Chapter 1: Introduction
1.1 1.2 1.3 1.4 1.5 1.6 1.7 What Is Investment? Why Should One Invest? When to Start Investing? What Care Should One Take While Investing? Investing Is A Plan Factors Affecting Investment Decision What Investment Is Not..??
1.1 What is Investment/Investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.
Investment is a term frequently used in the fields of economics, business management and finance. It can mean savings alone, or savings made through delayed consumption. Investment can be divided into different types according to various theories and principles.
“Investment is the investing of money or capital in order to gain Profitable returns, as interest, income, or appreciation in value.”
When an asset is bought or a given amount of money is invested in the bank, there is anticipation that some return will be received from the investment in the future. There are a number of definitions of investment. While dealing with the various options of investment, the defining terms of investment need to be kept in mind.
Investing is a very exhaustive subject. It means different things to different people. At some point of time we all are investing in something. It may be relationships; it may be marriage or a career. Life is all about doing something to reap benefits in the future. So all of us are in the investment game. However, it means different things to different people. People invest in:
“Why do we have so many different types of car and trucks? Because different people have different needs”
Large families so that when they grow old, their children can take care of them. Education, to ensure job security and comfortable life. Land and crops, in order to fend for themselves and their families. Small families, to provide a good standard of education and living for their child. Their health. By exercising regularly and eating a balanced diet. Charitable works, to serve the needy and the poor, and External assets like real estate, shares in listed companies, gold, silver, etc., so that they can fall back upon them in tough times.
Thus we have a lot of people doing things in the name of investing. This makes the subject of investment very complex.
1.2 Why should one invest?
One needs to invest to: ? ? ? Earn return on your idle resources Generate a specified sum of money for a specific goal in life Make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.
For example: If the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year.
1.3 When to start Investing?
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules
For all investors are:
Invest early Invest regularly Invest for long term and not short term
1.4 What care should one take while
investing?
Before making any investment, one must ensure to:
Obtain written documents explaining the investment Read and understand such documents Verify the legitimacy of the investment Find out the costs and benefits associated with the investment Assess the risk-return profile of the investment Know the liquidity and safety aspects of the investment Ascertain if it is appropriate for your specific goals Compare these details with other
investment opportunities available Examine if it fits in with other
investments you are considering or you hold Deal only through an authorized intermediary Seek all clarifications about the intermediary and the investment Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment. These are called the Twelve Important Steps to Investing.
1.5 Investing is a plan
It is not a product or a procedure. It is a very personal plan. An individual has to decide what his goals are and how he can go from one level of comfort to another he would have certain resources coming to him and certain commitments to be fulfilled. A person is able to earn when he is young. These earnings need to be invested wisely so that in old age when a person‘s capacity to earn diminishes, he can fall back on his investments. Therefore, he needs to have a clear picture of his financials before making an investment plan. Example: Take the case of working couple, aged 30, with two school going children-a son and a daughter. At present they live a very comfortable life. But they need to plan for the future and a very comfortable life. But they need to plan for the future expenses. The children will want to go in for higher studies within next 7-10 years. They will need to be married. The family might need a bigger house or there could be some major illness in the family. All these expenses will have to be met. The needs will increase but the income may not keep the pace. If one does not plan for these expenses one may not be able to achieve the milestones as and when they come. So this couple needs to estimate their income flow and visualize their expenses. An investment plan will help to plan for eventualities in the future. If one is at comfort level ?A‘. From there one needs to go to a higher comfort level ?B‘. to do that one would need different types of investment vehicles like stocks, bonds, real estate, etc. one would choose the investment vehicles according to one‘s needs. Figure explain this
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INSURANCE
GOLD
REAL ESTATE
COMMODITIES BONDS
MUTUAL FUNDS
STOCKS
A
1.6 Factors affecting Investment
Decisions
Before you begin investing, it‘s helpful to understand some of the factors that will affect your investment decisions, such as: Risk Liquidity Time Horizon Total Return Diversification Tax Consequences Rupee Cost Averaging
Risk: Risk in investments can take various forms. Liquidity: A "liquid" investment is one that can be readily turned into cash if you need the funds on short notice. Investments can vary greatly in their degree of liquidity. Shares can be traded on any business day at their current market value, which may be more than, equal to or less than the amount initially invested. Time Horizon: Different investors have different time frames in which to achieve their investment objectives. Generally, young investors with long time horizons should be able to assume greater risks because they have more time to offset any losses with the higher return potential of investments with greater risk. Older investors, however, often choose to reduce risk because they have less time to recoup losses. Total Return: All investments provide one or a combination of two different types of returns to investors - income or growth. Income is the dividend earned from stocks. Growth is the price appreciation of the security. The total return of an investment is the
combination of income and growth realized over a given time period. In selecting investments based upon their expected total return, you should understand which portion is generated from income and which from growth. Usually, the greater the reliance on income, the lower the market risk but the greater the long-term purchasing power (or inflationary) risk. Diversification: Building a diversified portfolio with securities spread across different investment classes can help you avoid the risk of having all of your eggs in one basket. By mixing industries
and types of assets, you spread your risk. A particular market condition may have less impact if your portfolio consists of a wide assortment of securities than if you purchase only one type of security. Most beginning investors don't have sufficient capital to properly diversify their portfolio by purchasing individual securities. Investing in mutual funds allows you to buy a professionally managed, diversified portfolio with relatively small rupee amounts. In addition, many mutual funds allow you to take advantage of rupee cost averaging by investing at regular intervals. Note: Mutual fund investing involves risk. Your principal and investment return in a mutual fund will fluctuate in value. Your investment, when redeemed, may be worth more or less than the original cost. Tax Consequences: Not all investment returns are subject to the same taxation. Short term and long term returns are taxed at different capital gains rates or even taxed as business income. The taxation policy should be kept in mind while deciding which investments to make. Rupee Cost Averaging: Rupee cost averaging, the practice of committing a fixed amount of money to an investment program on a regular basis, is a popular practice with many long-term investors. By investing a set amount regularly (usually monthly or quarterly), investors are able to avoid the pitfalls of trying to time market peaks and valleys. Also, because the amount of the investments is set, investors who practice rupee cost averaging buy more shares of a stock or mutual fund when they are less costly and fewer shares when they are more expensive. Like any investment strategy, rupee cost averaging doesn't guarantee a profit or protect against loss in a declining market. Because rupee cost averaging requires continuous investment regardless of fluctuating prices, you should consider your financial and emotional ability to continue the program through both rising and declining markets.
1.7 What Investing Is Not?
Investing is NOT gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping lady luck is on your side.
Chapter 2: Avenues of Investment…..
MUTUAL FUNDS REAL ESTATE
FIXED DEPOSITS
STOCKS
BONDS
COMMODITY
GOLD
2.1 Fixed deposit:
Fixed deposits are loan arrangements where a specific amount of funds is placed on deposit under the name of the account holder. The money placed on deposit earns a fixed rate of interest, according to the terms and conditions that govern the account. The actual amount of the fixed rate can be influenced by such factors at the type of currency involved in the deposit, the duration set in place for the deposit, and the location where the deposit is made. The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a specified period of time. In most cases, fixed deposits carry duration of five years. During that time, the money remains in the account and cannot be withdrawn for any
reason. Individuals, corporate entities, and even non-profit organizations that wish to set aside funds and limit their access to the funds for a period of time often find that fixed deposits are a simple way to accomplish this goal. As an added benefit, the monies in the account will earn affixed rate of interest regardless of any fluctuations in interest rates that apply to other types of accounts. However, both these benefits can also turn into disadvantages under certain circumstances. Because the money cannot be withdrawn until the duration is complete, the funds cannot be used even in emergency situations. Changes in the going interest rate may also rise to a point above and beyond the interest rate applied to existing deposits. This means account holders are actually earning less interest with fixed deposits than with other types of loans and accounts. While the interest rate on fixed deposits cannot be changed, there is sometimes a way to work around the issue of obtaining use of funds in an emergency situation. At times, the lending institution where the fixed deposit is placed may be willing to extend a separate loan to the account holder, using the fixed account as collateral. While not ideal, this can at least make it possible to deal with the current financial crunch. Fixed deposits are a credible way to make a return on investment that is somewhat higher than a standard savings account. The use of fixed deposits can also be helpful when working with various types of currency. By establishing what is known as a Foreign Currency Fixed Deposit or FCFD, it is possible to choose the type of currency involved in the deposit and lock in a rate of interest. If the choice of currency is a good one, this means the investor can enjoy a healthy fixed deposit currency rate for the duration of the deposit and earn more than with a standard fixed deposit strategy. However, going with an FCFD does contain a slightly higher amount of risk, since the funds deposited must be converted to the currency of choice and then converted back when the deposit is fulfilled. If the currency did not fare well in the interim, there is some chance of obtaining a loss, due to the changes in the rate of exchange from the time the fixed deposit was activated until the time the deposit is considered complete
Advantages of Fixed Deposits:
? Safety: FDs have conventionally been the premier choice for investors with a low risk appetite; assured returns is the key factor which attracts investors towards deposits. Stick to FDs of the highest credit rating i.e. those with a ?AAA? rating even if their rates seem modest vis-à-vis those offered by company deposits. Company deposits are unsecured in nature and investing in them would imply taking on disproportionately higher risk. If as an investor you are open to investing in instruments involving higher risk levels, market linked instruments like mutual funds may not be a bad deal. ? Tenure: Short tenured fixed deposits continue to be your best bet. With interest rates on the ascent, a further hike in rates offered by fixed deposits cannot be ruled out. Locking your investments in longer tenured instruments may lead to an opportunity loss. Even if a 3-Yr FD looks like a lucrative proposition as compared to one which runs over a year or so, pick the short tenured one. In a rising rate scenario, you could be more than compensated for the lower returns at present.
