Investment in Debt - II

Company Fixed Deposits:

Company Fixed deposits are similar to bank fixed deposits which earns you a fixed returns over a fixed tenure. Though similar in nature bank fixed deposits are much secure than company fixed deposits which usually gets set-off by bit higher interest rate.

Due to its unsecured form, Co. fixed deposits it becomes important to be selective in company in which you are planning to have fixed deposit exposure. Also need to check credit ratings assigned by credit rating agencies it is prudent to put deposits in company whose FD's are rated AA or above.

As mentioned earlier rate of returns on Company fixed deposits offered are much higher given the risk factor. Remember higher is the risk for higher returns so only getting higher returns should be base criteria for selecting co. fixed deposits. Thus do the homework for selecting company like credit rating assigned to the instrument please avoid any unrated FD schemes. Next should be the returns provided, unless needed shouldn't opt for regular payouts instead go in for cumulative deposits. Keep tenure of deposits into focus depending on your time to achieve short term goals.

Some of the current ongoing Company fixed deposit schemes are

ICICI home finance. Besides regular payout they offer Cumulative income plan have tenure ranging from 20 months to 84 Months and rate of returns ranging from 7.15 % p.a. to 8.5 % p.a.

Credit Rating:  AAA by CARE and MAAA by ICRA.

Click here for more details

Mahindra Finance Cumulative scheme offers tenure from 12 months to 36 months with Interest rates from 8% p.a. to 9% p.a.

Credit Rating: FAA

Click here for more details

to be continued

Updates on Electrosteel Castings

In the past quarter the stock had hit a 52-week high of Rs 45.85 on 17 September 2009. The stock had outperformed the market in past one quarter, jumping 29.62% as against 9.47% rise in the Nifty 50 index.
The mid-cap steel casting maker had an equity capital of Rs 28.73 crore which grew to 31.27 crore at June end to 32.67 as of now. Face value per share is Rs 1.
The company is planning for QIP placement in near future which is meant to augment the long- term resources, including working capital requirement, and to develop iron-ore mines, coking and non-coking coal mines. Part of the proceeds will also be used to build a war chest for future opportunities, reports suggest.
Promoters have raised their stake in the company over past quarter to 47.90 % against earlier 45% through conversion of warrants. Recent lapse of warrant conversion of shares (convertible at Rs. 68 and Rs.81) due to steep discounted share prices in markets has added 48 paise per share. Sucessful closure QIP issue at around CMP 44 - 45 plus level will provide good support to share prices. In recent past the stock prices have consolidated at 44 - 45 level through in past 15 days shares haven't been able to breach 45 - 46 level it has challenged those level almost every alternate trading session on good volume. Breakout over 46 on closing basis will take stock to new 52 week high of around Rs 51-55. I expect stock to trade at 50+ levels in next quarter and 60-65 level in next 6 -9 months period.

Looking at the above recommendations is to hold / accumulate at every fall in prices.

Updates on QIP
Electrosteel Castings Ltd has informed BSE that the Board of Directors of the Company at its meeting held on September 15, 2009, has approved composite QIP issue for an amount upto Rs. 6000 Million. The composite QIP issue consists of issue of Equity Shares and Non Convertible Debentures (NCDs) with warrants. This two-pronged strategy would enable the Company to derive maximum value from the fund raising process. The Equity issuance is expected to be of about Rs. 1000 - 1500 Million, and the NCDs size would be of about INR2000 Million. The NCDs shall also have the option to subscribe for the convertible warrants into Equity Shares for an amount upto Rs. 2000 Million. The warrant holder shall have an option to convert the same into Equity Shares between a period of 3 - 5 years. The issue price or Equity Shares and warrant would be determined in consultation with the Merchant banker based on the SEBI regulations. 

The Company would now seek the approval of the Shareholders.

