Various Available Instruments for Investors

Various Available Instruments for Investors

On the account of festival of light, I wish to all my readers and investors to Happy Diwali. From Diwali in India it is the beginning of new year called “Samvat Year”. The businessman makes new accounts book for the year and prayer goddess Laxami and Subhkarta Sri Ganesh. The new earning or young investor should begin investment for wealthy and prosperous future.

I have many times felt that when we discuss about investment with investor they often feel that they need a big amount of sum for it. It is not true, you can begin from small amount. There is no need of wait for big amount of money. On this Diwali, start some investment with financial planning. We will discuss about some available investment options today.

Fixed Deposit and Post Office Deposit:

It is the safest option but it is not much effective to counter the inflation. At present, banks provide 8-9% return for long term fix deposit. There is possibility of interest rate cut by RBI to the last quarter of this fiscal.

Post office RD is offering 8.40% return and return is taxable. You can start as little as Rs 10 in the post office schemes. National Saving Certificate offers 8.80% return

PPF:

It stands for Public Provident Fund. From this financial year, the investment limit has been increased till Rs 1.5 lakh from Rs 1 lakh. The return of PPF is 8.7% for this year. The lock in period of PPF is 15 year and it may be extended in 5 years block by subscriber.

Mutual Fund:

On the sign of improvement in economy, there is much possibility of great return from mutual fund in long run. For your records, there are many mutual funds schemes which have delivered more than 10 times return in the last 10 years. It is less risky in compare with direct investment in the shares. It is very good option for small investors as you can begin the investment a little Rs 500 for each month as SIP (Systematic Investment Plan).

Company bonds and deposit:

There are various companies which are offering till 12% return comes with various ratings according to their risk profile. Before investing in this, you should check the rating and risk profile of the companies.

In the point of returns, the shares and equity mutual funds have outperformed the all asset classes. The average return of shares and equity mutual funds has been more than 15% in the last 15 years.

If you want more information regarding investment or you need investment services, feel free to ask us. We also conduct the seminar on investment and financial planning. If you are interested for seminar in your city just drop the mail.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

Debt Investment : Part 1

Debt Investment : Part 1

We have discussed about equity as asset class in details our previous blogs. Now we are moving towards debt investment. Debt means loan. It means borrower have obligation to return money with interest to lenders.

In debt market investor invest money as a loan with issuer at a predefined coupon rate. Issuer may be any institution, banks, government, public sector companies, private companies. Coupon rate is nothing but interest rate which issuer pays to the investors at predefined regular interval.

Advantage and disadvantage of debt investment:

• It is less volatile than equity market. Conservative investors invest in debt market for safety of principal amount. They feel more comfortable in debt compare with equity investment.

• In debt investment, investors get regular cash flow in the form of coupon which is predefined. Investors get coupon income at regular interval.

• It works on interest rate moment. The bond prices increase when interest rate goes down and investor can take advantage of capital appreciation.

• The return on debt investment is fixed. That is the reason investors feel more comfortable in this investment.

• However, it has less risk than equity but it gives low return and merely beat inflation. In majority of debt investment post tax return even not able to beat inflation.

• It is low risk and low return investment and retail investor cannot direct participate in the debt market. They participate in the debt market through bonds, debt mutual fund and PPF etc. Right price discovery is also problem in debt market.

• Debt investment has interest rate risk and credit risk also. We will discuss further about these risks in our further blogs.

We will discuss in our next blog about the various available debt avenues and its suitability to the investors. If you want more information regarding debt investment or you have any other query related investment feel free to ask us.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

www.artofinvest.com

www.arvindtrivedicfp.blogspot.in

Important things to complete before investing

Few  small  but important things before investing

Wish a very happy and prosperous new year 2014 to all of blog reader and investors. Let us take a closer look to 2003 to assess about the performance of various asset classes. After 6 year wait, nifty and sensex have broken their last high this year and delivered the positive return. Gold has posted its biggest loss since 1981 but the intensity of declining price was low in India due to weak rupee compare with rest of world. Real estate has also witnessed a slowdown during this year. The investor has also withdrawn money from equity mutual fund also and shifted towards fix return like product  like bank FD, company FD, govt. tax free bond etc. Inflation also has remained high side during the most of the year.