? Liquidity: Find out how your FD fares on the pre-mature encashment front i.e. how easily can your investment be liquidated. Also enquire about the penalty clauses, e.g. do you suffer a loss of interest and/or principal amount. Compare how various FDs rank on this parameter and pick the best deal; thereby try to minimize the impact of illiquidity which is typically associated with FDs. ? Flexible investment periods: To suit your personal needs, you can choose from an investment period of between 1 and 60 months for fixed deposit, or between 1 week to 12 months for foreign currencies deposit. If you need your deposit to mature on a specific date ? Accessibility: Banks offer you access to a wide range of the world‘s major currencies to help you achieve your investment goals. You can even switch from one currency to another by simply giving us your instructions. Your deposit can also be remitted either by draft or telegraphic transfer. ? Automatic renewals: To ensure continued growth, your matured deposit will automatically be renewed for the same period of time at the bank‘s prevailing rate. This allows you to enjoy uninterrupted interest earnings on your principal amount invested. In the event that you decide to change your renewal instruction, you will need to inform us at least 2 working days before maturity. ? Early payment of interest: If you place your savings in Fixed Deposit account for at least 24 months, you can enjoy early interest payments. On receipt of your instructions, the interest will be credited to your operating account on a yearly basis.
? Pre-approved overdraft: To ensure that your investment continues to grow, whilst giving you the flexibility to satisfy any unexpected financial needs, Banks offer you a pre-approved overdraft worth up to 90%or 100% Deposit value. ? Credit Card: Enjoy the benefits of recognition, payment flexibility, attractive reward points, worldwide accessibility to cash at over 600,000 ATMs and many more simply by carrying a credit card. To qualify, all you need is to maintain at least B$5,000 in your Fixed Deposit Account over a 3 months period.
Disadvantages Of Investing Of Fixed Deposits:-
A person can withdraw money only when his/her maturity period is over. A person suffers a loss if he/she try to withdraw money before maturity period As compared to other investment instruments percentage of return is less.
2.2 Real Estate:
Real Estate Market Investment involves the buying and selling of Real Estate for sheer profit. Profits are piled up slowly by renting out Real Estate Properties in a cash flow method or are generally improved upon and resold for a financial gain. Real Estate Market Investment makers can also wholesale properties in order to make profits. Usually real estate market has a 'laggard effect' to the equity markets. What it means is a few months/year after equity markets have rallied the real estate markets also start moving up. The Property Market in India has shown a substantial development in the last few years and is bustling with many investors looking forward to gain more from this apparently risk free sector. If we compare Real Estate to other types of investment like mutual funds and equities, then it definitely emerges as a safer option. The chief reason for generation of such interest from buyers is due to the several measures taken by the government to expand Realty Market and make it attractive for buyers from India as well as the world.
Investors sell their stocks at a profit in equity markets and invest the money into real estate. But before making investments an investor should analyze the market thoroughly. The factors an investor should look into before investing are:
? ? ?
The current demand of the Real Estate Market. The future trend of the Real Estate Market. It is also important to know whether the demand is increasing, decreasing or remaining constant.
Real Estate Market Investment has advantages and disadvantages at the same time. Though it looks like the advantages are more in numbers but the disadvantages if not taken care of can prove to be fatal.
Types of Real Estate:
Residential real estate The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the lender stands to gain returns from it. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Commercial real estate Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50
Advantages of Investing In Real Estate:
The real advantage in the Real Estate Market Investment is that theoretically this business has an ever growing tendency because of the growing population and the demand for Real estate‘s both for residential and office usages. As all the things in this field are very expensive and every time one sells it the profit becomes more. The ability to borrow based on the value of the Real estate Property, is another advantage. It is easier to finance Real Estate than any other product. While investing other pluses requires the buyer to have the entire buying price available for the pluses. But in Real Estate Market Investment, one just needs to have a fraction of the buying price available as the down payment. That is why, Real Estate, in spite of being extremely expensive, is much easier to buy than a piece of industrial instrument of the very same price.
Disadvantages of Investing In Real Estate
Real Estate Market Investment is something that needs to be maintained and taxes to be submitted from time to time. A small mistake in this procedure can bring a major loss to the investor. During the real estate booms, investors can be attracted to buy Real Estate properties without calculating the expenditures attached in the purchase and for the existing expenditures of the property. The Real Estate Market can then suddenly flow against them instead of flowing for them making the investor face a major loss.
2.3 Bonds:
Unlike equities that represent a participation in a company, a bond is a debt security. When you purchase a bond, you lend money to the issuer of the bond. The issuer can be a government, a municipality, a federal agency, a corporation or another entity. A bond has generally a maturity (a date at which the issuer reimburse the amount borrowed) and an interest payment. The stream of payments linked to a bond is known in advance (provided that the issuer can pay) but this stream depends of the bond. You have bonds that pay a fixed interest during the life of the paper (fixed rate bonds); you have others that pay a revised interest rate (floating rate bonds) or even no interest at all (zero coupon bonds). The first thing that comes to most people's minds when they think of investing is the stock market. After all, stocks are exciting. The swings in the market are scrutinized in the newspapers and even covered by local evening newscasts. Stories of investors gaining great wealth in the stock market are common. Bonds, on the other hand, don't have the same sex appeal. Plus, bonds are much more boring - especially during raging bull markets, when they seem to offer an insignificant return compared to stocks. However, all it takes is a bear market to remind investors of the virtues of a bond's safety and stability. In fact, for many investors it makes sense to have at least part of their portfolio invested in bonds.
2.4 Commodity:
A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals like Gold, Silver, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.
2.5 Gold:
For centuries gold has been the ultimate cushion against the dangers of stocks price falls, fluctuating rate changes, inflation, rising/falling real estate prices, natural calamities, wars and more. Gold has been the best way to safeguard your investments against unstable financial markets. Whether or not gold is a good investment, is a question that does not have a simple answer. Gold has appreciated substantially over the past couple of years. The growth rate of late has been much higher than the conventional rate of appreciation. However, if we look at the past 15-20 years record, it is seen that Gold is a hedge against inflation. Over the last 20 years, the average return from Gold has been around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term. Also, another aspect that we should look at is a weakening currency. No matter which country you originate from, there is a chance that your country‘s currency will suffer a downfall at a particular point of time. Gold, on the other hand, retains its true value and can help you protect your riches because it does not rely on the state of the country‘s economic, whether it is on the up or downtrend. Therefore, investing a small portion of one‘s investment portfolio in gold would be a good idea.
Chapter 3: Equity Market 3.1 Introduction 3.2 Types of Equity 3.3 Tips for Investing In Equity 3.4 Advantages and Disadvantages 3.5 Risk and Returns
Chapter 3: Equity Market
Equities....Today's home for tomorrow's money
3.1:- Introduction
What are Share / Stock / Equity? A share is one of a finite number of equal portions in the capital of a company, mutual fund or limited partnership, entitling the owner to a proportion of distributed, nonreinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Dividends are not guaranteed. They may be increased if the company performs well, but they may also be reduced or eliminated if the company performs poorly. So when you purchase shares, you become part owner of a company. As an owner, you are usually entitled to voting rights on the board of directors and corporate policy.
Why Should One Invest In Equities? Although past performance cannot guarantee future market results, Stocks,
historically have outperformed all other long-term financial assets. They are the only the financial asset that has significantly outpaced inflation over time. Investors buy stock to potentially increase their return on investment in one or both of two ways: ? Dividend Payments
Many companies pay portions of their annual profits to stockholders in the form of dividends. Stocks with consistent track record of paying attractive dividends are known as income stocks because investors often buy these stocks to receive the income by way of dividends in addition to being invested in the company's future growth prospects. ? By Selling the stock for more than they originally paid -
Some companies reinvest most of their profits back into the business in order to expand. Stocks of companies with sales and earnings that are expanding faster than the general economy and faster than the average company are called growth stocks because investors expect the company to grow and expect the stock price to grow with it. When such increase in the stock price is witnessed, investors can sell their shares for an amount greater than their purchase price, thus pocketing the difference as profit. How One Can Make Profits By Investing Equities? Every year, when the company draws up its accounts, the company profit for the year will become apparent. The directors of the company will decide how much of the profit to plough back into the company, and how much to distribute to the owners of the equity - i.e. the shareholders. The profit is then distributed as an amount per share - called a dividend. Companies like to increase their dividend year on year. As well as the profit from the dividends, equity share owners will also benefit if the share price rises. This means that the shareholders can sell their equity shares at a higher price than they were bought originally.
So the investment return from equity shares comes from two sources: - the dividends paid from the profits of the company, and the rise in the equity share price. This return, combining these two sources of profit, has comfortably exceeded the rate of inflation in the past. Modes of Stock Purchase Stocks can be purchased individually (meaning you purchase shares of stock in one particular company) or as part of a pool investments, such as mutual funds. Mutual funds are baskets of stocks that are available for the fraction of the price you would need to buy the same stocks individually. That‘s because a large number of investors pool their money together and invest in the entire portfolio of stocks. Professional money managers direct the investments within mutual funds, choosing each of the individual investments based on the mutual fund's investment goals. For example, some equity mutual funds invest in well-established companies that pay regular dividends. Others invest in younger, more growth-oriented firms or companies that have been operating below expectations for several years. Note: As with the purchase of individual stocks, your investment return and principal value of an investment in mutual funds will fluctuate. Your shares may be worth more or less than your original investment when redeemed.
3.2 Types of Equity
There are a number of types of equity, each with different characteristics. ?
Common stock or ordinary shares:
Common stock, as it is known in the United States, or ordinary shares, according to British terminology, is the most important form of equity investment. An owner of common stock is part owner of the enterprise and is entitled to vote on certain important matters, including the selection of directors. Common stock holders benefit most from improvement in the firm's business prospects. But they have a claim on the firm's income and assets only after all creditors and all preferred stock holders receive payment. Some firms have more than one class of common stock, in which case the stock of one class may be entitled to greater voting rights, or to larger dividends, than stock of another class. This is often the case with family owned firms which sell stock to the public in a way that enables the family to maintain control through its ownership of stock with superior voting rights. ? Preferred stock:
Also called preference shares, preferred stock is more akin to bonds than to common stock. Like bonds, preferred stock offers specified payments on specified dates. Preferred stock appeals to issuers because the dividend remains constant for as long as the stock is outstanding, which may be in perpetuity. Some investors favour preferred stock over bonds because the periodic payments are formally considered dividends rather than interest payments, and may therefore offer tax advantages. The issuer is obliged to pay dividends to preferred stock holders before paying dividends to common shareholders. If the preferred stock is cumulative, unpaid dividends may accrue until preferred stock holders have received full payment. In the case of non cumulative preferred stock, preferred stock holders may be able to impose significant restrictions on the firm in the event of a missed dividend.