Other significant updates on warrant conversion:
The promoters stake has gone up to 47.90 on enhanced equity capital by addition of approx. 1.40 crore shares on conversion of warrants.
Meanwhile, the ECL board has cancelled the warrants issued in March last year. The company had allotted 87 lakh warrants convertible at Rs 68 per share to a foreign entity on 11 March 2008. The company had also received Rs 5.91 crore representing 10% of the total consideration towards the allotment of the warrants. The warrants were convertible within 18 months from the date of allotment, and the last date of conversion was 11 September 2009. However, the applicant did not opt for the conversion as the ruling market price was at a steep discount to the conversion price. As a consequence, the entire amount received has been forfeited and the warrants cancelled.
Electrosteel Castings Ltd has informed BSE that subsequent to the approval of the shareholders in its meeting dated January 25, 2008, the Board of Directors on March 24, 2008 allotted 12137146 convertible warrants issued for cash of Rs. 81/- per share to a Foreign Company. As per provisions of SEBI (DIP) Guidelines, the Company had also received Rs. 983.11 Lakhs representing 10% of the total consideration towards allotment of said warrants. In terms of SEBI (DIP) Guidelines, the said warrants were convertible within 18 months from the date of allotment and the last date of conversion was September 24, 2009. As the applicant did not opted for conversion of said warrants within the permissible time of 18 months, the entire amount received thereon from the applicant stands forfeited and accordingly, all 12137146 convertible warrants stands canceled.

Based on lapse of warrants issued by the company and forfeiture of amount Rs. 15.74 crore. This work out to around 48 paise per share on equity capital of 32.67 crore.

Investment in Debt

Why invest in Debt?

Debt instruments in India typically include company bond, fixed deposits, debt mutual funds, government securities, small saving schemes like  like National Saving Certificates (NSC), Kisan Vikas Patra (KVP) etc. Debt are comparatively far less riskier than equities and suitable for person with low risk tolerance instruments, good and much safer for shorty term investment, fixed returns (usually not always).

Debt typically are for persons with low risk appetite. Usually in debt instruments there is relative safety of principal amount and mostly predictable rate of returns.

Need of Debt Instrument:
As discussed in run up to creation of financial plan, asset allocation, ris profile, goals etc. Investment in equity forms just a part of plan for long term investments usually for 10+ years of investment horizon. But what about short term goals, exigency funds etc. which are of shorter duration. Debt is where you can park your exigency funds, investments to meet short term goals. Debt are low risk instruments, usually with fixed maturity value and fixed term.

Bank Deposits:
Bank deposits have been India's traditional investment instruments as they are of low risk and offers security of principal amount. Deposits upto Rs. 1 lakh in any bank is protected under deposit guarantee scheme. Deposits offers fixed returns and can provide quick liquidity by pre mature withdrawal facility. Now a days banks have come out with variation on deposit scheme like auto-sweep facility to convert additional cash in your account into deposits which garners more interest than saving bank account offers, flexi-deposits, recurring deposits etc.

As said bank deposits are low risk instrument and hence offers low returns. Deposits can offer returns from 6-8 % p.a. based on type and term of deposits.

Tax benefits are also available under section 80c for fixed deposits with 5 year lock in.On fixed deposits with lock in  period.

Government of India (GoI) Securities
GoI Securities in another kind of debt instruments of low risk grade. Usually GoI bond are issued to Banks, Financial Institutions, Mutual Funds, Pension Funds, Insurance companies, corporates etc. We as individual can take exposure to such instruments by investing in above mentioned institutions.

Some example of GoI securities are Central Govt. bonds, T-bills, State Govt. securities etc.

Rate of returns are usually bit higher than fixed deposits.

PSU Bonds / Infrastructure Bonds / Capital tax saving bonds:

The above mentioned bond are typically for medium to long term investments for tenure of 5 - 10 years. They are usually issued by Public Sector Undertakings, Banks, Financial Institutes etc. These bonds could be floating rate or fixed rate, deep discount bonds, or zero coupon bonds.

They are generally issued by way of private placement with institutional investors, or offered to public. As an individual investor they can be bought at the time of issue in the market. Such bond usuall have a credit rating provided by third party credit rating agencies like ICRA, CRISIL, CARE etc.. This ratings help us understand associated risk with the respective bond issues.

Bond usually have a fixed rate of returns and interest can be received in form of payouts at regular interval or cumulative bonds. Most f the bond get listed on security exchanges and can be traded in market. This provides liquidity to the bonds but prices will be market driven based on current value with time decay etc. taken into considerations. Some of these bond also provide tax benefits like investment Infrastructure bonds can be availed as tax benefits under section 80c or Capital Gains tax bond can provide for set off against short term or long term capital gains tax payable.

