Tag - Personal Finance

May 2013

Understanding the various terminologies used in Debt Markets!!!

Understand the various terms in Fixed INcome, Debt Market, What is Repo Rate, Reverse Repo, Yield to Maturity, Modified Duration

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The debt market in India consists of mainly two categories—the government securities (g-secs) markets comprising central government and state government securities, and the corporate bond market. The g-secs are the most dominant category of debt markets and form a major part of the market in terms of outstanding issues, market capitalization, and trading value.

In order to finance its fiscal deficit, the government floats fixed income instruments and borrows money by issuing g-secs that are sovereign securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. The corporate bond market (also known as the non-gsec market) consists of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures.

Listed below are the various terminologies used in the fixed income market:

Coupon: A coupon payment on a bond is a periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. Coupons are normally described in terms of the coupon rate, which is calculated by adding the total amount of coupons paid per year and dividing by the bond’s face value.

Maturity: Maturity refers to the term of the bond i.e. the date on which the issuer has to repay the principal amount to the bondholder.

Yield to maturity: The Yield to maturity (YTM) is the internal rate of return or the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond. (more…)

August 2010

What and How of Nifty Index!!!

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One of my friend recently just wanted to get an idea about Nifty and How it is calculated. I am presenting some basic facts about Nifty here….

Background of Nifty

S&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.

S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is India’s first specialised company focused upon the index as a core product. IISL has a Marketing and licensing agreement with Standard & Poor’s (S&P), who are world leaders in index services.

  • The traded value for the last six months of all Nifty stocks is approximately 44.89% of the traded value of all stocks on the NSE
  • Nifty stocks represent about 58.64% of the total market capitalization as on March 31, 2008.
  • Impact cost of the S&P CNX Nifty for a portfolio size of Rs.2 crore is 0.15%
  • S&P CNX Nifty is professionally maintained and is ideal for derivatives trading

What and How of Nifty Index, How is stock selected in Index, Sensex, India Index Services and Products Ltd. (IISL)NSE, CRISIL, Liquidity,  Impact Cost, Floating Stock, index calculation

How Stocks are selected :

The constituents and the criteria for the selection judge the effectiveness of the index. Selection of the index set is based on the following criteria:

Liquidity (Impact Cost)

For inclusion in the index, the security should have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations for a basket size of Rs. 2 Crores.

Impact cost is cost of executing a transaction in a security in proportion to the weightage of its market capitalisation as against the index market capitalisation at any point of time. This is the percentage mark up suffered while buying / selling the desired quantity of a security compared to its ideal price (best buy + best sell) / 2

Floating Stock

Companies eligible for inclusion in S&P CNX Nifty should have atleast 10% floating stock. For this purpose, floating stock shall mean stocks which are not held by the promoters and associated entities (where identifiable) of such companies.

Others

a) A company which comes out with a IPO will be eligible for inclusion in the index, if it fulfills the normal eligiblity criteria for the index like impact cost, market capitalisation and floating stock, for a 3 month period instead of a 6 month period.

b) Replacement of Stock from the Index:

A stock may be replaced from an index for the following reasons:

i. Compulsory changes like corporate actions, delisting etc. In such a scenario, the stock having largest market capitalization and satisfying other requirements related to liquidity, turnover and free float will be considered for inclusion.

ii. When a better candidate is available in the replacement pool, which can replace the index stock i.e. the stock with the highest market capitalization in the replacement pool has at least twice the market capitalization of the index stock with the lowest market capitalization.

With respect to (2) above, a maximum of 10% of the index size (number of stocks in the index) may be changed in a calendar year. Changes carried out for (2) above are irrespective of changes, if any, carried out for (1) above.

And Finally how is the index calculation done

S&P CNX Nifty is computed using market capitalization weighted method, wherein the level of the index reflects the total market value of all the stocks in the index relative to a particular base period. The method also takes into account constituent changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting the index value.

Source : NSE

July 2010

RBI hikes short-term rates; CRR unchanged

rbiThe central bank raised interest on Tuesday in the face of inflation has been above 10 percent for the past five months. The Reserve Bank of India said it would continue to normalize policy in line with the growth and inflation rate in the economy.