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Convertible preferred stock
This may be converted into common stock under certain conditions, usually at a predetermined price or within a predetermined time period. Conversion is always at the owner's option and cannot be required by the issuer. Convertible preferred stock is similar to convertible bonds. ? Warrants
Warrants offer the holder the opportunity to purchase a firm's common stock during a specified time period in future, at a predetermined price, known as the exercise price or strike price. The tangible value of a warrant is the market price of the stock less the strike price. If the tangible value when the warrants are exercisable is zero or less the warrants have no value, as the stock can be acquired more cheaply in the open market. A firm may sell warrants directly, but more often they are incorporated into other securities, such as preferred stock or bonds. Warrants are created and sold by the firm that issues the underlying stock. In a rights offering, warrants are allotted to existing stock holders in proportion to their current holdings. If all shareholders subscribe to the offering the firm's total capital will increase, but each stock holder's proportionate ownership will not change. The stock holder is free not to subscribe to the offering or to pass the rights to others. In the UK a stock holder chooses not to subscribe by filing a letter of renunciation with the issuer. ? Issuing shares
Few businesses begin with freely traded shares. Most are initially owned by an individual, a small group of investors (such as partners or venture capitalists) or an established firm which has created a new subsidiary. In most countries, a firm may not sell shares to the public until it has been in operation for a specified period. Some countries bar firms from selling shares until their business is profitable, a requirement that can make it difficult for young firms to raise capital.
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Flotation
Flotation, also known as an initial public offering (ipo), is the process by which a firm sells its shares to the public. This may occur for a number of reasons. The firm may require additional capital to take advantage of new opportunities. Some of the firm's original investors may want it to buy them out so they can put their money to work elsewhere. The firm may also wish to use shares to compensate employees, and a public share listing makes this easier as the value of the shares is freely established in the market place. The flotation need not involve all or even the majority of the firm's shares. ? Private offering
Rather than selling its shares to the public, a firm may raise equity through a private offering. Only sophisticated investors, such as money management firms and wealthy individuals, are normally allowed to purchase shares in a private offering, as disclosures about the risks involved are fewer than in a public offering. Shares purchased in a private offering are common equity and are therefore entitled to vote on corporate matters and to receive a dividend, but they usually cannot be resold in the public markets for a specified period of time. ? Secondary offering
A secondary offering occurs when a firm whose shares are already traded publicly sells additional shares to the public called a follow on offering in the UK or when one or more investors holding a large proportion of a firm's shares offers those shares for sale to the public. Firms that already have publicly traded shares may float additional shares to increase their total capital. If this leaves existing shareholders owning smaller proportions of the firm than they owned previously, it is said to dilute their holdings. If the secondary offering involves shares owned by investors, the proceeds of a secondary offering go to the investors whose shares are sold, not to the issuer.
3.3 Tips for Investing In Equity:
Everything you need to know about investing in stocks • Stocks are'nt just piece of paper • There are many different kinds of stock • Stock price track earnings • Stock are your best shot for getting A return over and above the pace of inflation • Individual stocks are not the market • A great track record does not gaurrantee strong performance in future • You cant tell how expensive A stock is by looking only at its price • Investors compare stock price to other factors to access value
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• A smart portfolio positioned for long term growth includes strong stocks from different industries
• Its smarter to buy and hold good stocks then to engage in rapid fire trading
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3.4 Advantages and Disadvantages…
Advantages of Equity Shares
To the company: While issuing the equity shares, the company does not accept any obligation of any type. The company neither offers any security to the investors in the form of assets of the company nor commits the repayment of these shares during the life time of the company nor commits the payment of any dividend to the shareholders. This is a total risk free source of capital for the company.
To the investors: a. As per the law, the liability of the equity shareholders is restricted only to the extent
of face value of the shares purchased by the investors. The personal properties of the investors are not at stake even if the company fails to fulfill its contractual obligations. b. Possibility of getting higher returns is always there in case of equity shares. The
investors can gain from equity shares in two forms. One, the regular dividend paid by the company in the form of cash or by way of bonus shares and second, the capital appreciation received by the investors by selling the equity shares in the secondary market i.e. stock exchanges. As such, equity shares are a good investment attracting the risk taking investors.
Disadvantages of Equity shares
a.
As the investors in equity shares enjoy the voting powers to control the fairs of the
company, the management of the company is always under constant danger of getting interfered and disturbed in the regular administration. b. The cost of associated with the equity shares is on higher side as compared to the
borrowed capital. By issuing more and more equity shares, the company looses the cost advantage. c. Many categories of investor‘s i.e. institutional investors may not be able to invest in
the equity shares due to various statutory restrictions. d. The excessive issue of equity shares may result in over capitalization future.
3.5 Risk and Returns
Every investment opportunity carries some risks or the other. In some investments, a certain type of risk may be predominant, and others not so significant. A full understanding of the various important risks is essential for taking calculated risks and making sensible investment decisions. Seven major risks are present in varying degrees in different types of investments. Default risk This is the most frightening of all investment risks. The risk of non-payment refers to both the principal and the interest. For all unsecured loans, e.g. loans based on promissory notes, company deposits, etc., this risk is very high. Since there is no security attached, you can do nothing except, of course, go to a court when there is a default in refund of capital or payment of accrued interest. Business risk The market value of your investment in equity shares depends upon the performance of the company you invest in. If a company's business suffers and the company does not perform well, the market value of your share can go down sharply.
This invariably happens in the case of shares of companies which hit the IPO market with issues at high premiums when the economy is in a good condition and the stock markets are bullish. Then if these companies could not deliver upon their promises, their share prices fall drastically. Liquidity risk Money has only a limited value if it is not readily available to you as and when you need it. In financial jargon, the ready availability of money is called liquidity. An investment should not only be safe and profitable, but also reasonably liquid. An asset or investment is said to be liquid if it can be converted into cash quickly, and with little loss in value. Liquidity risk refers to the possibility of the investor not being able to realize its value when required. This may happen either because the security cannot be sold in the market or prematurely terminated, or because the resultant loss in value may be unrealistically high. Purchasing power risk, or inflation risk Inflation means being broke with a lot of money in your pocket. When prices shoot up, the purchasing power of your money goes down. Some economists consider inflation to be a disguised tax. Ironically, relatively "safe" fixed income investments, such as bank deposits and small savings instruments, etc., are more prone to ravages of inflation risk because rising prices erode the purchasing power of your capital. "Riskier" investments such as equity shares are more likely to preserve the value of your capital over the medium term. Interest rate risk In this deregulated era, interest rate fluctuation is a common phenomenon with its consequent impact on investment values and yields. Interest rate risk affects fixed income securities and refers to the risk of a change in the value of your investment as a result of movement in interest rates.
Suppose you have invested in a security yielding 8 per cent p.a. for 3 years. If the interest rates move up to 9 per cent one year down the line, a similar security can then be issued only at 9 per cent. Due to the lower yield, the value of your security gets reduced. Political risk The government has extraordinary powers to affect the economy; it may introduce legislation affecting some industries or companies in which you have invested, or it may introduce legislation granting debt-relief to certain sections of society, fixing ceilings of property, etc. One government may go and another come with a totally different set of political and economic ideologies. In the process, the fortunes of many industries and companies undergo a drastic change. Change in government policies is one reason for political risk. Whenever there is a threat of war, financial markets become panicky. Nervous selling begins. Security prices plummet. In case a war actually breaks out, it often leads to sheer pandemonium in the financial markets. Similarly, markets become hesitant whenever elections are round the corner. The market prefers to wait and watch, rather than gamble on poll predictions. Market risk Market risk is the risk of movement in security prices due to factors that affect the market as a whole. Natural disasters can be one such factor. The most important of these factors is the phase (bearish or bullish) the markets are going through. Stock markets and bond markets are affected by rising and falling prices due to alternating bullish and bearish periods:
Our series on Business Intelligence ROI has explored the importance of ROI for BI projects, provided examples of the types of BI projects that never pay off, and evaluated the methodology for calculating BI ROI. We saw that if a project has measurable returns it is more likely to get off the ground and get you acceptance for future BI projects. Many of you who are tasked to calculate the ROI of your BI projects were never taught such a thing in school, so let's break down another element that will help you do your calculations: types of return. Here are 5 types you should evaluate: 1. Revenue enhancement Simply put, your organization will generate more money as a result of doing your project. Shareholders appreciate these types of projects – you're reaching the right group of customers who see value in your project – and are willing to pay. 2. Revenue enhancement/margin protection This means that your organization will increase profits through better efficiency. This does not necessarily mean more revenue but just higher profitability as a result of streamlining your current process. 3. Cost reduction The current process costs 'x', but as a result of doing your project, it will cost x minus 5% or even x minus 10%. Your project could reduce wasteful practices and therefore save the company money.
4. Cost avoidance In the business intelligence space, cost avoidance is the easiest type of ROI to prove. There's an existing process and it takes 'x' amount of resources over a certain period of time. As a result of implementing your project, the process takes fewer (maybe no) resources to produce the same results, thereby avoiding current costs. 5. Capital cost avoidance If your project extends beyond a single fiscal year, then you are investing in a capital expenditure ("capex"). These are expenditures that create future benefits, or help you avoid capital costs in future periods.
Chapter 4: Mutual Fund 4.1 Introduction 4.2 Types of Mutual Funds 4.3 Tips for Investing In Mutual Funds 4.4 Advantages and Disadvantages 4.5 Risk and Returns
4.1 Introduction
A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal
definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies." Most mutual funds are "open-ended," meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered a type of mutual fund. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
ORGANISATION OF A MUTUAL FUND
There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:
4.2 Types of Mutual Funds
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
4.3 Tips for investing in mutual funds
1 • Do: Select a fund with proven track record and go through its offer document
2
• Do: Select a fund with proven track record and go through its offer document
3
• Don't: blindly chase a fund for its current performance or overlook another for its lackluster performance in the near past.
