bad economy as your trump card. This is a good chance to swoop in and use it to your advantage by getting a relatively cheaper deal. And when it comes to selling a property, I believe there is no good time to sell a property. It's always best to believe the best, so keep
believing that the economy is going to flourish and the country is going to develop, which it will in the long run. Naturally, with this, the price of your very hard-earned, precious land will
also shoot, so I don't think it's ever a good time to sell until you desperately need money.
MONEY, SWEETER THAN HONEY! -Puja Bhowmick Who doesn’t want to earn bonus? So one can invest in Commodities or in Foreign Exchange Market. Whenever we are trading, it requires immense analysis and research and also one needs to be aware of every nooks and corners of news. Commodities Any physical and natural substance including staple and metals which can be traded is called commodity. If we look into the history, then exchanging of golden coins during any trade instigated the idea of formal market. The types of commodity market are Multi Commodity Exchange of India (MCX) and National Commodity and Derivatives Exchange of India (NCDEX). Metals like gold, copper, silver, crude oil etc. are traded in MCX whereas grain, pulses, potatoes, etc. are traded in NCDEX. Commodity market is different from share market on the basis of exchange, instruments, trade types like in Share Market one can trade both with cash and Future and Options but in Commodity one can only trade with Future and Options (which has been included recently), holding period where in Share Market can hold shares as long as one wants but in Commodity market one can only hold till the expiry date and working hours like in Share Market the Stock Market opens a 9:15 am and closes at 3:30 pm whereas in Commodity market, it opens at 10:00 am and closes at 11:30 pm. The main players in the Commodities exchange are 1)
Producer, 2) Industrial End-User, 3) Speculators and 4) Traders. To start the trade one needs to open a commodity account with the help of a broker by submitting KYC along with necessary documents like Aadhaar, Bank proof, Income proof etc. Two important aspects of commodity market which are Margin requirement and 1 point movement are required to be understood. The commodity margin is the initial amount depending on the commodity that one has to deposit with one’s broker before the person can start trading. One point movement is required to calculate profit or loss for every one rupee movement of underlying commodity. Our approach should involve specific reasons like trend analysis to invest in commodity market and not gambling because it’s a high risk market. Foreign Exchange Foreign Exchange Management Act (FEMA), 1999, (Section 2) described Foreign Exchange as: “Foreign exchange means foreign currency and includes Deposits, credits and balances payable in any foreign currency. Drafts, traveller’s cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency.” In simple words Foreign Exchange can be defined as conversion of currency where traders have the facility to buy and sell currencies. It is not only
exchanged, currencies can also be transferred from one country to another. Fundamentals of Foreign Exchange: Almost every country has its own currency with the distinct legal possession. The exchange is mostly put through banks which necessarily involves two centres. A particular document or an instrument is required to confirm the exchange. The distinct attributes of the foreign exchange market are as follow: 24 hours availability for 5 working days.
Trading is managed electronically thus no physical existence.
It supports huge capital inflow thus highly liquid.
A market were time zone is a crucial factor.
It is hugely impacted by government policies and controls.
Exchange Rate One more aspect to Foreign Exchange Market is the exchange rate. It refers to “the rate at which currency of one country is exchanged with the currency on the other country.” It is a compelling rate which can vary at the blink of an eye depending on a variety of factors. Determinants of Foreign Exchange include demand and supply for foreign exchange. Factors on which exchange rate keeps on changing at various point of time are difference between inflation, interest rate, income level, government control of domestic country and foreign country.
Most currencies which are been traded are US dollar (USD),Euro (EUR), Japanese yen (JPY), Pound sterling (GBP) , Australian dollar (AUD) , Canadian dollar (CAD) , Swiss franc (CHF) , Chinese renminbi (CNH) , Swedish krona (SEK) and New Zealand dollar (NZD). Below are the 10 biggest players in the foreign exchange market, according to Euro money’s 2019 FX Survey: COMPANY
MARKET SHARE JPMorgan 9.81% Deutsche Bank 8.41% Citi 7.87% XTX 7.22% UBS 6.63% State Street 5.50% HCTech 5.28% HSBC 4.93% Bank of America 4.63% Merrill Lynch Goldman Sachs 4.50% (Source:https://www.euromoney.com/article/b1 fpv028mthbmy/euromoney-fx-survey-2019results-released)
Indian Forex Market Previously, Reserve Bank of India used to fix the buying and selling rates and the market would remain only within the band which determines a point below or above which the currency cannot drift. However at present, demand and supply drive the exchange rate at which currencies are traded. Forex in Indian is considered to be better than any other emerging countries. But as every bean has its black, Indian Forex Market is no exceptional. We are facing risks of global liquidity conditions, widening
trade deficit, decrease in export and increase in imports. In 2019, India recorded its highest foreign exchange asset and its foreign reserve stood around 453 billion USD. Currently, India’s external debt has witnessed an increase of 2.6 %. Global factors like Fed’s decision also has a huge impact on Indian Forex Market.
Conclusion Both Foreign Exchange and Commodity market has high risk but also can promise higher return if we have kept a close eye on the economy. We have to understand various macroeconomics and global factors. One good thing about knowing both commodity and forex market is somewhere both are interconnected, for example, crude oil put an impact on USD-INR quotation. Before trading some precautions one must take like staying away from fraudulent advisory firms, one must not trade without stoploss, one must not overtrade and most importantly emotions must not drive one.