The RBI lifted the repo rate, at which it lends to banks, by 25 basis points to 5.75 percent, which was in line with expectations, but raised the reverse repo rate, at which it absorbs excess cash from the system, by a steeper than expected 50 basis points to 4.50 percent.

The central bank left the cash reserve ratio (CRR) unchanged at 6 percent.

Inflation in India emerged last year in the wake of a poor monsoon that drove up food prices but has spread broadly throughout the economy, spawning protests against a government whose voter base is predominantly poor and rural.  New Delhi’s decision to increase fuel prices is expected to add nearly a percentage point to wholesale price index (WPI) inflation starting in July and led the opposition to call a one-day nationwide strike early this month.

The government is hoping on normal summer monsoon rains to results in better crop yields and ease pressure on food prices, and has said inflation should decline to 6 percent by December, which in my opinion is a task in itself…..

The Simple rules to Successful Investing – Part 1

The Simple rules to Successful Investing , Understanding Investing, Stocks, Mutual Funds, Tax, Insurance, Estate, Wills.

“No amount of talking or reading can teach you swimming. You will have to get in the water.”

There are these little general rules which are applicable and useful for decision making and taking actions. And these simple rules are applicable in so many aspects of life, they are just some small reminders, some common-sense stuff which are really useful.

And yes most of them are applicable in investment planning as well.

a. Perfect Plan – Forget it.There is no such thing as a perfect investment plan and no such thing as a perfect time. The right time is now. Tomorrow is and always will be uncertain. Perfectionism is the enemy of action. Do not let perfect investment plan or a perfect time to invest stop you from starting.

b. Analysis Paralysis – Too much thinking will often result in getting stuck.Some thinking is good — it’s good to have a clear picture of where you’re going or why you’re doing this — but don’t get stuck thinking. Just do.

c. Get the Broad Picture and Start. You need to get the broad picture in your mind. You need to understand your future requirements or what do you want to achieve (goals). You need to know the time you have to meet those requirements. And, then you should have the broad plan to meet the goals. Once you have the broad picture. Get going.
All the planning will take you nowhere unless you take that first step, no matter how small it is.

d. Keep things Simple and take Small Steps. Small steps always work. Little tiny blows can break down that mountain. And then each step counts. Keep the big picture in mind, but start by taking small steps.

Understand the advantage of Investing Early here.

The Little Rules to successful action To be contd … Part 2.

“Free Lunch” Seminars—Avoiding the Heartburn of a Hard Sell

"Free Lunch" Seminars,Avoiding the Heartburn of a Hard Sell , Retirement Planning, Investment Planning, Tax Planning, Life insurance selling malpractices.

BEWARE —-Investors frequently get invited to free seminars. These seminars make tall promises. To educate  about investing, or profit from home trading strategies or about managing money in retirement. They also provide VIP treatment , sometimes provide an expensive meal at no cost.

Please remember that , just because someone buys you breakfast, lunch or dinner does not mean you that you have to buy into whatever these guys they are saying. And definitely you need not buy into all what they are selling. Believe me , you will avoid some serious heartburns……… Use your judgment to arrive at a decision later point in time.

The same holds true when specially you go to buy a car. Most people spend a good time looking at the car and take a test drive. Now just because the salesman spent his 30mins — does not mean that you need to buy the car.

The same holds for when you are being sold — Life Insurance, General Insurance, Boutique stores, Electronics etc.

Be careful – If you do not wish to purchase and are being forced into a deal , Use your judgement and Learn to say No – firmly. We live in an age where it is still a buyer’s market – do not forget this.

Indian Rupee to get a New Symbol

rupee-symbol

The Indian Rupee is all set to get a New Symbol. The above designs have been shortlisted. Great to know that we are going to get our Currency Symbol. Just like Dollar has $, Pound has £, Euro has € etc.

All above symbols represent R of Devnagri (Hindi) Language means  ” र ” (Ra)… Option 1 is so childish. How did it make to the final 5 is amazing.

There is no regulation for Currency Symbol selection. It should be compatible as per all views like Language, International presentation and uniformity.