Most of my friends and investors are asking about where to invest in 2014 and which asset class going to deliver highest return. Most of us ignore some small but very important step before investment. We make big financial future goal and spend a lot of time on the research report and expert advice for investment. Before investment there are few things which everyone must address. Investing is not about to only picked some best sector stocks or mutual funds or bonds scheme. Many people want to talk only about inflation figure, interest rate movement or gold return.

There are some points which you should complete before a single money investment:

• Go for online bank account facility. It would be good if you have separate account for income and expenses.

• Open a demat account even if you do not interested in shares trading. Now in demat account you can manage your mutual fund units, insurance policies and bond also.

• The other important thing is to compile KYC (Know your client) norm. For mutual fund it is compulsory for almost any investment.

• All address proofs, ID proofs and other important docs like bank cheque book, insurance policy, your photograph etc should be keep safe and in properly.

• Try to do maximum things online as it is time saver and quick and help to find your networth quick

• At last very important, keep a track of income and expenses (cash flow), asses your liquid position, do provision for some money for emergencies, buy a term insurance and health policy according to need before a single rupee investment.

Once again my best wish to all of you for good financial health and physical health on the eve one year 2014. For more detail and any other query related investment, you can contact me through my email.

Warm regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Understanding Bond – Part 3

In the part-2 we had learned the basic characteristics of bonds. Today we will understand about price fluctuation of bonds. Often we investor confuse about bond pricing. Bonds price fluctuate with prevailing market interest rate. For understand bond pricing, first we need to understand concept of yield.

Yield Concept:

Yield is a figure that shows the return you get on a bond. The formula of calculating simple yield is : yield = coupon amount/price. When we buy a bond at par or face value, yield is equal to the interest rate. When we purchase it below or more from face value then yield change accordingly our trade price.
For an example : If you buy a bond with a 10% coupon at its Rs 1,000 par value, the yield is 10% (100/1,000). But if the price goes down to Rs 800, then the yield goes up to 12.5% (100/800). This happens because you are getting the same guaranteed Rs100 on an asset that is worth Rs 800. Conversely, if the bond goes up in price to Rs1,200, the yield reduce to 8.33% (100/1,200).

Yield to Maturity (YTM):

In the above yield concept we have learnt calculation in very simple form. In real yield is calculated as YTM. YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond till maturity.

YTM consider all the interest payments (coupon payment) you will receive and assumes that you will reinvest these interest payments at the same rate as the current yield on the bond plus any gain or loss according to purchase rate. Calculation of YTM we learn in next part of this series. Now at this point we should understand that YTM is more accurate and enables us to compare bonds with different maturities and coupons.

Bond's price and its yield are inversely related. When price goes up, yield goes down and when price goes down the yield goes up.

As we have discussed the factors of face value, coupon, maturity, issuers and yield in past bond series. All of these characteristics of a bond play a role in its price. But there are one more important factor that influences a bond more and that is prevailing interest rates in the economy. When interest rates rise, the prices of bonds in the market fall, older bond’s yield increase and newer bonds being issued with higher coupons. When interest rates fall, the prices of bonds in the market rise, older bond’s yield decrease and newer bonds being issued with lower coupons.

I hope till now we have learnt about YTM concept in initial level. In next part we will discuss about different types of bonds.

Regards,

Arvind Trivedi

Certified Financial Planner

Understanding Bonds – Part 2

After the introduction of the basic concept of the bonds, today we are trying to explore characteristics of a bonds.

Face Value / Par Value:

The face value is also known as the par value or principal. It is the amount of money a bond holder will get back once a bond matures. Corporate bonds normally have a par value of Rs 1,000, but this amount can be much greater for government bonds. Now the confusing part is that the price of the bond. A newly issued bond usually sells at par value. After issuing, its price would be fluctuates due to many economic conditions till the maturity date. If it trades above the face value, it is said to be in premium and when it trades below from the face value, it is said to be in discount.

Maturity Date:

The maturity date is the date on which the investor will get back face value or par value from the issuer. In general, maturity date can be range from one day to 30 years or even more than 30 years depend on the bond’s term and condition. Obviously a bond that matures in one year is much more predictable and less risky than a bond that matures in 20 years. So the longer the time to maturity, the higher the interest rate. If all things are being equal, a longer term bond will fluctuate more than a shorter term bond.

Coupon rate or Interest rate:

Coupon rates or interest rates both are same. It is the amount the bondholder will receive as interest payments till maturity date as per predefined condition maintained in the bond. Most bonds pay interest in every six months, but many pay also monthly, quarterly or annually. The coupon is expressed as a percentage of the par value or face value. For example if a bond pays a coupon of 10% and its par value is Rs 1,000, then it will pay Rs 100 of interest in a year.