INVESTMENT IN ANNUITIES -Vikram Leo Singh
Annuities are a financial product that is mainly sold by life insurance companies to help you generate a fixed regular income for the rest of your life. It is a contract between you and an insurance company or financial institution which pays to you, out a fixed stream of payments either immediately or in the future. Annuities can be structured into 2 types either fixed or variable depending upon details and factors: Variable annuities are less stable it works parallel with the markets, suppose if the markets are doing good you get a greater future return and vice-versa. A fixed annuity is a stable fixed interest form of an annuity contract that pays you a guaranteed return on the principal investment.
income you missed. The discount rate results in a higher future value for the annuity. To make this simple and how it works let's take an example, suppose 60 you want to retire so at starting you paid in instalments of monthly, quarterly or annually depending upon your financial condition to the insurance company or the financial institution and in return, after the maturity period you will be getting a fixed cashflow of RS 50,000 depending upon your scheme and discount rate for the rest of your life. But there is some limitation to it as annuities are only bought as keeping pension plan in mind so you cannot start investing until you are 30 years old.
So How Does an Annuity Work? The present value of an annuity is the current lump sum value of periodic future payments calculated using a specific rate, the present value is based on the concept of the time value of money which states that Rs 1 today is worth more than Rs 1 in the future. This is because you could invest the full amount and receive an additional return over the following years to determine the present value of an annuity discount the cash flow by the prevailing discount rate, the higher the rate, the lower the present value, this is done because the discount rate equals the interest rate and investor would have been paid had you received the money and a lump sum and invested it, in essence, it's the
How to Choose Best Annuity for You? Timing If you want annuity payments to pay you regular cash flow after retirement then you should go for a ‘deferred annuity plan. Otherwise, if you want to get paid immediately, you should buy an ‘immediate annuity plan’.
Variability If the annuity is a fixed amount, either guaranteed or not guaranteed is fixed. And if it varies based on the performance of the underlying investments, it’s a variable annuity. A person with lower-risk appetite may choose a fixed annuity where the returns may be less but uncertainty is also less, while in variable annuities, returns may vary depending on the market conditions. Coverage An annuity plan can cover one life (say, husband) or two lives (husband and wife) where after the death of one person, the other person would continue to receive annuity payments for his/her lifetime. The advantage of buying a joint-life annuity is that your financial dependant (spouse) will continue to receive payments after you die, while in the case of a single life annuity your spouse will not receive regular cash support if you pass away.
people who depend solely on annuity pay-outs to meet living expenses. As inflation erodes the real value of the returns, small annuity payments would cause financial misery at an age when they would find it difficult to shift to a better provider. These companies do not fully pass on the returns earned to the customers but retain a substantial portion of earnings as reserves to meet contingencies. This conservative approach may be detrimental to the interests of older people who depend solely on annuity pay-outs to meet living expenses
Safety The safety aspect is paramount in annuities because these are extremely long-run products. A person buying a deferred annuity would keep saving regularly, via premiums paid to the insurer, for a long time before retirement, say for 20-30 years. On retirement, he would expect the payback to continue for another 20-30 years on an average. Returns After safety, returns play a vital role. As annuity products are very long term, most companies are conservative in terms of giving returns. These companies do not fully pass on the returns earned to the customers but retain a substantial portion of earnings as reserves to meet contingencies. This conservative approach may be detrimental to the interests of older
Liquidity Liquidity is another aspect to be taken into account when choosing a pension policy, while annuity products due to their very structure are not very liquid and cannot be encashed whenever required at one go like a fixed deposit, life insurance policy or mutual fund units, there could be financial
contingencies that compel the customers to go for such options. The advantage of buying a joint-life annuity is that your financial dependant (spouse) will continue to receive payments after you die, while in the case of a single life annuity your spouse will not receive regular cash support if you pass away. There is growing support in offering annuities to retirees, or soon-to-be retirees. Part of that is because of the sheer size of the baby boomer population, with 10,000 individuals turning 65 per day. Another reason is longevity. The longer you live, the more money you must have to cover your needs. “To an economist, an annuity is the most efficient way to create income in retirement. ” The best options present in the market are: SBI Life – Annuity Plus HDFC Life New Immediate Annuity Plan ICICI Pru Immediate Annuity Reliance Immediate Annuity Plan
NOT JUST LETTERS:INVESTMENTS IN POST OFFICE -Neha Thampi
account is Rs 500 with a minimum balance of Rs 50
Established in 1854, the Indian post office is the world’s most widely distributed postal system with more than 1.5 lakh post offices across the country. It also holds the record for having the world’s highest post office at Himachal Pradesh- at an impressive height of 15,550 feet above the sea level. With emails and WhatsApp, one might think that the post office is outdated and out of place in today’s technology powered world, but the post office is not just restricted to delivering letters and parcels. It offers financial services- savings schemes, insurance, mutual funds and money remittances with the post office savings bank being one of India’s oldest banks. The post office offers a range of small savings schemes which covers all the different segments ranging from farmers to retired citizens. Following are their schemes: Post Office Savings Account The minimum amount for opening a post office savings
Deposits as well as withdrawals can be done in electronic mode at any Core Banking Solution (CBS) post office The account offers an interest of 4% per annum The interest earned on this account is tax free to the extent of Rs 10,000
National Savings Recurring Deposit Account Minimum of Rs 100 monthly deposit Interest rate of 7.2% compounded quarterly Default fee of Rs 0.05 for every 5 rupees will be charged National Savings Time Deposit Account Minimum opening balance of Rs 1000 Interest rates from 01/07/19