Returns on bond tend to be usually higher than traditional fixed deposits and are less riskier when compared to fixed deposit instruments of private corporates.

to be continued in my next post :)

Buy One Rupee at 80 paise only - DCM Shriram Consolidated Limited (DSCL)

Company background:

DSCL is an integrated business entity, with extensive and growing presence across the entire Agri-rural value chain and Chloro-Vinyl industry. The Company has added innovative value- added businesses in these domains. With a large base of captive power produced at a competitive cost, the Company aims at maximizing value creation in its Chloro-Vinyl businesses. The high-value and knowledge based business being incubated by DSCL include Hariyali Kisaan Bazaar, Fenesta Building Systems and Hybrid Seeds.

Promoters are holding more than 55% of the equity and other significant shareholders are DII and corporate bodies, see shareholders details as of Jun-09.

Major Shareholders	%
Promoter	55.26
Life Insurance Corporation of India	8.06
Stepan Holdings Ltd	4.27
Reliance Growth Fund	3.30
Ristana Services Ltd	2.90
New India Assurance Company Ltd	1.20
Sundram BNP Paribas Select Midcap	1.13
	76.12

Snapshot:

DSCL has built a diversified set of revenues streams, DSCL is in a good position to ride any variability in the operating environment. With major expansions complete and stability across various businesses, I believe that DSCL is in sound operating and financial health to be able to report continued progress in the future. The company has completed all its major capex plans in FY09. It plans to consolidate operations and deploy cash surpluses to strengthen its balance sheet in FY10.

DSCL has strong presence in diverse sectors – agri-rural businesses and Chloro-Vinyl businesses – with multiple revenue streams and swing capabilities enabled DSCL to optimize earnings and face the volatility much better in FY09 and Q1FY10. In Q1FY10, DSCL reported revenue of Rs. 893.6 cr, 12.6% higher y-o-y. The revenue growth was largely contributed by Sugar, Agri Inputs and Hariyali Kisaan Bazaar businesses.

Given the current focus of the government in raising the rural spend and thrust on rural economic through various government scheme may augur well for DSCL. At current market price of  Rs. 61.70 it available at discount to book value of Rs 75. In short I can say by investing in this stock you will get Re. 1 at only 80 paise which in itself is value buy. Besides this companies varies lines of business gives diversification to Chemicals, Plastic, Agri segment, Sugar, Cement and Retail (rural segment). Though its difficult to project earning in such a diversified company, its a good bet on domestic consumption sectors. I expect this stock deserves to be re-rated as analysts look for value picks as Sensex is already at price earning multiple of 21x, whereas this stock is available at price earning ratio of 8.71, and price to book of 0.83. I expect target of Rs. 77/- followed by Rs. 93/- in next 6 to 12 months i.e. a rise of 50% from Current Market Price and rate it as an out performer.

Click this link for detailed report

Valuation Parameters:

Portfolio Management Services (PMS)

PMS are services provided by banks, financial institution for individual investor wherein they will act as a guide for an investor at some pre-determined charges to provide active research and management of investment amount in various asset classes.  They can provide customized solutions in  investments specially created to meet needs that cannot be met from the standard financial instruments available in the market.  PMS provides investment avenues in form of exposure to traditional and non - traditional investment across different asset classes. In equity PMS it can provide investment idea into listed / unlisted equities.

Returns can be equivalent or superior to direct equity investment depending on asset allocation to equity. There maybe lock-in period, PMS can be advise / research and recommendation based  and flexible or rigid with authority lying with fund manager to take decision on clients behalf. Minimum investment criteria may be applicable. Fee can be performance based with some minimum asset management charges. This is suitable for investor with high risk appetite and high net worth individuals.

Index - Exchange Traded Funds (ETF)

Index Exchange Traded Funds are essentially Index Funds that are listed and traded on capital markets (exchanges) like equities. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that changes throughout the day.