If coupon rate fix till the maturity then this bond is called as fixed coupon bonds. When the interest rate (coupon rate) is linked to the market rates through an index then it is known as floating rate bonds.

Issuer:

It is the most important factor to know ‘Who is the issuer of the bond?’.The issuer of a bond is a crucial factor to consider before purchase any bond. First check the issuer's stability and credit for getting paid back coupon and face value. For example, the Indian government is far more secure than any corporation. Its default risk (the chance of the debt not being paid back) is extremely small. That is the reason Indian government securities are known as risk free assets. The reason behind this is that a government will always be able to bring in future revenue through taxation. If the issuer is non govt organisation, it must continue to make profits, which should be more than guaranteed coupon and face value.

There are also a bond rating agencies which helps investors determine a company's credit risk at the time of purchasing bond. Blue chip firms have a high rating, while risky companies have a low rating. There are many popular rating agencies. Few of them are Moody, Standard and Poor , Crisil and Fitch Ratings.

If the company falls below a certain credit rating, its grade changes from investment quality to junk status. Junk bonds are the bonds whose issuer companies in some sort of financial difficulty. Because they are so risky, they have to offer much higher yields than any other debt. So every time investor should not be in trap of higher coupon rate from these type of junk bond companies. It is better to be avoid such type of bond.

In next part of the bond series we will discuss about bond yield, price in more detail.

Regards,

Arvind Trivedi

Certified Financial Planner

Understanding Bonds – Part 1

When we think about investment, the first thing comes in the people’s mind that they should invest in the share market or real estate for making rapid and huge profit. Stories of investors gaining great wealth in the stock market and real estate are common. The other side for bond market, the picture is different and not very exciting for common investor. People are not much excited about bond market due to lack of knowledge and less media coverage. People often think bonds are much more boring - especially during bull markets, when they seem to offer less return compared to stocks.

In the bear market investors want invest in bonds for safety and stability. In my opinion, for many investors it makes sense to have at least part of their portfolio invested in bonds. So we are starting a series of articles related bonds in the many parts to understand  what bonds are, the different types of bonds and their important characteristics, how they behave, how to purchase them.

In our lives we need money at some point and we borrow that money from our relatives, friends or banks. Just like that companies need money for expand of business and government need money for development and welfare for citizen. The solution is to raise required money by issuing bonds (or other debt instruments) to a public market. Basically, A bond is nothing more than a loan for which you are the lender and companies or govt are borrower. The companies and government that sells a bond is known as the issuer (borrower).

As in simple case borrower pay some interest to lender for lending money at predetermined rate and specified time. In case of bond the interest rate is often known as the “coupon rate”. The date on which the issuer (borrower) has to repay the borrowed amount known as “maturity date “ and  borrowed money know as “face value” of bond . Bonds are known as fixed income securities because you know the exact amount of cash you'll get back if you hold the security until maturity. For example, if you buy a bond with a face value of Rs 1,000, a coupon of 8%, and a maturity of 10 years. It means you'll receive a total of Rs 80 (Rs 1,000 * 8%) of interest per year for the next 10 years. If bonds pay interest semi-annually, you'll receive two payments of Rs 40 in a year for 10 years. When the bond matures after 10 year, you'll get your Rs 1,000 back on maturity date.

Difference between Debt and Equity:

The main difference between bonds and equity are that bonds are debt and stocks are equity. By owning equity (stock) an investor becomes an owner in a company. It means owner of stocks has right of voting and the right to share future profits if any.   By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders. In the case of bankruptcy, a bondholder will get paid before a shareholder. However, the bondholder only entitled for principal amount (face value of bond) and interest (coupon amount). Bondholder does not share in the profits if a company does well in future.

It means debts are lower risky instrument with lower return and stocks are higher risky instrument but uncertain return. Now the question is for whom debt instruments are suitable and for whom stocks (equities) are good. For retired person who need fixed income with capital protection debt instruments are ideal. For those who are worried about of stock market volatility in near term and don’t want risk to wipe out of capital amount debt instruments are suitable. These instruments are the best option for short term horizon’s investment with lower risk.

In the next article we will understand bonds in more detail.

Regards,

Arvind Trivedi

Certified Financial planner