Period Rate 1 yr A/C 6.9% 2 yr A/C 6.9% 3 yr A/C 6.9% 5 yr A/C 7.7% Online account opening facility through mobile banking Deduction can be claimed under 80C for the 5-year
investment
account
National Savings Monthly Income Account Account can be opened by cheque or cash Interest rate of 7.6% per annum payable monthly 4.5 lakhs are the maximum investment in case of a single account and 9 lakhs in case of a joint account Premature encashment of account is allowed after one year and before 3 years at a 2% discount and at a 1% discount after 3 years Senior Citizens Savings Scheme (SCSS) For individuals of 60 years and above Maximum investment of 15 lakhs Maturity period of 5 years Interest rate of 8.6% per annum Account must be opened by cash if the amount is less than one lakh and by cheque if it exceeds one lakh TDS will be deducted if interest exceeds Rs 10,000 Public Provident Fund Account (15 years) Minimum deposit of Rs 500 and a maximum deposit of Rs 1,50,000 in a year Deposits can be made in either instalments or as a lumpsum amount Deposits are eligible for deduction under 80C Interest is tax free Premature closure before the 15-year period is not allowed
Loan facility (loan can be taken from the PPF account to the extent of 25% of available balance in the account) can be availed from the third year Withdrawals can be made from the 7th year of opening the account
National Savings Certificate (NSC) Minimum opening balance of 1000 Maturity period of 5 years Interest rate of 7.9% compounded annually but payable at maturity Interest accrued is deemed as reinvested as per section 80C Deposits made under this scheme are eligible for tax rebate under section 80C Kisan Vikas Patra (KVP) Minimum balance of Rs 1,000 Interest rate of 7.6% compounded annually Encashment 2 to 2.5 years from issue-sdate Sukanya Samriddhi Accounts Minimum opening balance of Rs 250 and a maximum balance of Rs 1,50,000 in a financial year Legal guardian can open at the most two accounts in the name of two girl children Partial withdrawal of up to 50% of balance at the end of preceding financial year is permissible after account holder attains age of 18 years Account to be close on reaching attaining 21 years of age Premature closure at the age of 18 is permissible provided she’s
married. Why should you invest with the post office? When it comes to investing, security is one of the key factors that determine where to invest. Given the current crackdown on banks over NPAs and the problems faced by NBFCs, the post office seems like the most reliable option given that they have government backing. Interest on these schemes are calculated based on the yields of government bonds and this direct link to government bonds ensures that there isn’t much fluctuation in interest rate making them a stable investment. The minimum opening balances of all the schemes are quite small; making it an affordable investment plan for even the low-income groups. The rates offered by the post office are also very lucrative with the Senior Citizens Savings Scheme offering the highest interest rate amongst all retirement funds and the Sukanya Samridhhi providing parents a way to save up for the education of their girl child. This initiative is particularly beneficial for the rural areas. A comparative analysis of the above schemes shows that of the lot, investing in the Post Office Monthly Investments Scheme (MIS) gives the highest return with the interest rate being even higher than that of a fixed deposit with SBI which offers a 6.9% per annum. It is a scheme that is best suited for the risk averse investor who is looking for regular income. Challenges
Despite having high interest rates, a lot of people particularly the younger generation do not prefer investing in post office saving schemes due to a host of reasons. The first and foremost being the registration process- post offices require their customers to go to the post office for opening the savings account and do not have online deposit facility for all their schemes. In an era where one can even raise a loan sitting at home this technological backwardness has put off quite a few. Government organisations have always been criticised for their inattentiveness and the long waits to get anything done and the same extends to the post office. Added to this is the fact that while transferability is a feature of a few savings scheme, post office savings are linked to the place of investment i.e. transferring your account from one post office to the other is a tedious process that can take years. Accountability is a very important feature when it comes to investments and tracking your account online is not possible for post office savings schemes. To know the status of your account you are required to go to the post office which is again a time consuming and tedious process. The post office definitely has a lot to offer with its high interest rates and assured safety of investments; however it needs to focus of readapting itself to the changing technology to capture the growing market of younger investors as currently most of their customer base consists of older generation. Given the current crackdown on banks over NPAs and the problems faced by
NBFCs, the post office seems like the most reliable option given that they have government backing. Interest on these schemes are calculated based on the yields of government bonds and this direct link to government bonds ensures that there isn’t much fluctuation in interest rate making them a stable investment. The minimum opening balances of all the schemes are quite small; making it
an affordable investment plan for even the low-income groups. Accountability is a very important feature when it comes to investments and tracking your account online is not possible for post office savings schemes
MUTUAL FUNDS: WHY DIVERSIFICATION? -Simi Gopalakrishnan
Why Mutual Funds?
Mutual funds investments are subject to market risk ,please read the offer document carefully before investing .The most familiar quote marketing the mutual funds as an investment tool , but ever wondered why ?? Like most of the other stocks and securities ,mutual funds are subject to systematic risk – risk which is imposed by your system, which is beyond your control. Macro-economic factors – inflation, changes in interest rates, fluctuations in the currencies, recessions, wars etc play a key role in influencing the direction and volatility of the market .
When it comes to invest our savings , someone would prefer a risk free instruments such as Fixed Deposits, Government Bonds , buy insurance policy etc. The best way to maximise your return would be to diversify your investments .The primary benefit of investing in mutual funds is that you get exposure to a basket of instruments. If one of them does not perform well there are other instruments to compensate. Also as a lay investors you do not have to go researching regarding the market instruments . Our portfolio would be best managed by the fund managers who are trained professionals in creating individually customised portfolios. Suppose you are a beginner who can afford to pay only Rs.1000 a month . The best way to do is to invest in a fund through Systematic Investment Plan (SIP)
How does mutual funds work ?
Types of Mutual Funds
It can be best described through the diagram given below.