ETF are kind of passively managed fund as it doesn't really need to have a  dedicated fund manager , or financial analysts as its job is to replicate investment as per weight-age of underlying security. / index Liquidity is provided by listing on the capital markets. Rtturns provided are quite high and can be in range of 12-18% CAGR over 10+years period and comparatively much safer than Direct Equity Investment, more cost effective than actively managed funds. In my future post I will try and explain what does Index means and provide historical analysis of kind returns provided by index over past 30 years of its existence in India.

Nifty BEES by Benmark mutual fund is an example of index ETF. There are some similar ETF from UTI, Kotak etc. In near future we may see launch of Index funds with underlying securities of Hong Kong Stock Exchange (Hang Seng), MSCI Index etc.

Equity Linked Saving Schemes (ELSS)

ELSS is nothing but Equity Mutual Funds having tax benefit at time of investment but with lock-in period of 3 years. To start investment in equity by a new investor like Mutual fund . ELSS should be first choice in case investor hasn't taken complete income tax benefit under section 80c. See my earlier post on tax implications for more details. Returns provided and cost will be more or less similar to actively managed fund with benefit in terms of tax at maximum slab applicable at time of investment (max 33%).

Thus giving immediate returns / savings at the time of investment and returns at 10 to 15 % CAGR returns over period 10+ years. ELSS can be bought through fund houses directly or through financial advisor / mutual fund agents at cost of nominal advisory fees.

Equity Oriented Mutual Funds

A new investor into equities can and should start by investing in Equity Markets (Capital Markets) through Mutual Fund schemes. This is simplest form of investment into equity.

The advantage here is given fund has dedicated fund manager and skilled financial analyst to do research and identify good growth oriented companies with good fundamentals. Thus taking out the risk of lack of knowledge on financial parameters. Hence they become comparatively less riskier instruments than direct equity investments. Besides by buying a single fund it will provide exposure to various companies at a time on pro-rata basis against fund size thus providing diversification and cutting risk of having exposure to a single company. The returns provided may be bit lesser than direct equity investment as operational charges like asset management charges, admin charges etc recovered from the returns earned.

There are various flavor available in Equity Mutual Funds like sectoral funds, diversified funds, balanced funds, hybrid fund, index funds etc. In future post I will try to cover some of these flavors and their overall objectives etc.

Mutual Funds are also known as actively managed funds run under supervision of fund managers. Mutual funds can be bought or sold through fund houses / asset management companies directly or through agents. Returns provide will be in range of 10 - 15% CAGR over 10+ years, less riskier than direct equity investment but cost inefficient when compared to direct equity / passively managed funds.

Direct Equity Investments

Taking direct exposure to equities means buying equity of companies directly from equity market. As mentioned earlier investment in equities is riskier. Besides this form of investment needs knowledge of various valuation parameters, understanding of company fundamentals, ability to read and understand company balance sheets, P&L accounts, important ratios etc. Thus investment through direct equity tends to be more time consuming, riskier in terms of lack of adequate knowledge etc. 

Having said that with risk also comes rewards. Direct Equity nvestment is high risk - high reward instrument. Direct equity investments provides superior returns than all other forms of  iquity investment but are much riskier and time consuming. Direct equity exposure should be taken by those individuals who are experienced investors, having adequate understanding of underlying fundamentals.  Needless to say the investor needs to have high risk appetite and long term investment horizon.

In my future post I will provide what some of the important ratios a shareholders should be aware of how it is calculated, its importance in determining valuations etc.

Investment in Equities

Why invest in Equities?

When compared to all other asset class, investing in equity is riskier. However as a well known saying goes "higher the risk, higher are the returns". Investing in equities world over has been far more rewarding than one can imagine. Across the world and in India equity investments have outperformed almost every other asset class in the long run.

What investing in Equities means:

As an equity investor of  a company is becoming a shareholder of the company i.e. as an equity investor you are kind of part owner of the company. Thus as a shareholder you can partake in the growth opportunities of your company and reap the benefits in long run. Good companies with good management offers superior returns by tapping growth opportunities and overcoming any hindrances and making company grow many times over in the long term . Being a shareholder in such companies gets your investment in equity provide as many times returns. For equity investment in basket of good companies provide around 15-18% CAGR growth for holding over 10+ years, besides providing good returns annually/regularly in form of profit distribution.