4
• Don't: Panic
5
• Do: Hold your peace
6
• Don't: Invest huge amounts all at once
7
• Do: Invest via SIPs
8
• Don't: Simply chase performance
9
• Do: Invest according to your risk profile
10
• Don't: Ignore expenses
11
• Do: Compare expense ratio
4.4 Advantage of Mutual Funds
Advantages of mutual funds
1. Professional Management Qualified professionals manage money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme, so you see that it is a continuous process that takes time and expertise that will add value to investment. These fund managers are in a better position to manage investments and get higher returns. 2. Diversification The cliché, "don‘t put all eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers risk of loss by spreading money across various industries. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds will spread investment across only one industry and it would not be wise for portfolio to be skewed towards these types of funds for obvious reasons. 3. Choice of Schemes Mutual funds offer a variety of schemes that will suit investors needs over a lifetime. When they enter a new stage in life, all needed to do is sit down with investment advisor who will help to rearrange portfolio to suit altered lifestyle
4. Affordability A small investor may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes that allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. One can invest with a minimum of Rs. 500 in a Systematic Investment Plan on a regular basis. 5. Tax Benefits Investments held by investors for a period of 12 months or more qualify for Capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation. 6. Liquidity With open-end funds, you can redeem all or part of investment any time you wish and receive the current value of the shares or the NAV related price. Funds are more liquid than most investments in shares, deposits and bonds and the process is standardized, making it quick and efficient so that you can get cash in hand as soon as possible. 7. Rupee Cost Averaging Through using this concept of investing the same amount regularly, mutual funds give investor the advantage of getting the average unit price over the long-term. This reduces risk and also allows you to discipline self by actually investing every month or quarterly and not making sporadic investments. 8. The Transparency of Mutual Funds The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare one to the other. Once you are part of a mutual fund scheme, you are provided with regular updates, for example daily NAVs, as well as information on the specific investments made and the fund manager‘s strategy and outlook of the scheme.
9. Easy To Administer Mutual funds units in modern times are not issued in the form of certificates, with a minimum denomination rather they are issued as account statement switch a facility to hold units in fraction up to 4 decimal points.10.Highly Regulated The governing of mutual funds by SEBI ensures that the fund activities are carried out in the best interest of the investors.
Disadvantages of mutual funds
The following are some of the reasons which are deterrent to mutual fund investment: • Costs despite Negative Returns: Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares. • Lack of Control: Investors typically cannot ascertain the exact make-up of a funds portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.
• Price Uncertainty: With an individual stock, you can obtain real- time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stocks price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the funds NAV, which the fund might not calculate until many hours after you‘ve placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.. Some mutual fund schemes with the point of attractiveness to investors-Comparison of best performing mutual funds with index Equity schemes: Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns. These can be further classified into three types: 1. Diversified Equity schemes: The aim of diversified equity funds is to provide the investor with capital appreciation over a medium to long period (generally 2 – 5 years). The fund invests in equity shares of companies from a diverse array of industries and balances (or tries to) the portfolio so as to prevent any adverse impact on returns due to a downturn in one or two sectors
2. Equity Linked Saving Schemes (ELSS): These schemes generally offer tax rebates to the investor under section 88 of the Income Tax law. These schemes generally diversify the equity risk by investing in a wider array of stocks across sectors. ELSS is usually considered a variant of diversified equity scheme but with a tax friendly offer 3. Sectoral Fund/ Industry Specific schemes: Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Info Tech, FMCG, and Pharmaceuticals etc. These are ideal for investors who have already decided to invest in particular sector or segment. Sectoral Funds tend to have a very high risk-reward ratio and investors should be careful of putting all their eggs in one basket
4.5 Risk and Return
Risk is an inherent aspect of every form of investment. For mutual fund investments, risks would include variability, or period-by-period fluctuations in total return. The value of the scheme's investments may be affected by factors affecting capital markets such as price and volume volatility in the stock markets, interest rates, currency exchange rates, foreign investment, changes in government policy, political, economic or other developments. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".
Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you'll actually be able to buy less, not more.
Credit Risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.
Investment Risks: In the sect oral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.
Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.
Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.
Generally, Mutual Funds do not offer guaranteed returns to investors. Although, SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum. The name of the guarantor and the manner in which the guarantee shall be met must be disclosed in the offer document by the Mutual Fund. Investments in mutual funds are not guaranteed by the Government of India, the Reserve Bank of India or any other government bodies.
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
?
Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
?
If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
Chapter 5: Mutual Funds Vis-À-Vis Equity Market 5.1 Introduction 5.2 Similarities in Equity Shares and Mutual Funds 5.3 Difference between Equity Shares and Mutual Funds
5.1 Introduction:
Equity share/Direct investment Equity shares:
These are shares of company and can be traded in secondary market. Investors get benefit by change in price of share or dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market:
Mutual Funds:
A brief introduction A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investment sand the capital appreciations realized by the schemes are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.
5.2 Similarities in Equity Shares and Mutual Funds
Both are similar in that they invest in equities. plain vanilla mutual funds generally do not short equities and hedge funds in many cases take short positions. A MF generally can not take concentrated positions by law, whereas a hedge fund does not have such limitation. Rest of differences between these two is the general differences between a mutual fund and an hedge fund.
A typical mutual fund is a highly regulated collective investment vehicle and follows strict rules of the regulator (SEC in US and SEBI in India). A hedge fund is generally registered as a limited liability partnership or some similar structure that does not come under the regulators area of regulation. Due to this difference, a mutual fund can advertise itself and solicit money from general public whereas a hedge fund can not. Hedge funds also have a minimum investment threshold so only accredited investors can invest. This is the reason hedge funds is generally considered for rich investors.
There are some differences in how fund managers are compensated.
5.3 Difference between Equity Shares and Mutual Funds
A mutual fund is the ideal investment vehicle for today‘s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. Investing in Mutual Fund is convenient because of two basic reasons. All investment carry risks, especially equity investment that bears larger risks, their returns are more volatile and uneven. To cut down the risk one needs to put money in several instruments rather than in one or two products. A Mutual Fund can effectively spread its investments across various sectors of the economy and amongst several products. Risk diversification is the Key. Secondly ‘where to invest and where not to‘, is a specialized business. One may not have the expertise, time and resources of a wellmanaged fund
After the entire analysis of survey and questionnaires, we find that most of the respondents said that they have equity stocks in their portfolio. And among these (who invests in equity) 52%, investors prefer to invest through Mutual funds and only 33% (17 investors) said that they do invest directly in equity market. According to survey people prefer to invest into Mutual funds than investing directly into stocks. 46% of the respondents feel that mutual funds reduce their risk in investing in the market as it gives diversification to their portfolio. 17% respondents said that it give them the benefit of professional management. Just 14% said it give them liquidity irrespective of market conditions. And also lack of time was cited as the reason by 23%of the respondents. Out of those who said that they prefer to directly invest in stock market, majority (54%) gave high weight age to high risk and high returns game. 33% said that they want to be their own fund managers. Also, over 48% agreed that they prefer to book profit as they reach their profit target. They do believe in churning and enjoy making higher returns. Some investors told that they like to keep a certain percentage of their portfolio into mutual funds and the rest they want to manage by them selves. It can also be seen from findings that an investor has made higher returns in a long run by investing into direct equities, but if one wants to make a higher returns in the short run and mid term horizon, then definitely mutual funds are the best buy.
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1.1 1.2 1.3 1.4 1.5 1.6 1.7 What Is Investment? Why Should One Invest? When to Start Investing? What Care Should One Take While Investing? Investing Is A Plan Factors Affecting Investment Decision What Investment Is Not..??
1.1 What is Investment/Investing?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keeping the savings idle you may like to use savings in order to get return on it in the future. This is called Investment.
Investment is a term frequently used in the fields of economics, business management and finance. It can mean savings alone, or savings made through delayed consumption. Investment can be divided into different types according to various theories and principles.
“Investment is the investing of money or capital in order to gain Profitable returns, as interest, income, or appreciation in value.”
When an asset is bought or a given amount of money is invested in the bank, there is anticipation that some return will be received from the investment in the future. There are a number of definitions of investment. While dealing with the various options of investment, the defining terms of investment need to be kept in mind.
Investing is a very exhaustive subject. It means different things to different people. At some point of time we all are investing in something. It may be relationships; it may be marriage or a career. Life is all about doing something to reap benefits in the future. So all of us are in the investment game. However, it means different things to different people. People invest in:
“Why do we have so many different types of car and trucks? Because different people have different needs”
Large families so that when they grow old, their children can take care of them. Education, to ensure job security and comfortable life. Land and crops, in order to fend for themselves and their families. Small families, to provide a good standard of education and living for their child. Their health. By exercising regularly and eating a balanced diet. Charitable works, to serve the needy and the poor, and External assets like real estate, shares in listed companies, gold, silver, etc., so that they can fall back upon them in tough times.
Thus we have a lot of people doing things in the name of investing. This makes the subject of investment very complex.
1.2 Why should one invest?
One needs to invest to: ? ? ? Earn return on your idle resources Generate a specified sum of money for a specific goal in life Make a provision for an uncertain future
One of the important reasons why one needs to invest wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past. For example, if there was a 6% inflation rate for the next 20 years, a Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.
For example: If the annual inflation rate is 6%, then the investment will need to earn more than 6% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year.
1.3 When to start Investing?
The sooner one starts investing the better. By investing early you allow your investments more time to grow, whereby the concept of compounding increases your income, by accumulating the principal and the interest or dividend earned on it, year after year. The three golden rules
For all investors are:
Invest early Invest regularly Invest for long term and not short term
1.4 What care should one take while
investing?
Before making any investment, one must ensure to:
Obtain written documents explaining the investment Read and understand such documents Verify the legitimacy of the investment Find out the costs and benefits associated with the investment Assess the risk-return profile of the investment Know the liquidity and safety aspects of the investment Ascertain if it is appropriate for your specific goals Compare these details with other
investment opportunities available Examine if it fits in with other
investments you are considering or you hold Deal only through an authorized intermediary Seek all clarifications about the intermediary and the investment Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment. These are called the Twelve Important Steps to Investing.