The 3 major classification of the mutual funds are:
Functional classification Portfolio Ownership
On the basis of functional classification funds can be divided into Open ended funds Closed ended funds
Open ended funds are those wherein investors can enter and exit at any time. These are perpetual funds which can be bought at any time after its launch. The units of open ended funds are not freely tradable. While closed ended funds are those who have fixed duration. The scheme has a limited life and at the end of which corpus of the fund is genrally liquidated. In a closed ended scheme, investors can buy the scheme during IPO or from the stock markets after the units have been listed. A investor can exit by selling in the stock market or at the expiry of the scheme or during repurchase period at his option. The fact that the closed ended funds can be easily traded in the markets will give us another point of difference that you can get premiums and discount as compared to open ended scheme. The fund managers in an open ended scheme is going to control the prices through valuing underlying securities whereas in a closed ended scheme , the price is set by the market forces.
hence the investment capital is fixed in nature. What some investors try to do is in case of closed ended vehicles let’s say they are trading at a discount on their asset value they would think about buying the units and switch to a similar open ended scheme exploiting the arbitrage which exists On the basis of portfolio classification funds can be divided into : 1. Equity funds 2. Debt funds 3. Growth funds Equity funds contains those units which are primarily invested in stocks/shares. If the company is successful the shareholder gets to earn in 2 ways  
When the stock price increases ( capital appreciation) When profit is passed on to investors in the form of dividends
Equity funds are further classified into the following :
Investment capital in case of open ended units are variable i.e the fund can expand and accommodate new investors onboard. In case of closed ended units there is enough funds
1. Growth funds: Those funds which mainly seek to provide long term capital appreciation. These funds are designed for long term investors. 2. Aggressive funds: Those funds looking for super normal profit and their investment is made in start ups , IPO, speculative shares. These are best for investors who are willing to take higher risks. 3. Income funds: These funds maximise the present income by investing in those stocks which yield a regular income. However the NAV of the income funds would be lower than that of growth funds
4. Balanced funds: these are mix of growth and income funds. Debt funds invests a significant amount of your money in fixed income securities like government securities , treasury bills, bonds ,debentures and money market instruments . Types of Schemes 1. Balanced funds those funds which make their allocation to both debt and equities. The debt aspect of the portfolio would give stability the equity would give growth. It remains an ideal option for those investors seeking moderate returns. 2. Equity diversified funds These funds would contain a huge number of diversified stocks . 3. Equity linked tax savings scheme This is one of the most popular scheme for investors as they can save taxes under Section 80C of the Income Tax Act . They have a lock in period of 3 years. Key Constituents of Mutual Funds Mutual funds are registered as trust .The business is set up by the sponsers , the money is invested by the Asset Management Company (AMC) and operations are monitored by trustees.
on the risk appetite ,and various other factors. 3. Trustees: The trust is headed by Board of Trustees. The trustees holds the property of mutual funds for the benefit of unit holders and they look into legal, operating and functioning requirements of the mutual funds. The trustees have to monitor the actions of AMC and ensure they are not detrimental to the unit holders also by following SEBI regulations. 4. Unit Holders: An individual or entity holding stake /units in the mutual fund scheme. 5. Mutual Funds :It is an entity registered under the Indian Trust Act to raise money through sale of units to the public. The funds collected are passed on to the AMC for investments . How To Evaluate The Performance Of Mutual Funds . Net Asset Value (NAV) It is the amount which the unit holder would get if the mutual fund were wound up. NAV represents the market value of total assets – total liabilities attributable. It is computed per unit of holding .NAV of the unit changes daily as the value of assets and liabilities does. Holding Period Return
1. Sponsor : These are companies registered under the companies Act and they form the mutual funds. 2. Asset Management Company : They are also registered under the Companies Act but they are exclusively involved in managing the money invested in the mutual funds. Professional fund managers are appointed by the AMC based
3 major sources of mutual fund returns are as follows 1. Dividend earned 2. Capital appreciation 3. Change in the price of NAV Sharpe Ratio This model was developed by William Sharpe and it indicates the amount of return earned per unit of risk. It is used
to rank the risk adjusted performance of various portfolio . Higher the sharpe ratio better is the portfolio return. ď ś Treynor Ratio This is very much similar to the above ratio except the fact that it uses beta instead of standard deviation. It evaluates performance of the portfolio based on the systematic risk (beta)of a fund . The unsystematic risk can be diversified. How To Select The Best Mutual Funds ??? Seeing past return or past performance is not always a good way to decide which mutual funds to be selected. There are certain factors which play important role in this decision. 1. Goal / objective: the best way to create wealth is decide one’s objective. Do we wish to invest for long term purpose or is it a short term objective. 2. Duration and risk : They are different for different investors. In case of less risk appetite investors, debt fund would be the key. In case your duration is more than 3 years, invest in a more balanced funds would help which would diversify risk. 3. Fund manager : fund manager plays an important role in determine your investments. A person of good repute gives confidence to users. 4. Expense ratio: Expense ratio is nothing but the cost incurred by the AMC which is charged from the investors. Usually the expense ratio in an industry can vary between 0%- 1.5%. So whenever you
decide to invest in a mutual funds go for the scheme which has lower expense ratio since it gives a higher returns.
DON’T DELAY – INVEST IN EQUITIES TODAY -Shreya Jariwala
INTRODUCTION Equity Shares are categorized under long term sources of finance because legally they are irredeemable in nature. For an investor, these shares are a certificate of ownership in a company by virtue of which investors are entitled to share net profits and have a residual claim over the assets of the company in the event of liquidation. Investors have voting rights in the company and their liability to the company is limited to the amount of investment.
bodies accompanied with some formalities. 2. ISSUED SHARE CAPITAL: It is that part of authorised capital which is offered to investors. 3. SUBSCRIBED SHARE CAPITAL: It is that part of issued capital which is accepted and agreed by the investor. 4. PAID-UP CAPITAL: It is the part of subscribed capital that is actually invested in the business.
There are other types of Equity Shares as well: 1. RIGHTS SHARE: These are the shares issued to the existing shareholders of a company. Such kind of shares are issued to protect the ownership rights of the investors.
Equity Share is the main source of finance for any company giving investors rights to vote, share profits and claim on assets. In the financial statements of a company equity shares are placed on the liability side of the balance sheet. They are classified into various categories as follows: 1. AUTHORISED SHARE CAPITAL: It is the maximum amount of capital which can be raised by a company. It can be increased from time to time. Some fees is required to be paid is required to be paid to legal
2. BONUS SHARES: These are the type of shares given by the company to its shareholders as a dividend. 3. SWEAT EQUITY SHARES: These shares are issued to exceptional employees or directors of the company for their exceptional job in terms of providing know how or intellectual property rights to the company. The various prices of equity shares are as follows: 1. PAR/FACE VALUE: It is the value of a share of which it is accounted in the books of accounts.