How to select right companies to invest in?

Identifying right company involves bit  of efforts on part of investor in form of its valuation parameters. Valuation parameters includes understanding past track record of the company in term of growth in sales, profitability, return on equity etc. This parameter should indicate if company has been growing consistently and profitably and providing superior returns on such value parameter (ideally 20+ %). Having identified and invested in such companies let the power of compounding work for you. Ideal investment time frame should be 10+ years or at least five years. As famous adage goes Time is money, thus there's always a waiting period before the returns start getting reflected on your equity holding. In short term 6 month to 1 year returns may look lumpy either on positive side or on negative side. Since in short term equity markets are largely driven by factors like liquidity, sentiments etc. However in longer run fundamental do catch and adequate return starts getting reflected.

Some of the instruments available to take exposure to equity

• Direct Equity Investment
• Equity Mutual Funds
• Equity Linked Saving Schemes
  
• Exchange Traded Fund
• Portfolio Management Services

There are lots of myth about investment in equities, I will spend some time later in detailing those myths and fact on equities in my future blogs.

Asset Allocation and Risk Profile

Asset allocation and Risk profile forms most important part of any financial plan. Like we have discussed earlier that we need to first determine our goal and than break it up into logical smaller financial goals by determining the needs based on time scale to achieve them. Next segregated /group our short term (3-5 years), medium term (5-10 years) and long term (10+ years)  goals into three different buckets.

Based on time horizon we would first allocate investments in different asset classes after allocating funds for exigency.

While making an asset allocation one's risk profile needs to be taken into considerations. If you are a person with low risk appetite then major allocation should ideally be more towards debt/liquid instruments and higher the risk appetite higher can be allocation to riskier assets/instruments like equities etc. There is no such benchmark as what percentages to should be allocated to each of the instruments as its depended on risk appetite. However thumb rule to do asset allocation is 100 minus age. So far a person of age 25, 75% exposure can be taken into riskier intruments like equities, equity mutual funds etc. and for say a senior citizen risk appetite might be very low thus investments should be in more safer assets.

The simple logic behind the above rule is allocation based on life cycle. Younger a person is age being on his side more funds can be allocated to riskier assets as over long term tas hey tend to exploit power of compouding to give higher returns. But as age goes up risk appetite starts to reduce and thus asset allocation needs to keep pace with age. Hence its important to revisit financial plan at least once a year to see if there is any deviation in goals, tweak asset allocation on need basis. For example if you are approaching towards a particular milestone / financial goals in next 2 -3 years there's need to shift appropiate amounts towards debt/liquid instrument to de-risk any volatility in returns / value.

In my upcoming articles 'll write about different asset classes.

Wealth Creating Assets and Goals

Till now we have seen how to list down goals, assets, liability cash flows to create a structure for financial plan followed by understanding concepts like 'Power of compounding', 'Rule of 72', understanding different wealth creating assets and different instruments for investment and tax implication.

While creating financial plan we discussed about breaking up our goals into short term, medium term and long term goals. Now we will look at how to align our goals and selecting various wealth creating assets. First and most important aspect of any financial plan is to put aside a contingency fund required to finance any immediate / unforeseen expenditure. Ideally we should have liquid cash equivalent to our 6 month expenses / earnings. This money can be kept in bank savings account / liquid funds to provide for any immediate need for funds. Similarly next is to align our other goals with investment in to other wealth creating instruments. A sample table with respect to short to long term goals and ideal investment instrument is listed below for your ready reference.

Click here to open table as a web page

Wealth Creating Assets

Well in my earlier post I have written about investing in wealth creating or growing assets. So obvious question is what are various avenues of wealth creating instruments.

Wealth creation assets can be broadly classified into asset classes as mentioned below:

• Equity
• Debt
• Intangible assets like Insurance e.g. term cover, medical etc.
• Real Estate
• Gold
• Others e.g. art, mints etc.
  

Appended below if brief outline on each of the above classes going forward I will go into details of each asset classes some of its flavors, returns expected from them, risk-reward ratios, pros and cons etc.