1.5 Investing is a plan
It is not a product or a procedure. It is a very personal plan. An individual has to decide what his goals are and how he can go from one level of comfort to another he would have certain resources coming to him and certain commitments to be fulfilled. A person is able to earn when he is young. These earnings need to be invested wisely so that in old age when a person‘s capacity to earn diminishes, he can fall back on his investments. Therefore, he needs to have a clear picture of his financials before making an investment plan. Example: Take the case of working couple, aged 30, with two school going children-a son and a daughter. At present they live a very comfortable life. But they need to plan for the future and a very comfortable life. But they need to plan for the future expenses. The children will want to go in for higher studies within next 7-10 years. They will need to be married. The family might need a bigger house or there could be some major illness in the family. All these expenses will have to be met. The needs will increase but the income may not keep the pace. If one does not plan for these expenses one may not be able to achieve the milestones as and when they come. So this couple needs to estimate their income flow and visualize their expenses. An investment plan will help to plan for eventualities in the future. If one is at comfort level ?A‘. From there one needs to go to a higher comfort level ?B‘. to do that one would need different types of investment vehicles like stocks, bonds, real estate, etc. one would choose the investment vehicles according to one‘s needs. Figure explain this
B
INSURANCE
GOLD
REAL ESTATE
COMMODITIES BONDS
MUTUAL FUNDS
STOCKS
A
1.6 Factors affecting Investment
Decisions
Before you begin investing, it‘s helpful to understand some of the factors that will affect your investment decisions, such as: Risk Liquidity Time Horizon Total Return Diversification Tax Consequences Rupee Cost Averaging
Risk: Risk in investments can take various forms. Liquidity: A "liquid" investment is one that can be readily turned into cash if you need the funds on short notice. Investments can vary greatly in their degree of liquidity. Shares can be traded on any business day at their current market value, which may be more than, equal to or less than the amount initially invested. Time Horizon: Different investors have different time frames in which to achieve their investment objectives. Generally, young investors with long time horizons should be able to assume greater risks because they have more time to offset any losses with the higher return potential of investments with greater risk. Older investors, however, often choose to reduce risk because they have less time to recoup losses. Total Return: All investments provide one or a combination of two different types of returns to investors - income or growth. Income is the dividend earned from stocks. Growth is the price appreciation of the security. The total return of an investment is the
combination of income and growth realized over a given time period. In selecting investments based upon their expected total return, you should understand which portion is generated from income and which from growth. Usually, the greater the reliance on income, the lower the market risk but the greater the long-term purchasing power (or inflationary) risk. Diversification: Building a diversified portfolio with securities spread across different investment classes can help you avoid the risk of having all of your eggs in one basket. By mixing industries
and types of assets, you spread your risk. A particular market condition may have less impact if your portfolio consists of a wide assortment of securities than if you purchase only one type of security. Most beginning investors don't have sufficient capital to properly diversify their portfolio by purchasing individual securities. Investing in mutual funds allows you to buy a professionally managed, diversified portfolio with relatively small rupee amounts. In addition, many mutual funds allow you to take advantage of rupee cost averaging by investing at regular intervals. Note: Mutual fund investing involves risk. Your principal and investment return in a mutual fund will fluctuate in value. Your investment, when redeemed, may be worth more or less than the original cost. Tax Consequences: Not all investment returns are subject to the same taxation. Short term and long term returns are taxed at different capital gains rates or even taxed as business income. The taxation policy should be kept in mind while deciding which investments to make. Rupee Cost Averaging: Rupee cost averaging, the practice of committing a fixed amount of money to an investment program on a regular basis, is a popular practice with many long-term investors. By investing a set amount regularly (usually monthly or quarterly), investors are able to avoid the pitfalls of trying to time market peaks and valleys. Also, because the amount of the investments is set, investors who practice rupee cost averaging buy more shares of a stock or mutual fund when they are less costly and fewer shares when they are more expensive. Like any investment strategy, rupee cost averaging doesn't guarantee a profit or protect against loss in a declining market. Because rupee cost averaging requires continuous investment regardless of fluctuating prices, you should consider your financial and emotional ability to continue the program through both rising and declining markets.
1.7 What Investing Is Not?
Investing is NOT gambling. Gambling is putting money at risk by betting on an uncertain outcome with the hope that you might win money. Part of the confusion between investing and gambling, however, may come from the way some people use investment vehicles. For example, it could be argued that buying a stock based on a "hot tip" you heard at the water cooler is essentially the same as placing a bet at a casino. A "real" investor does not simply throw his or her money at any random investment; he or she performs thorough analysis and commits capital only when there is a reasonable expectation of profit. Yes, there still is risk, and there are no guarantees, but investing is more than simply hoping lady luck is on your side.
Chapter 2: Avenues of Investment…..
MUTUAL FUNDS REAL ESTATE
FIXED DEPOSITS
STOCKS
BONDS
COMMODITY
GOLD
2.1 Fixed deposit:
Fixed deposits are loan arrangements where a specific amount of funds is placed on deposit under the name of the account holder. The money placed on deposit earns a fixed rate of interest, according to the terms and conditions that govern the account. The actual amount of the fixed rate can be influenced by such factors at the type of currency involved in the deposit, the duration set in place for the deposit, and the location where the deposit is made. The most unusual characteristic of a fixed deposit is that the funds cannot be withdrawn for a specified period of time. In most cases, fixed deposits carry duration of five years. During that time, the money remains in the account and cannot be withdrawn for any
reason. Individuals, corporate entities, and even non-profit organizations that wish to set aside funds and limit their access to the funds for a period of time often find that fixed deposits are a simple way to accomplish this goal. As an added benefit, the monies in the account will earn affixed rate of interest regardless of any fluctuations in interest rates that apply to other types of accounts. However, both these benefits can also turn into disadvantages under certain circumstances. Because the money cannot be withdrawn until the duration is complete, the funds cannot be used even in emergency situations. Changes in the going interest rate may also rise to a point above and beyond the interest rate applied to existing deposits. This means account holders are actually earning less interest with fixed deposits than with other types of loans and accounts. While the interest rate on fixed deposits cannot be changed, there is sometimes a way to work around the issue of obtaining use of funds in an emergency situation. At times, the lending institution where the fixed deposit is placed may be willing to extend a separate loan to the account holder, using the fixed account as collateral. While not ideal, this can at least make it possible to deal with the current financial crunch. Fixed deposits are a credible way to make a return on investment that is somewhat higher than a standard savings account. The use of fixed deposits can also be helpful when working with various types of currency. By establishing what is known as a Foreign Currency Fixed Deposit or FCFD, it is possible to choose the type of currency involved in the deposit and lock in a rate of interest. If the choice of currency is a good one, this means the investor can enjoy a healthy fixed deposit currency rate for the duration of the deposit and earn more than with a standard fixed deposit strategy. However, going with an FCFD does contain a slightly higher amount of risk, since the funds deposited must be converted to the currency of choice and then converted back when the deposit is fulfilled. If the currency did not fare well in the interim, there is some chance of obtaining a loss, due to the changes in the rate of exchange from the time the fixed deposit was activated until the time the deposit is considered complete
Advantages of Fixed Deposits:
? Safety: FDs have conventionally been the premier choice for investors with a low risk appetite; assured returns is the key factor which attracts investors towards deposits. Stick to FDs of the highest credit rating i.e. those with a ?AAA? rating even if their rates seem modest vis-à-vis those offered by company deposits. Company deposits are unsecured in nature and investing in them would imply taking on disproportionately higher risk. If as an investor you are open to investing in instruments involving higher risk levels, market linked instruments like mutual funds may not be a bad deal. ? Tenure: Short tenured fixed deposits continue to be your best bet. With interest rates on the ascent, a further hike in rates offered by fixed deposits cannot be ruled out. Locking your investments in longer tenured instruments may lead to an opportunity loss. Even if a 3-Yr FD looks like a lucrative proposition as compared to one which runs over a year or so, pick the short tenured one. In a rising rate scenario, you could be more than compensated for the lower returns at present.
? Liquidity: Find out how your FD fares on the pre-mature encashment front i.e. how easily can your investment be liquidated. Also enquire about the penalty clauses, e.g. do you suffer a loss of interest and/or principal amount. Compare how various FDs rank on this parameter and pick the best deal; thereby try to minimize the impact of illiquidity which is typically associated with FDs. ? Flexible investment periods: To suit your personal needs, you can choose from an investment period of between 1 and 60 months for fixed deposit, or between 1 week to 12 months for foreign currencies deposit. If you need your deposit to mature on a specific date ? Accessibility: Banks offer you access to a wide range of the world‘s major currencies to help you achieve your investment goals. You can even switch from one currency to another by simply giving us your instructions. Your deposit can also be remitted either by draft or telegraphic transfer. ? Automatic renewals: To ensure continued growth, your matured deposit will automatically be renewed for the same period of time at the bank‘s prevailing rate. This allows you to enjoy uninterrupted interest earnings on your principal amount invested. In the event that you decide to change your renewal instruction, you will need to inform us at least 2 working days before maturity. ? Early payment of interest: If you place your savings in Fixed Deposit account for at least 24 months, you can enjoy early interest payments. On receipt of your instructions, the interest will be credited to your operating account on a yearly basis.
? Pre-approved overdraft: To ensure that your investment continues to grow, whilst giving you the flexibility to satisfy any unexpected financial needs, Banks offer you a pre-approved overdraft worth up to 90%or 100% Deposit value. ? Credit Card: Enjoy the benefits of recognition, payment flexibility, attractive reward points, worldwide accessibility to cash at over 600,000 ATMs and many more simply by carrying a credit card. To qualify, all you need is to maintain at least B$5,000 in your Fixed Deposit Account over a 3 months period.
Disadvantages Of Investing Of Fixed Deposits:-
A person can withdraw money only when his/her maturity period is over. A person suffers a loss if he/she try to withdraw money before maturity period As compared to other investment instruments percentage of return is less.
2.2 Real Estate:
Real Estate Market Investment involves the buying and selling of Real Estate for sheer profit. Profits are piled up slowly by renting out Real Estate Properties in a cash flow method or are generally improved upon and resold for a financial gain. Real Estate Market Investment makers can also wholesale properties in order to make profits. Usually real estate market has a 'laggard effect' to the equity markets. What it means is a few months/year after equity markets have rallied the real estate markets also start moving up. The Property Market in India has shown a substantial development in the last few years and is bustling with many investors looking forward to gain more from this apparently risk free sector. If we compare Real Estate to other types of investment like mutual funds and equities, then it definitely emerges as a safer option. The chief reason for generation of such interest from buyers is due to the several measures taken by the government to expand Realty Market and make it attractive for buyers from India as well as the world.
Investors sell their stocks at a profit in equity markets and invest the money into real estate. But before making investments an investor should analyze the market thoroughly. The factors an investor should look into before investing are:
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The current demand of the Real Estate Market. The future trend of the Real Estate Market. It is also important to know whether the demand is increasing, decreasing or remaining constant.
Real Estate Market Investment has advantages and disadvantages at the same time. Though it looks like the advantages are more in numbers but the disadvantages if not taken care of can prove to be fatal.