2. ISSUE PRICE: It is the price at which equity share is actually offered to the investor. Normally, the issue price and the face value of a share are same in the case of new companies.
of the company. Also try to access data about mutual funds and financial institutions who are investing money in the company. An investor also should be familiar with the following terms:
3. SHARE PREMIUM AND SHARES AT DISCOUNT: When a share is issued at a price higher than its face value the excess amount is called premium. Contrary to it, if the share is issued at a price lower than the face value, it is said to be issued at a discount.
HIGH - The highest price for the stock in the trading day.
4. BOOK VALUE: It is the ratio of the total of paid-up capital and reserves and surplus divided by total number of shares. This is the balance sheet value of shares. 5. MARKET VALUE: In the case of companies listed on stock exchanges the market value of the share is the price at which they currently sold in the market.
LOW - The lowest price for the the stock in the trading day. CLOSE - The price of the stock at the time the stock market closes for the day. CHG(CHANGE) – The difference between two successive days. YLD(YIELD) – Dividend divided by price. BID PRICE - Buyers price. ASK PRICE - Seller’s offer price.
HOW TO INVEST IN EQUITY SHARES? The first step towards equity investments is RESEARCH. Before investing in stocks of any company it is important to do some research about management of the company, announcements, dividend payoffs, corporate moves, etc. check out growth rate of the stock’s earnings and some historical data to what the company has done in the past. Get the current status of the stock movements by using real-time quote, average trades per day, total number of outstanding shares, dividends , high and low for the day and for last 52 weeks. This research will give you an idea about the nature and performance
INVESTING EQUITIES:
RULES
FOR
The first word on investment is “DON’T LOSE” and the second on investment is don’t forget the first rule. This means that if you buy stocks far below what they are worth and you buy a group of them then you will never lose money. It means buy shares below its intrinsic value. Secondly, managers must have a fact driven temperament i.e, invest by doing EIC APPROACH which means do the economy analysis then the industry analysis and then the company analysis. Thirdly, study the business and not the stock. An investor should do fundamental and technical analysis before investing.
the company by means of financial statements. Technical analysis is trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts. Fourth, do not give into the hype. If you have studied a business well and the market is reacting otherwise you should not sell your stock because of that. Warren Buffet the god of stock markets started by investing in FMCG Companies because he was a foodie and he understood that business. And lastly, don’t over complicate investing. You can choose any company you like and follow it on daily basis via news.
In short fundamental analysis is when you check the background of
HAPPY INVESTING!
DERIVATIVE – THE RISK MANAGEMENT TOOL -Harshada Mahindrakar
What is a derivative? In the practical world, an investor tries to maximize his returns and minimize the risks of the securities. In this case, Derivative is a complex and profitable financial instrument which is originated from the need to minimize the risk. it works as a powerful risk management tool. The word “derivative” comes from mathematics and refers to a variable, which is derived from another variable. It’s a time-bound contract between two parties where the value of the contract depends on the value/price of an underlying asset. These are the secondary securities whose value is solely based on primary securities that they linked to. These are not investment assets like shares and debentures, which means derivatives do not hold any value of their own. Generally, the underlying asset includes stock, currencies, bonds, commodities, metals and even intangible assets. In derivative, the risk and return of the underlying asset are transformed to create a new contract
and that time-bound contract is derivative. For example, Mr. Satish holds a hundred shares of a particular company at Rs. 50 per share, he thinks after a year the price of shares will go down hence to limit the risk he enters into contract with Mr. Dipak quoting that he will sell his hundred shares at Rs.50 to Mr. Dipak irrespective of the current market price after a year. In the above case, if the price of shares shoots up after a year, Mr. Dipak will gain profits and if the price goes down than Rs. 50 Mr. Satish will gain profits. In the changing current market prices, derivatives contracts follow the basic principle of earning profits by speculating the value of an underlying asset in the future. Investors generally trade in five types of derivative contracts i.e. options, futures, forwards, swaps and warrants. Options:Options are those derivative contracts that give the holder the option to buy or sell the underlying asset at a prespecified price sometime in the future. An option to buy the underlying asset is known as a call option. On the other hand, an option to sell the underlying asset at a specified price in the future is known as a put option. Here, the buyer is not obligated to exercise the option contract and
contracts can be traded on the stock exchange. Futures:These are the standardized contracts where the holder is allowed to buy/sell the underlying asset at an agreed price at the specified date. Unlike options, in future contracts, the parties are under an obligation to perform the contract. The value of futures contracts changes according to the market movements till the expiration date, these are markedto-market every day and also traded in
the
stock
exchange.