Equities:

When compared to all other asset class, investing in equity is riskier. However as a well known saying goes "higher the risk, higher are the returns".  Investing in equities world over has been far more rewarding than one can imagine. Across the world and in India equity investments have outperformed almost every other asset class in the long run.

Debt:

Debt instruments in India typically include company bond, fixed deposits, debt mutual funds, government securities, small saving schemes like  like National Saving Certificates, Kisan Vikas Patra etc. Debt are comparatively far less riskier than equities and suitable for person with low risk tolerance instruments, good and much safer for shorty term investment, fixed returns (usually not always).

Insurance:

Insurance is typically to cover for risks, liabilities created during earning years, to take care of  old age or retirement, pensions etc. Usually lay man gets confused between Investment and Insurance. Generally its a good practice to keep both of them separate. Insurance should be looked upon as an instrument to cover for liabilities or as a risk mitigation plan for unforeseen circumstances. They are lots of different instrument within Insurance products like ULIP, Pure risk cover, health insurance, group insurance, pensions etc.

Real Estate:

Real estate is an attractive avenue to park fund for long term. Though it has inherent risks like huge investment, still an unorganized sector for small investor or largely under developed market in India though Financial Institutions are coming out with REIT, Real Estate Mutual fund etc. but ticket size of investment are quite huge, inefficient tax benefits on returns, low liquidity etc. Can act as a source of regular income, hedge against inflation, portfolio diversification etc.

Gold:

One of the most liked commodity for investment in India. Age old tradition as safe bet against calamity, inflation war etc. Gold is universally accepted commodity, its kind of international currency .Gold provides good and must diversification required in ones portfolio. One of safest avenues of investment with good returns over long period of time.

Others:

Other investment avenues include investment in Art, Mints, Stamps, Antiques, Private Equity etc.

Compounded Annual Growth Rate (CAGR) Calculator

Click here to view /download Compounded Annual Growth Rate (CAGR) calculator.

This is an important utility for calculating compounded annual growth rate (CAGR) given initial investment, period (in yrs) and targeted return OR calculating returns based on initial amount, period and CAGR OR to determine number of years needed to reach certain amount at a given initial investment and CAGR.

In case you face any issues to download or save the spreadsheet mail me at vivek.ruparel@gmail.com

See sample below:

Instruments for investments and tax implications

As discussed in my earlier post on financial independence I have listed down few instruments for savings / creation of growing assets its indicative returns and tax implications. Hope this helps. If you have any queries or doubts please post it in comments section I will try and resolve those queries.

Cheers!

Click here to open above table as web page

Gold Exchange Traded Fund

Gold is one of the most preferred way of investing for Indian more so because it has got huge emotional quotient (EQ) in our hearts. Gold gives a feeling of financial security. Besides Gold is the best and age old hedge against inflation. most liquid form of investment, universal acceptance. We Indians do tend to weigh our financial status with how gold we own.

But with that EQ also comes question of storing gold securely, purity checks, implication of wealth tax, income tax implication by way capital gains etc. Now with introduction of Exchange traded fund for golds since past couple of year this issue can be handled more efficiently. Yes by having gold in DEMAT (Dematerialize) form through Gold Exchange traded fund

Gold exchange traded fund offers investors an innovative, cost-efficient and secure way to access the gold market. Gold ETF is intended to offer investors a means of participating in the gold bullion market without taking physical delivery of gold,and to buy and sell on National Stock Exchange (NSE).

Gold ETF usually provide returns that closely correspond to the returns provided by domestic price of gold through physical gold

• Low cost way of investing in gold
• Excellent Diversification for Portfolio
• Quick and Convenient Dealing for investors
• No Storage & Security Issues
• Transparent Pricing
• Taxation of a Mutual Fund
• Listed and traded on NSE just like a stock-Easy

Financial Independence : Financial Planning a relook

In my earlier posts we looked at creating a structure for getting Financial Independence. Thus so far we have looked at

1. Setting goals
2. Listing down Asset & Liability
3. Create a Simple Cash Flow work sheet

Having done above, next step is to start working on financial planning aspects which consist of following steps

1. Revisiting your goals and checking if they are realistic breaking them up on time scale like short term goals and long term goals.
2. Managing Assets
3. Controlling Liabilities
4. Tax planning

1. Setting Goals:

Be realistic: It is important to set realistic goals that are within your reach. Who won't aspire to have a 100% returns in matter of year or two that would simply be wishful thinking. Or for that matter say one may aspire of owning a grand palatial house in Tahiti island / Ferrari car. They sure can qualify as dreams and we can try and work towards that but need to check if it is realistic.