Types of Real Estate:
Residential real estate The most common form of real estate investment as it includes the property purchased as other people's houses. In many cases the Buyer does not have the full purchase price for a property and must engage a lender such as a Bank, Finance company or Private Lender. Herein the lender is the investor as only the lender stands to gain returns from it. Different countries have their individual normal lending levels, but usually they will fall into the range of 70-90% of the purchase price. Commercial real estate Commercial real estate is the owning of a small building or large warehouse a company rents from so that it can conduct its business. Due to the higher risk of Commercial real estate, lending rates of banks and other lenders are lower and often fall in the range of 50
Advantages of Investing In Real Estate:
The real advantage in the Real Estate Market Investment is that theoretically this business has an ever growing tendency because of the growing population and the demand for Real estate‘s both for residential and office usages. As all the things in this field are very expensive and every time one sells it the profit becomes more. The ability to borrow based on the value of the Real estate Property, is another advantage. It is easier to finance Real Estate than any other product. While investing other pluses requires the buyer to have the entire buying price available for the pluses. But in Real Estate Market Investment, one just needs to have a fraction of the buying price available as the down payment. That is why, Real Estate, in spite of being extremely expensive, is much easier to buy than a piece of industrial instrument of the very same price.
Disadvantages of Investing In Real Estate
Real Estate Market Investment is something that needs to be maintained and taxes to be submitted from time to time. A small mistake in this procedure can bring a major loss to the investor. During the real estate booms, investors can be attracted to buy Real Estate properties without calculating the expenditures attached in the purchase and for the existing expenditures of the property. The Real Estate Market can then suddenly flow against them instead of flowing for them making the investor face a major loss.
2.3 Bonds:
Unlike equities that represent a participation in a company, a bond is a debt security. When you purchase a bond, you lend money to the issuer of the bond. The issuer can be a government, a municipality, a federal agency, a corporation or another entity. A bond has generally a maturity (a date at which the issuer reimburse the amount borrowed) and an interest payment. The stream of payments linked to a bond is known in advance (provided that the issuer can pay) but this stream depends of the bond. You have bonds that pay a fixed interest during the life of the paper (fixed rate bonds); you have others that pay a revised interest rate (floating rate bonds) or even no interest at all (zero coupon bonds). The first thing that comes to most people's minds when they think of investing is the stock market. After all, stocks are exciting. The swings in the market are scrutinized in the newspapers and even covered by local evening newscasts. Stories of investors gaining great wealth in the stock market are common. Bonds, on the other hand, don't have the same sex appeal. Plus, bonds are much more boring - especially during raging bull markets, when they seem to offer an insignificant return compared to stocks. However, all it takes is a bear market to remind investors of the virtues of a bond's safety and stability. In fact, for many investors it makes sense to have at least part of their portfolio invested in bonds.
2.4 Commodity:
A commodity may be defined as an article, a product or material that is bought and sold. It can be classified as every kind of movable property, except Actionable Claims, Money & Securities. Commodities actually offer immense potential to become a separate asset class for market-savvy investors, arbitrageurs and speculators. Retail investors, who claim to understand the equity markets, may find commodities an unfathomable market. But commodities are easy to understand as far as fundamentals of demand and supply are concerned. Retail investors should understand the risks and advantages of trading in commodities futures before taking a leap. Historically, pricing in commodities futures has been less volatile compared with equity and bonds, thus providing an efficient portfolio diversification option. Commodity market is an important constituent of the financial markets of any country. It is the market where a wide range of products, viz., precious metals like Gold, Silver, base metals, crude oil, energy and soft commodities like palm oil, coffee etc. are traded. It is important to develop a vibrant, active and liquid commodity market. This would help investors hedge their commodity risk, take speculative positions in commodities and exploit arbitrage opportunities in the market.
2.5 Gold:
For centuries gold has been the ultimate cushion against the dangers of stocks price falls, fluctuating rate changes, inflation, rising/falling real estate prices, natural calamities, wars and more. Gold has been the best way to safeguard your investments against unstable financial markets. Whether or not gold is a good investment, is a question that does not have a simple answer. Gold has appreciated substantially over the past couple of years. The growth rate of late has been much higher than the conventional rate of appreciation. However, if we look at the past 15-20 years record, it is seen that Gold is a hedge against inflation. Over the last 20 years, the average return from Gold has been around 7%. So, if the past trend continues, one could expect around say 6-9% returns from gold in the long-term. Also, another aspect that we should look at is a weakening currency. No matter which country you originate from, there is a chance that your country‘s currency will suffer a downfall at a particular point of time. Gold, on the other hand, retains its true value and can help you protect your riches because it does not rely on the state of the country‘s economic, whether it is on the up or downtrend. Therefore, investing a small portion of one‘s investment portfolio in gold would be a good idea.
Chapter 3: Equity Market 3.1 Introduction 3.2 Types of Equity 3.3 Tips for Investing In Equity 3.4 Advantages and Disadvantages 3.5 Risk and Returns
Chapter 3: Equity Market
Equities....Today's home for tomorrow's money
3.1:- Introduction
What are Share / Stock / Equity? A share is one of a finite number of equal portions in the capital of a company, mutual fund or limited partnership, entitling the owner to a proportion of distributed, nonreinvested profits known as dividends and to a portion of the value of the company in case of liquidation. Dividends are not guaranteed. They may be increased if the company performs well, but they may also be reduced or eliminated if the company performs poorly. So when you purchase shares, you become part owner of a company. As an owner, you are usually entitled to voting rights on the board of directors and corporate policy.
Why Should One Invest In Equities? Although past performance cannot guarantee future market results, Stocks,
historically have outperformed all other long-term financial assets. They are the only the financial asset that has significantly outpaced inflation over time. Investors buy stock to potentially increase their return on investment in one or both of two ways: ? Dividend Payments
Many companies pay portions of their annual profits to stockholders in the form of dividends. Stocks with consistent track record of paying attractive dividends are known as income stocks because investors often buy these stocks to receive the income by way of dividends in addition to being invested in the company's future growth prospects. ? By Selling the stock for more than they originally paid -
Some companies reinvest most of their profits back into the business in order to expand. Stocks of companies with sales and earnings that are expanding faster than the general economy and faster than the average company are called growth stocks because investors expect the company to grow and expect the stock price to grow with it. When such increase in the stock price is witnessed, investors can sell their shares for an amount greater than their purchase price, thus pocketing the difference as profit. How One Can Make Profits By Investing Equities? Every year, when the company draws up its accounts, the company profit for the year will become apparent. The directors of the company will decide how much of the profit to plough back into the company, and how much to distribute to the owners of the equity - i.e. the shareholders. The profit is then distributed as an amount per share - called a dividend. Companies like to increase their dividend year on year. As well as the profit from the dividends, equity share owners will also benefit if the share price rises. This means that the shareholders can sell their equity shares at a higher price than they were bought originally.
So the investment return from equity shares comes from two sources: - the dividends paid from the profits of the company, and the rise in the equity share price. This return, combining these two sources of profit, has comfortably exceeded the rate of inflation in the past. Modes of Stock Purchase Stocks can be purchased individually (meaning you purchase shares of stock in one particular company) or as part of a pool investments, such as mutual funds. Mutual funds are baskets of stocks that are available for the fraction of the price you would need to buy the same stocks individually. That‘s because a large number of investors pool their money together and invest in the entire portfolio of stocks. Professional money managers direct the investments within mutual funds, choosing each of the individual investments based on the mutual fund's investment goals. For example, some equity mutual funds invest in well-established companies that pay regular dividends. Others invest in younger, more growth-oriented firms or companies that have been operating below expectations for several years. Note: As with the purchase of individual stocks, your investment return and principal value of an investment in mutual funds will fluctuate. Your shares may be worth more or less than your original investment when redeemed.
3.2 Types of Equity
There are a number of types of equity, each with different characteristics. ?
Common stock or ordinary shares:
Common stock, as it is known in the United States, or ordinary shares, according to British terminology, is the most important form of equity investment. An owner of common stock is part owner of the enterprise and is entitled to vote on certain important matters, including the selection of directors. Common stock holders benefit most from improvement in the firm's business prospects. But they have a claim on the firm's income and assets only after all creditors and all preferred stock holders receive payment. Some firms have more than one class of common stock, in which case the stock of one class may be entitled to greater voting rights, or to larger dividends, than stock of another class. This is often the case with family owned firms which sell stock to the public in a way that enables the family to maintain control through its ownership of stock with superior voting rights. ? Preferred stock:
Also called preference shares, preferred stock is more akin to bonds than to common stock. Like bonds, preferred stock offers specified payments on specified dates. Preferred stock appeals to issuers because the dividend remains constant for as long as the stock is outstanding, which may be in perpetuity. Some investors favour preferred stock over bonds because the periodic payments are formally considered dividends rather than interest payments, and may therefore offer tax advantages. The issuer is obliged to pay dividends to preferred stock holders before paying dividends to common shareholders. If the preferred stock is cumulative, unpaid dividends may accrue until preferred stock holders have received full payment. In the case of non cumulative preferred stock, preferred stock holders may be able to impose significant restrictions on the firm in the event of a missed dividend.
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Convertible preferred stock
This may be converted into common stock under certain conditions, usually at a predetermined price or within a predetermined time period. Conversion is always at the owner's option and cannot be required by the issuer. Convertible preferred stock is similar to convertible bonds. ? Warrants
Warrants offer the holder the opportunity to purchase a firm's common stock during a specified time period in future, at a predetermined price, known as the exercise price or strike price. The tangible value of a warrant is the market price of the stock less the strike price. If the tangible value when the warrants are exercisable is zero or less the warrants have no value, as the stock can be acquired more cheaply in the open market. A firm may sell warrants directly, but more often they are incorporated into other securities, such as preferred stock or bonds. Warrants are created and sold by the firm that issues the underlying stock. In a rights offering, warrants are allotted to existing stock holders in proportion to their current holdings. If all shareholders subscribe to the offering the firm's total capital will increase, but each stock holder's proportionate ownership will not change. The stock holder is free not to subscribe to the offering or to pass the rights to others. In the UK a stock holder chooses not to subscribe by filing a letter of renunciation with the issuer. ? Issuing shares
Few businesses begin with freely traded shares. Most are initially owned by an individual, a small group of investors (such as partners or venture capitalists) or an established firm which has created a new subsidiary. In most countries, a firm may not sell shares to the public until it has been in operation for a specified period. Some countries bar firms from selling shares until their business is profitable, a requirement that can make it difficult for young firms to raise capital.