Forwards:forward contracts are exactly like future contracts, where both the parties are under obligation to perform their contract except these are unstandardized and not traded in stock exchange but are available over-thecounter and are not marked-to-market. swaps:under swap contracts, two parties exchange the financial obligations (liabilities) or cash flows from two different financial instruments. Here, cash flows are decided based on the notional principal amount (e.g. loan or bond), agreed between both the parties without exchanging the principle. The amount of the cash flows is based on the rate of interest where
one cash flow is fixed and other changes according to the interest rates. Most swaps involve cash flows and interest rate swaps are commonly used swap contracts. These contracts are not traded in the stock exchange but are traded overthe-counter between financial institutions or businesses. Warrants:Warrants contract provides an investor the right but not obligation to buy or sell an underlying asset at a predetermined price before the expiry date. Warrants who give the right to buy security are called “call warrants”. On the other hand, those who give the right to sell a security is called “put warrants”. Why do investors trade in derivatives? apart from the maximizing returns derivative contracts provide different benefits to the investors, as follows • Transfer of risk and protection against market volatility:- Rapid fluctuations in the price of the underlying asset may result in the reduction of profits. in this case, derivative contracts work as a shield against a reduction in the price of stocks that investors own that’s how risk can be transferred from one party to another. Sometimes traders use derivatives for speculations and making profits where they take advantage of market fluctuations without actually selling the underlying security. On the other hand, investors also enter into a contract to safeguard the future price rise of the stock they are
planning on. •Arbitrage advantage:Arbitrage trading means buying a security at a low price from one market and selling it into another market, that’s how from differences in prices of two can earn high
markets investors profits. •Hedging risk exposure:Since the value of the derivatives is linked to the value of the underlying asset, the contracts are primarily used for hedging risks. For example, an investor may purchase a derivative contract whose value moves in the opposite direction to the value of an asset the investor owns. In this way, profits in the derivative contract may offset losses in the underlying asset. Disadvantages of derivatives:• Highly risky – the high volatility of derivatives may result in huge losses. • Speculative features – these are a wide tool of speculations. Due to extremely risky nature and unpredictable behavior may result in huge losses. • Counter-party risk – in sock exchange derivative trades go through the due-diligence process but some of the contracts are traded over-the-
counter where traded may face counter-party default. How to trade in derivatives? • Research and understand – first the trader needs to understand the functioning of the derivative market before trading. Strategies applicable to derivative markets are different from the market. • In the derivative market, a trader needs to deposit margin amount which he/she cant until the trade is settled. • A trader should have an active trading account that permits derivative contracts trading. If an investor is trading through an agent then he/she can place orders online or over the phone. •While selecting stocks investors should consider factors like cash in hands, margin requirements, price of the contract, price of the underlying asset and lastly should make sure that everything is as per budget. • Traders may wait and stay invested until the expiry date to settle the contract. in this case, the investor can pay the entire outstanding amount or enter into the opposite trade. Participants of derivative contract:Traders are categorized as per their trade motives in following categories:•Hedgers •Speculators •Arbitrageurs Conclusion:derivatives is an innovation that has redefined the financial service industry and has acquired a very significant place in the capital market. Derivative securities markets play an important
role by allowing investors who do not want the risks associated with holding an asset to transfer it to those who do. however, due to complications and riskiness, derivatives are blamed for the loss of fortune many times. Even most successful investor and CEO of Berkshire Hathaway once quoted about the derivatives in his annual letter “In our view, however, derivatives are financial weapons of mass destruction,
carrying dangers that, while now latent, are potentially lethal,� although he has also opened as using them and made millions of dollars out of it.
FIXED DEPOSITS – UNDERSTANDING THE RISK FREE INVESTMENT! -Utkarsh In India when professional individuals receive their first salary, they start to plan about their future. Planning about future comes with investments at an early stage. It depends on the individual whether he or she plans to have a risk oriented or risk free investment. Investments have been defined as long term and short term based. Fixed deposits are one such form of long term investments which are mainly for risk-averse investors. Fixed Deposits are the safest form of investments. It is a kind of debt instrument which is provided by banks or NBFCs. It has a limited time of investment. The way of functioning can be described as: suppose an individual puts his/her money in the bank and he/she gets interest by the bank on the same in case of a savings bank account. However in case of Fixed Deposits the principal amount has to be locked for a certain period of time. The investor earns interest based on the tenure of the deposit. Usually it ranges from 4.5% to 8% p.a. The cumulative interest is provided at the time of withdrawal. The fixed deposits which allows the investor to deposit the money into the financial institution, wherein the individual cannot withdraw the same amount for a specified period of time or else he/she will be penalized by the financial institution. It is usually seen that greater the period of investment higher the rate of interest is provided by the financial institution. If
there are chances of Repo rate (Rate at which RBI lends money to banks) changes the bank might bring changes in the interest rate as well. Usually the interest in India is paid after every three months and is credited directly into the account of the investor or may be paid by a cheque.
On the other hand if the investor tries to withdraw the deposit before the prescribed time limit then they can be penalized by the bank and it is called premature withdrawal. There is usually one disadvantage with it that the amount of interest will be paid at the rate of interest applicable at that time of withdrawal. There are various benefits of fixed deposits. It is the safest form of investment with a guarantee of returns. Apart from this the senior citizens also receive additional 0.5% interest on this investment and there is no upper cap for deposits. The Fixed deposits can
be classified into various categories as Normal, Tax Saving, and Senior citizen, cumulative and noncumulative. Normal Fixed deposits as the name suggests are as normal as they can be. They have a certain period of maturity which can range from 7days to 10 years. This is in other words a normal fixed deposit for a certain tenure and the interest rates are higher than normal savings account. Tax saving deposit is also a form of fixed deposit in which tax exemption is provided upto 1.5 Lakhs in a particular calendar year. Senior citizens are provided with special interest rates which are usually 0.5% more than the original rate provided to others. After this there are cumulative and non-cumulative fixed deposits in which interest is provided at quarterly and non-quarterly respectively. In the non-quarterly scheme the interest is paid to the investors based on monthly or quarterly or semi-annually as per choice. This scheme is quite useful to senior citizens. In India various Banks and NBFCs provide varying rates to the investors. PNB Housing Finance provides the highest rate of interest in the range of 8.05% to 8.7% for a period of 1 to 10 years. Apart from this Axis Bank also provides an interest range from 3.50% to 7.15% for a tenure of 7 days to 10 years. Similarly the country’s largest lender State Bank of India provides FD rates from 4.50% to 6.75% for 7 days to 10 years. HDFC provides FD rate of 7.50% to 7.7% for a period of 33 months to 66 months. Apart from this Bajaj Finserv provides a better FD rate of 7.6% to 8.35% in 1 to 5 years. IDFC
First Bank also provides on the rate of 4% to 8% for a period of 7 days to 10 years. On an average major banks and NBFCs provide FD rates in the range of 4% to 8%. A common form of term deposit is Recurring deposit. The only difference between fixed deposit and term deposit is that the individuals with fixed income deposit certain amount of money. The amount is the same and interest is provided on the rates applicable to fixed deposit. It is like the mathematical concept of recurring, wherein monthly installments of certain amount are converted later into fixed deposits. The Central Bank of a country is vital in deciding the rates of FD. As it is a well-known fact the RBI decides and controls the Montreal factors of the country. A reduction in the repo rate results in the cut in the fixed deposit rates. Thus RBI is crucial in deciding the liquidity and economy of the country. After the maturity the amount can be transferred into the bank account of the investor or it can be reinvested into another fixed deposit with the same tenure and the rates applicable as the previous one.