Having set the goals we need to identify time frame of each goals as short to medium term and long term goals

e.g. of short term goal can be savings to make the down payment for a home mortgage or say buying a car

e.g. for long term can be building a corpus for retirement, or say creating a corpus for child's higher education etc.

Goals needs to be flexible and may change over a period of time, thus as stated in my earlier posts we need to revisit our over all financial plan at regular intervals (ideally once a year) to check if we are proceeding in the right direction, if goals are still the same or needs some fine tuning

2. Managing Assets:

Identify the quality of assets you have. Assets can be broadly classified into two categories Wealth creating / growing assets or assets with depreciating value.

Example of growing asset : Bank deposit, Home, Equity, Government securities, Gold, bonds, Insurance etc.

Other Assets whose value depreciate with time: Car, Bike etc.

3. Controlling Liabilities:
Again liabilities can be of two types a good liability or a bad one

Example of good liability could be a loan that goes towards creation or purchase of wealth creating asset for e.g. home loan, education loan etc. A bad liability can be advances / loans to pay of say purchase of fancy car or expensive mobile phone, credit cards dues etc.

So based on 2 and 3 a good financial plan should aim at creating wealth creating assets or growing asset and reducing liabilities. Thus move your cash flow towards generation of growing assets and clearing off debts / liabilities off our books.

4. Tax planning:

A good financial plan needs to be tax efficient in the sense to make most of the tax benefits as we plan investing in creation of assets. We need to plan for taxes as almost 30% of our earnings gets deducted on account of tax payments though we cannot possibly eliminate tax liability completely but by careful planning we can reduce to liability to maximum extent possible. Remember a penny saved is penny earned.

In my next article I will focus on various instruments from perspective of savings, tax implication as on and possible returns on each of them.

Exchange Traded Funds(ETF)

Exchange Traded Funds are essentially Index Funds that are listed and traded on exchanges like stocks. Until the development of ETFs, this was not possible before. Globally, ETFs have opened a whole new panorama of investment opportunities to Retail as well as Institutional Money Managers. They enable investors to gain broad exposure to entire stock markets in different Countries and specific sectors with relative ease, on a real-time basis and at a lower cost than many other forms of investing.

An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that changes throughout the day.

Benefits of ETFs?

ETFs offer several advantages to investors: -

1. Can easily be bought / sold like any other stock on the exchange through terminals across the country.
2. Can be bought / sold anytime during market hours at a price close to the actual NAV of the Scheme.
3. No separate form filling. Just a phone call to your broker or a click on the net.
4. Ability to put limit orders.
5. Minimum investment is one unit.
6. Enjoy flexibility of a stock and diversification of index fund.
7. Expense Ratio is lower.
8. Provides arbitrage between Futures and Cash Market.

Tax Calculator for 2010

Click here to download Tax Calculator for 2010

Kaun Banega Crorepati Dwitiya! Umeed se dugna

Well we have already seen the power of compounding. Next is what "Rule of 72"

Rule of 72 is nothing but a method of estimating an investment doubling time. The number 72 when divided by the interest percentage per period we obtain the approximate number of periods (usually years) required for doubling.

The reverse also works true i.e. we can determine approx interest that should be earned to double and investment in fixed time frame.

Say you can get an Interest Rate of 12% p.a. then it will take approximately 72/12 i.e. 6 years to double the investment.

Say you need to double investment in 4 years Annual Rate of Interest / Return needed would be 72/4 i.e. 18%

Rule of 72 uses compound interest for calculation purpose.

Kaun Banega Crorepati!

One of fundamental principle in creation of wealth that I follow is “A person doesn’t become rich by how much one earns, but by how much one saves”

In this article I would like to focus on how small but regular savings can create wealth over a period of time and thus determine “Kaun Banega Crorepati”. This target can be achieved by exploiting the power of compounding

“The Power of Compounding”

Compound interest is a fundamental component in the laws of money. 