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Flotation
Flotation, also known as an initial public offering (ipo), is the process by which a firm sells its shares to the public. This may occur for a number of reasons. The firm may require additional capital to take advantage of new opportunities. Some of the firm's original investors may want it to buy them out so they can put their money to work elsewhere. The firm may also wish to use shares to compensate employees, and a public share listing makes this easier as the value of the shares is freely established in the market place. The flotation need not involve all or even the majority of the firm's shares. ? Private offering
Rather than selling its shares to the public, a firm may raise equity through a private offering. Only sophisticated investors, such as money management firms and wealthy individuals, are normally allowed to purchase shares in a private offering, as disclosures about the risks involved are fewer than in a public offering. Shares purchased in a private offering are common equity and are therefore entitled to vote on corporate matters and to receive a dividend, but they usually cannot be resold in the public markets for a specified period of time. ? Secondary offering
A secondary offering occurs when a firm whose shares are already traded publicly sells additional shares to the public called a follow on offering in the UK or when one or more investors holding a large proportion of a firm's shares offers those shares for sale to the public. Firms that already have publicly traded shares may float additional shares to increase their total capital. If this leaves existing shareholders owning smaller proportions of the firm than they owned previously, it is said to dilute their holdings. If the secondary offering involves shares owned by investors, the proceeds of a secondary offering go to the investors whose shares are sold, not to the issuer.
3.3 Tips for Investing In Equity:
Everything you need to know about investing in stocks • Stocks are'nt just piece of paper • There are many different kinds of stock • Stock price track earnings • Stock are your best shot for getting A return over and above the pace of inflation • Individual stocks are not the market • A great track record does not gaurrantee strong performance in future • You cant tell how expensive A stock is by looking only at its price • Investors compare stock price to other factors to access value
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• A smart portfolio positioned for long term growth includes strong stocks from different industries
• Its smarter to buy and hold good stocks then to engage in rapid fire trading
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3.4 Advantages and Disadvantages…
Advantages of Equity Shares
To the company: While issuing the equity shares, the company does not accept any obligation of any type. The company neither offers any security to the investors in the form of assets of the company nor commits the repayment of these shares during the life time of the company nor commits the payment of any dividend to the shareholders. This is a total risk free source of capital for the company.
To the investors: a. As per the law, the liability of the equity shareholders is restricted only to the extent
of face value of the shares purchased by the investors. The personal properties of the investors are not at stake even if the company fails to fulfill its contractual obligations. b. Possibility of getting higher returns is always there in case of equity shares. The
investors can gain from equity shares in two forms. One, the regular dividend paid by the company in the form of cash or by way of bonus shares and second, the capital appreciation received by the investors by selling the equity shares in the secondary market i.e. stock exchanges. As such, equity shares are a good investment attracting the risk taking investors.
Disadvantages of Equity shares
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As the investors in equity shares enjoy the voting powers to control the fairs of the
company, the management of the company is always under constant danger of getting interfered and disturbed in the regular administration. b. The cost of associated with the equity shares is on higher side as compared to the
borrowed capital. By issuing more and more equity shares, the company looses the cost advantage. c. Many categories of investor‘s i.e. institutional investors may not be able to invest in
the equity shares due to various statutory restrictions. d. The excessive issue of equity shares may result in over capitalization future.
3.5 Risk and Returns
Every investment opportunity carries some risks or the other. In some investments, a certain type of risk may be predominant, and others not so significant. A full understanding of the various important risks is essential for taking calculated risks and making sensible investment decisions. Seven major risks are present in varying degrees in different types of investments. Default risk This is the most frightening of all investment risks. The risk of non-payment refers to both the principal and the interest. For all unsecured loans, e.g. loans based on promissory notes, company deposits, etc., this risk is very high. Since there is no security attached, you can do nothing except, of course, go to a court when there is a default in refund of capital or payment of accrued interest. Business risk The market value of your investment in equity shares depends upon the performance of the company you invest in. If a company's business suffers and the company does not perform well, the market value of your share can go down sharply.
This invariably happens in the case of shares of companies which hit the IPO market with issues at high premiums when the economy is in a good condition and the stock markets are bullish. Then if these companies could not deliver upon their promises, their share prices fall drastically. Liquidity risk Money has only a limited value if it is not readily available to you as and when you need it. In financial jargon, the ready availability of money is called liquidity. An investment should not only be safe and profitable, but also reasonably liquid. An asset or investment is said to be liquid if it can be converted into cash quickly, and with little loss in value. Liquidity risk refers to the possibility of the investor not being able to realize its value when required. This may happen either because the security cannot be sold in the market or prematurely terminated, or because the resultant loss in value may be unrealistically high. Purchasing power risk, or inflation risk Inflation means being broke with a lot of money in your pocket. When prices shoot up, the purchasing power of your money goes down. Some economists consider inflation to be a disguised tax. Ironically, relatively "safe" fixed income investments, such as bank deposits and small savings instruments, etc., are more prone to ravages of inflation risk because rising prices erode the purchasing power of your capital. "Riskier" investments such as equity shares are more likely to preserve the value of your capital over the medium term. Interest rate risk In this deregulated era, interest rate fluctuation is a common phenomenon with its consequent impact on investment values and yields. Interest rate risk affects fixed income securities and refers to the risk of a change in the value of your investment as a result of movement in interest rates.
Suppose you have invested in a security yielding 8 per cent p.a. for 3 years. If the interest rates move up to 9 per cent one year down the line, a similar security can then be issued only at 9 per cent. Due to the lower yield, the value of your security gets reduced. Political risk The government has extraordinary powers to affect the economy; it may introduce legislation affecting some industries or companies in which you have invested, or it may introduce legislation granting debt-relief to certain sections of society, fixing ceilings of property, etc. One government may go and another come with a totally different set of political and economic ideologies. In the process, the fortunes of many industries and companies undergo a drastic change. Change in government policies is one reason for political risk. Whenever there is a threat of war, financial markets become panicky. Nervous selling begins. Security prices plummet. In case a war actually breaks out, it often leads to sheer pandemonium in the financial markets. Similarly, markets become hesitant whenever elections are round the corner. The market prefers to wait and watch, rather than gamble on poll predictions. Market risk Market risk is the risk of movement in security prices due to factors that affect the market as a whole. Natural disasters can be one such factor. The most important of these factors is the phase (bearish or bullish) the markets are going through. Stock markets and bond markets are affected by rising and falling prices due to alternating bullish and bearish periods:
Our series on Business Intelligence ROI has explored the importance of ROI for BI projects, provided examples of the types of BI projects that never pay off, and evaluated the methodology for calculating BI ROI. We saw that if a project has measurable returns it is more likely to get off the ground and get you acceptance for future BI projects. Many of you who are tasked to calculate the ROI of your BI projects were never taught such a thing in school, so let's break down another element that will help you do your calculations: types of return. Here are 5 types you should evaluate: 1. Revenue enhancement Simply put, your organization will generate more money as a result of doing your project. Shareholders appreciate these types of projects – you're reaching the right group of customers who see value in your project – and are willing to pay. 2. Revenue enhancement/margin protection This means that your organization will increase profits through better efficiency. This does not necessarily mean more revenue but just higher profitability as a result of streamlining your current process. 3. Cost reduction The current process costs 'x', but as a result of doing your project, it will cost x minus 5% or even x minus 10%. Your project could reduce wasteful practices and therefore save the company money.
4. Cost avoidance In the business intelligence space, cost avoidance is the easiest type of ROI to prove. There's an existing process and it takes 'x' amount of resources over a certain period of time. As a result of implementing your project, the process takes fewer (maybe no) resources to produce the same results, thereby avoiding current costs. 5. Capital cost avoidance If your project extends beyond a single fiscal year, then you are investing in a capital expenditure ("capex"). These are expenditures that create future benefits, or help you avoid capital costs in future periods.
Chapter 4: Mutual Fund 4.1 Introduction 4.2 Types of Mutual Funds 4.3 Tips for Investing In Mutual Funds 4.4 Advantages and Disadvantages 4.5 Risk and Returns
4.1 Introduction
A mutual fund is a type of professionally managed collective investment vehicle that pools money from many investors to purchase securities. While there is no legal
definition of the term "mutual fund", it is most commonly applied only to those collective investment vehicles that are regulated and sold to the general public. They are sometimes referred to as "investment companies" or "registered investment companies." Most mutual funds are "open-ended," meaning investors can buy or sell shares of the fund at any time. Hedge funds are not considered a type of mutual fund. A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is then invested in capital market instruments such as shares, debentures and other securities. The income earned through these investments and the capital appreciation realized is shared by its unit holders in
proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. The flow chart below describes broadly the working of a mutual fund:
ORGANISATION OF A MUTUAL FUND
There are many entities involved and the diagram below illustrates the organizational set up of a mutual fund:
4.2 Types of Mutual Funds
Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.
4.3 Tips for investing in mutual funds
1 • Do: Select a fund with proven track record and go through its offer document
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• Do: Select a fund with proven track record and go through its offer document
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• Don't: blindly chase a fund for its current performance or overlook another for its lackluster performance in the near past.