FIXED DEPOSIT OR NOT! If it is about deciding whether to go for FD or not then it is purely one’s own perspective. The FDs are meant for risk averse investors wherein an individual can get a guarantee for sure that is of fixed returns. On the other hand if stocks are considered for an option for investment the only advantage is the variability of returns
an individual can earn. However the stocks until sold are just profits on paper whereas there is a guaranteed return on FDs. The Banks have considerably good range of FD rates in India and they are good for people with limited source of income and senior citizens. On the other hand investors who are risk oriented can go for other forms of investments.
PPF: EMPLOYER PIGGY BANK IS IT? -Sandra Maria Babu
Public Provident Fund (PPF) account or PPF scheme is a long-term investment cum savings product offered concerning the security, returns, and tax savings. It was introduced in 1968 by the National Savings Institute of Ministry of Finance, guaranteed by the Central Government. Investors use this scheme to build a collection of money for the retirement benefit which is long term (tenure of PPF is 15 years which can be extended further). At the end of each quarter, the interest rate is set by the government which was 7.6% at the starting when it was written and which will be compounded annually. It attracts small savers because of its exemption from tax under Section 80C of Income Tax Act (ITA). The investors can invest any amount starting from Rs.500 to Rs. 1,50,000 in which a minimum deposit of Rs. 500 is compulsory every year. The loan can be taken after the 3rd and 5th year and do partial withdrawals after the 7th year in case of emergencies. The PPF account can be opened with Rs. 100 and it cannot be held jointly but can
have a nominee. NRIs are not allowed to open a PPF account as per the Indian Ministry of Finance and the existing account can be extended for a period of up to 5 years. The present quarterly interest rate for July 2019December 2019 is 7.9%. Premature closure is possible after the completion of five years for higher education or medical treatment of the account holder with a penalty of 1%. An individual can open only one account in his name and has to specify in the application form the account which he has to open either in the bank or post office. The debtors cannot access one's PPF account to claim dues and no court can attach the PPF account. PPF is suited for those who do not want volatility in return concerning equity funds. If you are aimed at long term goals and inflation-adjusted target amount is high then you can go for ELSS funds. It is better to diversify your funds in equity or in PPF rather than depending entirely on one of them. Employees Provident Fund ScamEven when people feel their investments are protected scams happen. One such scam was Uttar Pradesh Power Corporation Limited (UPPCL). Rs. 2,600 crore of state power employees provident funds were deposited in the Dewan Housing Finance Company (DHFL). The fund of employees was deposited in a scam hit DHFL. Rs. 1,600 belonging to electricity employees and other officers
were deposited with DHFL. As part of this scam UP government was in a position to return the money to employees. National Pension Scheme- The National Pension Scheme is an investment scheme by the central government with tax exemptions under Section 80C and Section 80CCD. This scheme can be opened by every investor except armed forces. During their employment, they can invest at regular intervals. After retirement, you can take a certain percentage from the lump sum and the rest of the amount will be sent monthly to you postretirement. This scheme gives you the option to change your fund manager and it gives higher returns, unlike PPF where it has generated 8% to 10% annualized returns. The equity exposure of this scheme is 75% to 50% and for government employees, it is 50%. After the investor turns 50 years this cap is reduced to 2.5% every year. For an investor of 60 years cap is fixed at 50%. The investment is safe from equity market volatility because it stabilizes the balance of risk-return. If you are investing for at least 3 years you can withdraw 25% of your investment for meeting contingencies which can be done 3 times in the entire tenure leaving a gap of 5 years. Allocation of investments in equity is possible under scheme E of NPS. There are two options of the equity allocation, either in auto or active choice where it allows a maximum of 50% investment. Under the auto choice, the risk of investment is decided based on your age and underactive choice you can split your investments. There are two types of NPS account- Tier I and Tier II. In Tier I
minimum subscription can be from Rs. 500 or Rs. 1000 p.a. compared to Tier II of Rs. 250. Central government employees must contribute 10% of their basic salary. The NPS returns depends on the performance of NPS funds. Tax benefits are the major attraction of any investment. Even the NPS is offering many benefits such as tax exemption, this exemption is for 40% of the corpus unlike other investments there are 100% tax exemptions. The investor is required to pay tax not only on the gains but on the invested capital which makes many people stay away from NPS.
CONCLUSION Comparing NPS and PPF which one is better depends upon the return an investor expects. PPF is preferred by those who want to risk-free and safe investment with feasible returns. Whereas in NPS the investor is given the safety of the principal amount as well as an appreciation of the amount invested. PPF always remains a suitable option for allocating debt portion of one's investment portfolio when the interest rates on fixed income products coming down.