Compounding interest simply refers to the fact that the interest you receive will be calculated not only on the principal amount that you invested, but also upon prior interest amounts added to your investment.

Let’s take a look at an example. Say, Mr. Wagle invested Rs. 100,000 into a 15yr. fixed deposit paying 10% per annum. He has the choice of either having the Rs 10,000 annual interest income paid into his savings account, or of re-investing it back into the deposit.

Here's how much money he would make when his deposit matures at the end of 15 years given both scenarios: 

	Interest Pay Out Option		Interest Re-Investment Option
End Year	Amount Invested	Plus Interest Paid Out	Amount Invested	Plus Interest Re-Invested
2009	100000	10000	100000	10000
2010	100000	10000	110000	11000
2011	100000	10000	121000	12100
2012	100000	10000	133100	13310
2013	100000	10000	146410	14641
2014	100000	10000	161051	16105
2015	100000	10000	177156	17716
2016	100000	10000	194872	19487
2017	100000	10000	214359	21436
2018	100000	10000	235795	23579
2019	100000	10000	259374	25937
2020	100000	10000	285312	28531
2021	100000	10000	313843	31384
2022	100000	10000	345227	34523
2023	100000	10000	379750	37975
Total Interest Credited:		150000		317725

Interest Paid Out Option		Interest Re-Invested Opt
Total Return upon maturity		Total Return upon maturity
Initial Amount Invested	100000	Initial Amount Invested	100000
Interest Credited	150000	Interest Credited	317725
Total Return	250000	Total Return	417725

Simply by re-investing his interest, and making use of the power of compounding, Mr. Wagle has come out ahead by Rs 151,772. Put another way, if he had chosen to have his interest paid out to him, he would have two and half times initial investment after 15 yrs. By reinvesting his income, he was able to multiply it more than 4 times!!

So with the longer time horizon the greater is the benefit. Below is the comparative table for Mr. Wagle if had he invested his funds just 5 more years, into a 20 yr deposit: 

Interest Paid Out Option		Interest Re-Invested Option
Total Return upon maturity		Total Return upon maturity
Initial Amount Invested	100000	Initial Amount Invested	100000
Interest Credited	200000	Interest Credited	572750
Total Return	300000	Total Return	672750

The difference now, given just 5 extra years, is a staggering Rs. 255,055. In other words, Mr. Wagle would have multiplied his initial investment 6.7 times by re-investing his interest income, as opposed to only 3 times by electing to have it paid back to him.

Above example is where we already have initial Investment kitty available and advantage of time scale interlaced with power of compounding. Next let’s take a look at example of saving at regular intervals and power of compounding

Say Mr. Wagle is 25 yr old starts investing just INR 5000 per month at a return of 10% pa, by the time he retires at age 60 he would have accumulated a sum of Rs. 16,261,462 (Crorepati Mr. Wagle)

If you're a 25yr old reading this, I urge you to start doing this now. Don't put it off – the key to compounding is time. If you wait until you're 30 to start doing this, you'll only have just under 1 crore around Rs. 9,869,641/- by age 60 and for a 35 yr old person would be just around 5,900,824

If you're 35 or 40 and you're reading this, don't be discouraged. “The early bird gets the worm, but the second mouse gets the cheese”. You're obviously not going to be able to derive the same benefit from compounding compared to a 25yr or 30 yr old, but start now anyway.

And herein lies the key to become a crorepati

1. That you learn to live on less than you earn J and invest what disposable income you have. Ideal combination that I would recommend is three way split i.e. 33% already gets deducted as tax 33% towards spends like usual expenses and rest 33% should flow to savings / investments.
2. That you invest at a reasonably good interest rate (i.e. well above the rate of inflation)
3. That you start as soon as possible to put time on your side

The example quoted above where in there is mention of 10% interest rate it was possible in safer avenues like fixed deposits last year. But now with softening of interest rate you won’t get that kind of returns. However this is where key comes to in financial planning i.e. to distribute your investments across different asset classes and exposure based on risk appetite for individuals.

In my next article will try to focus on different types of assets or investment avenues available and possible return over long period of time.