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• Don't: Panic
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• Do: Hold your peace
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• Don't: Invest huge amounts all at once
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• Do: Invest via SIPs
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• Don't: Simply chase performance
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• Do: Invest according to your risk profile
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• Don't: Ignore expenses
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• Do: Compare expense ratio
4.4 Advantage of Mutual Funds
Advantages of mutual funds
1. Professional Management Qualified professionals manage money, but they are not alone. They have a research team that continuously analyses the performance and prospects of companies. They also select suitable investments to achieve the objectives of the scheme, so you see that it is a continuous process that takes time and expertise that will add value to investment. These fund managers are in a better position to manage investments and get higher returns. 2. Diversification The cliché, "don‘t put all eggs in one basket" really applies to the concept of intelligent investing. Diversification lowers risk of loss by spreading money across various industries. It is a rare occasion when all stocks decline at the same time and in the same proportion. Sector funds will spread investment across only one industry and it would not be wise for portfolio to be skewed towards these types of funds for obvious reasons. 3. Choice of Schemes Mutual funds offer a variety of schemes that will suit investors needs over a lifetime. When they enter a new stage in life, all needed to do is sit down with investment advisor who will help to rearrange portfolio to suit altered lifestyle
4. Affordability A small investor may find that it is not possible to buy shares of larger corporations. Mutual funds generally buy and sell securities in large volumes that allow investors to benefit from lower trading costs. The smallest investor can get started on mutual funds because of the minimal investment requirements. One can invest with a minimum of Rs. 500 in a Systematic Investment Plan on a regular basis. 5. Tax Benefits Investments held by investors for a period of 12 months or more qualify for Capital gains and will be taxed accordingly (10% of the amount by which the investment appreciated, or 20% after factoring in the benefit of cost indexation, whichever is lower). These investments also get the benefit of indexation. 6. Liquidity With open-end funds, you can redeem all or part of investment any time you wish and receive the current value of the shares or the NAV related price. Funds are more liquid than most investments in shares, deposits and bonds and the process is standardized, making it quick and efficient so that you can get cash in hand as soon as possible. 7. Rupee Cost Averaging Through using this concept of investing the same amount regularly, mutual funds give investor the advantage of getting the average unit price over the long-term. This reduces risk and also allows you to discipline self by actually investing every month or quarterly and not making sporadic investments. 8. The Transparency of Mutual Funds The performance of a mutual fund is reviewed by various publications and rating agencies, making it easy for investors to compare one to the other. Once you are part of a mutual fund scheme, you are provided with regular updates, for example daily NAVs, as well as information on the specific investments made and the fund manager‘s strategy and outlook of the scheme.
9. Easy To Administer Mutual funds units in modern times are not issued in the form of certificates, with a minimum denomination rather they are issued as account statement switch a facility to hold units in fraction up to 4 decimal points.10.Highly Regulated The governing of mutual funds by SEBI ensures that the fund activities are carried out in the best interest of the investors.
Disadvantages of mutual funds
The following are some of the reasons which are deterrent to mutual fund investment: • Costs despite Negative Returns: Investors must pay sales charges, annual fees, and other expenses regardless of how the fund performs. And, depending on the timing of their investment, investors may also have to pay taxes on any capital gains distribution they receive — even if the fund went on to perform poorly after they bought shares. • Lack of Control: Investors typically cannot ascertain the exact make-up of a funds portfolio at any given time, nor can they directly influence which securities the fund manager buys and sells or the timing of those trades.
• Price Uncertainty: With an individual stock, you can obtain real- time (or close to real-time) pricing information with relative ease by checking financial websites or by calling your broker. You can also monitor how a stocks price changes from hour to hour — or even second to second. By contrast, with a mutual fund, the price at which you purchase or redeem shares will typically depend on the funds NAV, which the fund might not calculate until many hours after you‘ve placed your order. In general, mutual funds must calculate their NAV at least once every business day, typically after the major U.S. exchanges close.. Some mutual fund schemes with the point of attractiveness to investors-Comparison of best performing mutual funds with index Equity schemes: Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns. These can be further classified into three types: 1. Diversified Equity schemes: The aim of diversified equity funds is to provide the investor with capital appreciation over a medium to long period (generally 2 – 5 years). The fund invests in equity shares of companies from a diverse array of industries and balances (or tries to) the portfolio so as to prevent any adverse impact on returns due to a downturn in one or two sectors
2. Equity Linked Saving Schemes (ELSS): These schemes generally offer tax rebates to the investor under section 88 of the Income Tax law. These schemes generally diversify the equity risk by investing in a wider array of stocks across sectors. ELSS is usually considered a variant of diversified equity scheme but with a tax friendly offer 3. Sectoral Fund/ Industry Specific schemes: Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Info Tech, FMCG, and Pharmaceuticals etc. These are ideal for investors who have already decided to invest in particular sector or segment. Sectoral Funds tend to have a very high risk-reward ratio and investors should be careful of putting all their eggs in one basket
4.5 Risk and Return
Risk is an inherent aspect of every form of investment. For mutual fund investments, risks would include variability, or period-by-period fluctuations in total return. The value of the scheme's investments may be affected by factors affecting capital markets such as price and volume volatility in the stock markets, interest rates, currency exchange rates, foreign investment, changes in government policy, political, economic or other developments. Market Risk: At times the prices or yields of all the securities in a particular market rise or fall due to broad outside influences. When this happens, the stock prices of both an outstanding, highly profitable company and a fledgling corporation may be affected. This change in price is due to "market risk".
Inflation Risk: Sometimes referred to as "loss of purchasing power." Whenever the rate of inflation exceeds the earnings on your investment, you run the risk that you'll actually be able to buy less, not more.
Credit Risk: In short, how stable is the company or entity to which you lend your money when you invest? How certain are you that it will be able to pay the interest you are promised, or repay your principal when the investment matures?
Interest Rate Risk: Changing interest rates affect both equities and bonds in many ways. Bond prices are influenced by movements in the interest rates in the financial system. Generally, when interest rates rise, prices of the securities fall and when interest rates drop, the prices increase. Interest rate movements in the Indian debt markets can be volatile leading to the possibility of large price movements up or down in debt and money market securities and thereby to possibly large movements in the NAV.
Investment Risks: In the sect oral fund schemes, investments will be predominantly in equities of select companies in the particular sectors. Accordingly, the NAV of the schemes are linked to the equity performance of such companies and may be more volatile than a more diversified portfolio of equities.
Liquidity Risk: Thinly traded securities carry the danger of not being easily saleable at or near their real values. The fund manager may therefore be unable to quickly sell an illiquid bond and this might affect the price of the fund unfavorably. Liquidity risk is characteristic of the Indian fixed income market.
Changes in the Government Policy: Changes in Government policy especially in regard to the tax benefits may impact the business prospects of the companies leading to an impact on the investments made by the fund.
Generally, Mutual Funds do not offer guaranteed returns to investors. Although, SEBI regulations allow Mutual Funds to offer guaranteed returns subject to the Fund meeting certain conditions, most Funds do not offer such guarantees. In case of a guaranteed return scheme, the sponsor or the AMC, guarantees a minimum level of return and makes good the difference if the actual returns are less than the guaranteed minimum. The name of the guarantor and the manner in which the guarantee shall be met must be disclosed in the offer document by the Mutual Fund. Investments in mutual funds are not guaranteed by the Government of India, the Reserve Bank of India or any other government bodies.
There are three ways, where the total returns provided by mutual funds can be enjoyed by investors:
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Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all income it receives over the year to fund owners in the form of a distribution.
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If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
Chapter 5: Mutual Funds Vis-À-Vis Equity Market 5.1 Introduction 5.2 Similarities in Equity Shares and Mutual Funds 5.3 Difference between Equity Shares and Mutual Funds
5.1 Introduction:
Equity share/Direct investment Equity shares:
These are shares of company and can be traded in secondary market. Investors get benefit by change in price of share or dividend given by companies. Equity shares represent ownership capital. As an equity shareholder, a person has an ownership stake in the company. This essentially means that the person has a residual interest in income and wealth of the company. These can be classified into following broad categories as per stock market:
Mutual Funds:
A brief introduction A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal. The money thus collected is invested by the fund manager in different types of securities depending upon the objective of the scheme. These could range from shares to debentures to money market instruments. The income earned through these investment sand the capital appreciations realized by the schemes are shared by its unit holders in proportion to the number of units owned by them. Thus a Mutual Fund is the most suitable investment for the common man as it offers an opportunity to invest in a diversified, professionally managed portfolio at a relatively low cost. The small savings of all the investors are put together to increase the buying power and hire a professional manager to invest and monitor the money. Anybody with an investible surplus of as little as a few thousand rupees can invest in Mutual Funds. Each Mutual Fund scheme has a defined investment objective and strategy.
5.2 Similarities in Equity Shares and Mutual Funds
Both are similar in that they invest in equities. plain vanilla mutual funds generally do not short equities and hedge funds in many cases take short positions. A MF generally can not take concentrated positions by law, whereas a hedge fund does not have such limitation. Rest of differences between these two is the general differences between a mutual fund and an hedge fund.
A typical mutual fund is a highly regulated collective investment vehicle and follows strict rules of the regulator (SEC in US and SEBI in India). A hedge fund is generally registered as a limited liability partnership or some similar structure that does not come under the regulators area of regulation. Due to this difference, a mutual fund can advertise itself and solicit money from general public whereas a hedge fund can not. Hedge funds also have a minimum investment threshold so only accredited investors can invest. This is the reason hedge funds is generally considered for rich investors.
There are some differences in how fund managers are compensated.
5.3 Difference between Equity Shares and Mutual Funds
A mutual fund is the ideal investment vehicle for today‘s complex and modern financial scenario. Markets for equity shares, bonds and other fixed income instruments, real estate, derivatives and other assets have become mature and information driven. Price changes in these assets are driven by global events occurring in faraway places. A typical individual is unlikely to have the knowledge, skills, inclination and time to keep track of events, understand their implications and act speedily. An individual also finds it difficult to keep track of ownership of his assets, investments, brokerage dues and bank transactions etc. Investing in Mutual Fund is convenient because of two basic reasons. All investment carry risks, especially equity investment that bears larger risks, their returns are more volatile and uneven. To cut down the risk one needs to put money in several instruments rather than in one or two products. A Mutual Fund can effectively spread its investments across various sectors of the economy and amongst several products. Risk diversification is the Key. Secondly ‘where to invest and where not to‘, is a specialized business. One may not have the expertise, time and resources of a wellmanaged fund
After the entire analysis of survey and questionnaires, we find that most of the respondents said that they have equity stocks in their portfolio. And among these (who invests in equity) 52%, investors prefer to invest through Mutual funds and only 33% (17 investors) said that they do invest directly in equity market. According to survey people prefer to invest into Mutual funds than investing directly into stocks. 46% of the respondents feel that mutual funds reduce their risk in investing in the market as it gives diversification to their portfolio. 17% respondents said that it give them the benefit of professional management. Just 14% said it give them liquidity irrespective of market conditions. And also lack of time was cited as the reason by 23%of the respondents. Out of those who said that they prefer to directly invest in stock market, majority (54%) gave high weight age to high risk and high returns game. 33% said that they want to be their own fund managers. Also, over 48% agreed that they prefer to book profit as they reach their profit target. They do believe in churning and enjoy making higher returns. Some investors told that they like to keep a certain percentage of their portfolio into mutual funds and the rest they want to manage by them selves. It can also be seen from findings that an investor has made higher returns in a long run by investing into direct equities, but if one wants to make a higher returns in the short run and mid term horizon, then definitely mutual funds are the best buy.
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