BONDING WITH MONEY! -Preethika Sampath
A bond is simply a loan given to a company or government by an investor. By issuing a bond, a company or government borrows money from investors, who in return are paid interest on the money they have loaned and they are referred as fixed income instrument. Bonds are used by companies, municipalities, states and sovereign governments to fund new projects or ongoing expenses. Some investors use bonds in hopes of preserving the money they have while also generating additional income. Bonds are often viewed as less risky alternative to stocks, and are sometimes used to diversify a portfolio. Bonds have maturity dates by which the principal amount must be paid back in full or risk default. HOW BONDS WORK? When you buy a bond, you are loaning a sum of money to its issuer for a predetermined period of time. In exchange, the issuer promises to pay regular interest payment at a predetermined rate until the bond matures
and then repay your principal upon maturity. For example, A company X needs money to fund its new project and so it issues Bond to Y. The bond has maturity of 10-year, Face Value of $10,000 and coupon rate of 10% interest. The company X in exchange will promise Y to pay interest on $10,000 annually and then returns $10,000 at the end of 10 years. Once the bond reaches maturity, Y redeems its bond and the company X returns his $10,000 principal investment. WHY TO INVEST IN BONDS? While most investments provide some form of income, bonds tend to offer the highest and most reliable cash flows. Bonds provide a predictable income flow. They typically pay interest twice a year.
If bonds are held to maturity, bondholders get back their entire principal, so bonds are a way to preserve capital while investing.
It can help offset exposure to more volatile stock holdings.
Bonds offers diversification, which provides investors with better riskadjusted returns than portfolios with narrower focus.
HOW ARE BONDS ISSUED? Bonds are issued with a certificate in an electronic form. The par value is the amount stated on the face of the bond certificate. The annual interest paid to
the investor is also mentioned in the bond certificate along with the maturity date. Once the bond is sold to the investor in the primary market, it can be traded (bought and sold) between unlimited number of investors in the secondary market. Bonds trade based on the market price in the secondary market. The market price is driven by the demand, interest rate and credit quality. If a bond is trading at a discount, the market price is less than $1000 per bond (assuming face value of bond as $1000), and for premium bonds, they are priced above $1000 per bond. So, an investor who sells a bond may incur gain or loss. CATEGORIES OF BONDS There are 3 primary categories of bonds sold in the market: CORPORATE BONDS: These are bonds issued by corporations, partnerships and Limited Liability Companies and other commercial enterprises to fund a large capital investment or a business expansion. Corporate bonds tend to carry a higher level of risk compared to government bonds but are generally associated with higher returns. The value and risk associated with the bonds depends on the company’s financial outlook and company’s reputation issuing the bond. Companies issues bonds rather than seeking bank loans for debt financing in many cases because bond markets offer more favorable terms and low interest rate. GOVERNMENT BONDS:
Government bonds are issued by government to fund money for finance projects or day-to-day operations. Bonds, bills and notes issued by U.S Government are called Treasuries and they are the high-quality securities available. All the treasuries are liquid and are traded on the secondary market and one major advantage of the treasuries is that the interest earned is exempt from state and local taxes. They are backed by full faith and credit of the U.S government like the timely payment of principal and interest and so there is a less risk of default. MUNICIPAL BONDS: Municipal bonds (“munis”) are issued by state and local governments to encourage investors in civic projects that improve civilization such as funding roads, bridges, schools, highways, hospitals, sewer systems, housing and other public projects. These bonds tend to be exempt from federal income tax and sometimes from state and local taxes. Munis tend to offer competitive rates but with additional risk as local governments can become bankrupt.
HOW TO INVEST IN BONDS: The first thing needed is to Set up a brokerage account. Investors can purchase bonds through a brokerage firm which is in communication with governments and companies that wanted to issue debt. They can also have
access to markets where bonds trade in the secondary market. Purchase individual bonds that suits your portfolio. One investment objective is your timeframe for investing. If an investor has a specific time period for investing, he can invest in a bond that matures before the maturity date. For example, if an investor plans on retiring in 10 years, then he can buy bonds that have a maturity date of 10 years such that the bond issuer returns the invested fund on the maturity date. The longer the maturity, the higher is the interest offered on that bond. Check the Bond’s rating. An investor must also consider the credit rating on that bond. Credit rating refers to the ability of the issuer to make required interest payments and to pay-back the principal balance on time. The higher the bond rating, the more expensive is the bond. Highly rated bonds offer a low interest rate. If a bond has a poor rating, it offers a high interest rate to attract investors.
Place an order. Once an investor has decided on the bond, a brokerage firm can place the order for him/her. An investor receives a confirmation from the brokerage firm, which contains the details of the purchase.
RISKS ASSOCIATED INVESTING IN BONDS:
WITH
Interest rate risk- When interest rate rise, bond price falls and the bond that is currently held loses its value. Interest rate movements are the major cause for price volatility in bond markets.
Inflation risk- If the inflation rate outpaces the fixed amount of income a bond provides, the investor loses purchasing power.
Credit Risk- Credit risk (also known as Business or Financial risk) is the possibility that that issuer defaults on his debt obligation
Liquidity Risk- The possibility when an investor wishes to sell a bond, but is unable to find a buyer.
Bonds freeze your investment for a fixed period of time, for example, you can’t redeem a bond until its maturity, whereas stocks can be sold at any time.
One can reduce these risks by diversifying their investment within their portfolio.
Bonds contribute an element of stability to almost any portfolio-as a safe and conservative investment. They provide a predictable stream of income and are a great savings when you don’t want to put your money at risk. With a variety of different bond investments, including Municipal bond, Corporate bond, Government bonds one needs to know which is suitable for their situation and the risks associated in owning different types of bonds. Bonds, generally considered as a safer investment than stocks, earn a lower return on investment and protect oneself form market volatility. If a person is a risk-averse type, then one can’t bear the thought of losing money, then investing in bonds is a safer thing, which also pays interest. And another reason to consider bonds is at the time of retirement or after retirement, the person may not have the time to ride out stock market downturns, in that case bonds are the safer place for their money.
FINANCIAL TRIVIA
MONEY FOR THOUGHT : Why did the U.S. government put grooves on coins? So that no one could shave the edges. People often did this when the dollar, halfdollar, quarter and 10-cent coins were made from silver and gold. Now the grooved edges can help visually impaired people tell the coins apart.
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