My view is that instead of promoting the letter “R” for Rupee , we could have tried to promote / represent the country as a concept. (Eg: the letter “I” for India , or “R” for Republic of India etc.)  By looking at Dollar has $ — like “S” for States, Pound has £ — like “L” for London , Euro has € — ‘E’ for European Countries….

And lastly none of the above symbols appeal to me…..

February 2010

What is adequate life insurance coverage?

What is adequate life insurance coverage,foundation of financial planning, current liabilities, financially secure the foreseeable future, .

“Death is certain and Life is uncertain.”

You work hard, You earn , You save. You plan and have dreams. You do this to secure your future and the future your loved ones.

However, your untimely demise, can jeopardize the future of your loved ones. Emotional needs, of your loved ones and your dependents cannot be replaced or compensated.
However in case of financial needs, you can always plan ahead, so that your loved ones are left behind with adequate financial resources to take care of their future needs. This is all the more important in case you have dependents who are financially dependent on you (like your non-working spouse, children , old parents etc.).

This is where “adequate”  insurance of  “life” assumes such a significance.
Life Insurance is the foundation of financial planning and you should ensure that it is properly planned, first.

Many a times , I am truly surprised when I ask clients and people about their insurance coverage. I get responses like the following :
“I believe I am adequately covered” (– Salary 20Lacs/yr, Home Loan 40K / month, Car Loan 3Lacs, 2 young school kids, Insurance coverage – sum assured around 40Lacs ONLY – 2 policies, annual premium around 2Lacs) And he believes he is adequately covered. Badly mistaken……………

“I have one investment flat, and one flat in which I currently live – In case something happens to me , my wife can sell that flat and that can easily service the needs of the future”. I told him, why does he need to wait for his death, in order to sell the flat. Why is he not doing it now.? An hence why should his spouse sell the property to finance family needs ……………? This person understood the crux and went ahead to increase his insurance………….

“My father tells me about the futility of insurance – See, he is 65 yrs of age and he is still going hale and hearty” – This is such a stupid response. It is really difficult to believe seemingly intelligent people making such comments………….

“I will get 20Lacs at the end of the policy” Upon asking , how much money his wife will get in case he were to die today  – His reply was ” I do not know, I will have to check my policy”. He does plans his weekend outing to Lonavla and Khandala or other places near Mumbai along with friends meticuluosly. But hey , no plans for life………

” I have a child insurance policy which will give me 15 Lacs in due course apart from my endowment life policy of 20Lacs” Again , this fellow has been sold into these policies is paying roof high premiums for paltry insurance. And by the way, why insure your child , when you yourself are inadequately covered. Also does one really need child’s life to be insured to cover financial needs. No……….

” I have a ULIP (Unit Linked) policy and the agent has promised me guaranteed (LOL……..) returns in next 15 years” ……… I am sure the agent also must be laughing his way to the bank ………..

” I had bought policy from LIC to to save taxes. And I am happy to save on taxes”Now buying insurance just to save taxes is one of the worst mistakes one can make. Buying Life insurance to save taxes or to invest is just not right………

These are responses of intelligent,hardworking , well educated people. However, they fail to get the financial planning act together. I am sure that they can also put in little extra effort to get this part right as well.

As you can see, all the responses above have one underlying theme – all of the different sets of people have inadequate Life Insurance coverage. In some  cases unplanned, some have planned but due to thier ignorance have been sold products which will truly not help in case of insurance.

Let us face it , no one likes to really think about his own death. However, the truth also cannot be denied that death is indeed certain.It can happen in (a) normal course of time (let us say avg 70yrs)  (b) earlier in an untimely fashion (let  us 30 -45yrs) — this is prime time when dependents really need you (c) or later than normal. (>85+ yrs)

All the three cases can be properly planned for.

So, that brings us to the question — What is adequate life insurance coverage?

Simply put, an adequate life insurance coverage should cover the current liabilities of the descedent and should financially secure the foreseeable future needs of the dependents in such a way that the lifestyle of the dependents remains unaffected going forward and life goes on normally as if nothing truly happened……………..

Later we will see , how much insurance do you need. Or How to arrive at the magic figure of sum assured. You can read the post here at How much life insurance do I need?