Author: Admin

Various Structured Products

Here I am going to discuss about Equities as an asset class and the importance of having some portion of the total portfolio either directly or indirectly into this asset class.

Fixed income securities give an investor a sense of security in terms of return on investment and also the principle amount. However due to the fixed rate of return, a portfolio which is heavily weighted towards fixed income may become ineffective in times of high inflation and would eat into the purchasing power of your savings. What this simply means is that 100 bucks saved today in a fixed income security at lets say 8% return would become 108 at the end of the year. So if inflation is at 5% then it would eat into your returns by that much amount. Equities here due to inherent nature of higher risk, higher return is considered a good hedge against inflation.

One may directly invest in equities if he/she understands them as an asset class and is ready to put in time to review it fairly regularly. If not then one must take the route of Mutual Funds or Portfolio Management Services to take exposure to equities as they are professionally managed and understand the risk associated the investments.

The Categories of Mutual Funds are:

Balanced Funds: The objective of these funds is to provide a balance in asset allocation by investing some portions each in fixed income and equities. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. Thus they provide with a good opportunity of investing in a balanced portfolio instead of creating one. They should be part of one’s portfolio, but not entirely as they have risks associated with performance of the Fund Manager and so one must avoid putting all the eggs in one basket.

Equity Funds: These are funds with an objective of generating long term capital appreciation with some income by investing in stocks. There are different styles or themes that a mutual fund is bases its return objectives on. The fund may narrow down its focus to either large cap or mid and small cap companies. These funds generally benchmark their returns to an index they link their investment objective to, like the Nifty.

Index funds: These are funds that try to replicate the returns of an index and hence the term. An investor in an index fund believes that most fund managers can’t beat the market. Due to passive style of investment management, these funds carry lower charges than its actively managed peers and hence also attract attention.

Sectoral funds: They may target specific sectors of the economy such as financial, technology, infrastructure, health, etc and try and achieve higher returns than a diversified portfolio. Due to cyclical nature of businesses, these funds are generally more volatile and thus one should have only a limited portion of their assets in this category of mutual funds.

Investments are a function of once’s risk taking abilities, their goals and aspirations and their responsibilities. Hence, it is important that before starting off one takes note of their income and expenditures, short term goals like taxation and regular spending as well as their long term goals like Marriage, Education and Retirement.

The difference between the income and expenditure and the time-frame would then be basic factors that would decide the risk taking ability and hence the proportion of assets to invest in.

I’ll start with the different kind of assets.Assets can be broadly classified into Fixed income, Equities and Commodities.

FIXED INCOME

A Fixed Income instrument is an instrument in which the time period and returns are known in advance. Some of the Fixed Income instruments popular in India are:-

Public Provident Fund (PPF): The PPF is a long-term, government backed small savings scheme of the Central Government with a time frame of 15 years.One has to deposit certain amount each year in this period either in cash or by cheque. The minimum deposit that you can make into a PPF account in one whole financial year is Rs. 500. The maximum is Rs. 70, 000. The interest is compounded annually and is credited at the end of the financial year. The current interest rate stands at 8%.The amount you invest is eligible for deduction under the Rs. 1, 00,000 limit of Section 80C. On maturity, the entire amount including the interest is non-taxable.

National Saving Certificate (NSC): National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. They have a time-period of 6 years and require a minimum investment of Rs 500 but have no maximum limit. The interest is compounded semi-annually but is deemed to be reinvested and qualifies for tax rebate for first 5 years under section 80 C of Income Tax Act. The interest is taxable is there is no TDS.The amount invested however cannot be encashed till the maturity period is over.

Post Office Monthly Income Scheme: It also comes with a maturity period of 6 years. The minimum amount that can be invested is Rs 1500 and a maximum of Rs 450000 for an individual and Rs 900000 for a joint account. The interest is earned monthly and provides a auto credit facility of interest to your SB Account.

Public Sector Undertaking Bonds (PSU Bonds): These are Medium or Long Term debt instruments issued by Public Sector Undertakings (PSUs). They have varying Interest rates based on the time horizon.

Corporate Bond: These are instruments issued by corporate with wide range of tenors.Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, its rating, the current market conditions and the sector in which the Company is operating. To compensate for this risk, they offer higher yields than Government bonds.

Fixed Maturity Plans: These are issues and managed by mutual funds and similar to Fixed deposits, have a definite end date that could range from a month to a few years.They typically invest in typically Govt backed securities and corporate fixed deposits. Unlike a bank fixed deposit, the rate of return promised by a mutual fund for a FMP is not guaranteed, but is typically close to the targeted return since the investments are in Fixed income securities. The minimum amount required for investment is generally Rs 5000. The dividends received in the hands of the investor is tax-free. If one invests in a growth option, he can then avail benefits of indexation i.e. the taxable gains are reduced by the inflationary changes. Taxable Gains = Amount Returned – (Amount Invested x Inflation Index for Redemption Year/ Inflation Index for Investment Year)

Baniya is a community which has consistently produced traders and businessmen, and they all street smart and knows where to bet their money on.

Lets learn the basics of Baniya Buddhi:

Buy Low Sell High –

This is mentioned in a lot of books by biggest of the investment gurus, and this is the essence of the Baniya community where in they purchase goods at low price in the market and sell it at a higher price. Best example in the market today is Mr. Damani of D-Mart, he followed the same concept of sourcing goods at the lowest possible price and sell with good profit margins and still providing value to customers.The point here is to understand the importance of buying assets at a steep bargain and selling when it is above or at fair value.

Never follow the Herd –

Blindly following the herd will lead you to fall in the trap, retail and amateur investors without having the right knowledge follow the pundits on TV without having to understand the dynamics of that particular asset. They enter that particular asset at the wrong time. Baniya`s are among the best to follow this, they will try to purchase only a few assets but at the best price and not try to trade in stuff which they do not understand.Point is to follow stocks which you understand and invest in those.

Never lose money –

Even if you are making a long term investment have a threshold for losses. If a stock goes from 100 to 50, you lose 50% but for the same stock to now again reach 100 it is a 100% return. Thus as a prudent investor always sell your investment if they breach a loss criteria. 25-30% loss could be an indicator to sell your loss making investment even if you think prospects are good. As it may be that you would have made a mistake in valuing that stock. Baniya will never keep inventory whose value is deteriorating, they will immediately liquidate it after a certain time even if it is at a loss.

To be continued.