How Does Age Enter into Financial Planning?

Here are some guidelines to use, depending on your present age:

Ages 20 to 40.When you are young, growth of financial resources should be a primary goal; a relatively high degree of risk is tolerable.

Suggestion: Invest in a diversified portfolio of common stocks or in a mutual fund managed for growth of assets, not income. Speculation (real estate, coins, metals, etc.) is acceptable.

Ages 40 to 50. This is the period of time when the 20/20 rule goes into effect, working now for about 20 years and having 20 years more to go before retirement. Stocks are still an attractive choice, but now you need a more balanced approach. Begin to invest in fixed-rate instruments

(bonds), and look into ones that are tax free (municipals) only if your present or near-future income is high enough to warrant it.

Ages 50 to 60. At this point, growth is less important and risk less acceptable. Move a portion of your investments out of stocks and into bonds in order to minimize risk and increase your current flow of income.

Age 60 and Over. By now, the majority of your funds should be in incomeproducing investments to provide safety and maximum current interest.

Jaimini Bhagwati: Whither economics and finance? Policymakers need to broaden the scope of financial application

It would have been inconceivable just a year ago that the US government would need to support Fannie Mae and Freddie Mac and become a de-facto majority shareholder in General Motors, AIG, Citibank and Bank of America, and the UK government would hold controlling shares in the Royal Bank of Scotland. The Financial Times was concerned enough to run a series on the “Future of Capitalism”. Maybe the underlying concern was more about the future of capitalists, particularly those engaged in asset management and investment banking activities. However, public memory is notoriously short and we again have fawning comments about Goldman Sachs and the $3.4 billion profits posted by it in the April-June, 2009 quarter. These profits were driven by trading in fixed-income securities. In recent times, the bid-ask spreads on US government bonds have been wide since competition has been less with fewer market-makers. The Fed has deliberately stayed on the sidelines allowing banks to improve their financial health. It is surprising that such profits are being ascribed to financial acumen.

Goldman has returned $10 billion of TARP funding but it had also issued medium-term bonds worth several billion dollars which were guaranteed by the US Federal Deposit Insurance Corporation (FDIC). Goldman also benefited from the US government-funded bailout of AIG since it received $12.5 billion from AIG. Further, the somewhat discredited Value-at-Risk measure for Goldman is reported to have doubled over the last quarter. Steep bonuses seem to be back and there have been no consequences for most senior personnel in financial sector firms for decisions which resulted in their too-big-to-fail institutions receiving taxpayer-funded support.

At the same time, leading economists, central bankers and policymakers in finance ministries around the world have expressed sharply contrasting and even diametrically opposed views on the fundamentals of economics and finance. The following is illustrative of the issues on which there are clashing views. Namely, whether:

• asset-price bubbles can be recognised well in time and should central banks be made accountable for monitoring and preventing systemic risk from ballooning;
• inflation targeting delivers low inflation, steady growth, low levels of unemployment and financial sector stability or whether these three objectives were achieved in the last ten years due to a combination of global factors which were inherently unsustainable;
• it is possible to prevent financial firms from becoming too big to fail;
• the financial sector, including banking should be made “boring”, that is made to focus on core lending functions by raising capital requirements for trading activities;
• there should be ceilings on compensation in financial institutions since this could reduce greedy risk-taking;
• taxpayers are adequately compensated for government-funded support for private sector firms;
• the Efficient Markets Hypothesis (EMH) holds.

Paul Krugman has suggested that “much of the past 30 years of macroeconomics was spectacularly useless at best and positively harmful at worst.” According to other commentators, many policymakers and central bankers bought into the myth that economics is more than a social science. Taking a step back in time, Alfred Nobel conceived of five prizes, one each for Physics, Chemistry, Physiology or Medicine, Literature and Peace, for work which “conferred the greatest benefit on mankind.” The first prizes were awarded in 1901. And, it is only in 1968 that the Swedish central bank decided to fund a Nobel Prize for Economics. This was probably based on a consensus that innovative thinking in economics is more relevant for social welfare than, for example, history or sociology. Robert Skidelsky has suggested that economics should go back to its roots since its predictive power is similar to that of other social sciences and it should give up its excessive reliance on mathematical models.

Bertie Wooster, the central character in P G Wodehouse novels, would have remarked that his “mind boggles” if he had encountered the current uncertainties about established tenets of economics and finance. More seriously, and in fairness to these two inter-related disciplines, all these issues have been debated often in the past and there can be no categorical answers which apply uniformly over time and across countries. Unfortunately, however, now that there are signs that the major economies are recovering it may soon be back to business as usual.

In the late 1990s, an important insight of the then President of the World Bank was that economists needed to understand finance. To that end he insisted that all senior managers, which included many PhDs in economics, undergo basic finance training and learn how to read a balance sheet. The recent economic meltdown was triggered by a breakdown in investment banking and international capital markets. It is conceivable that central bankers and other regulators may have acted earlier if they were better informed about capital markets in general, and derivatives markets in particular. Consequently, in the Indian context, it would be useful to have a Chief Financial Adviser (CFA) in the ministry of finance in addition to a Chief Economic Adviser. The CFA could complement the work of the CEA to give the finance ministry a more in-depth picture of the health of financial markets and provide inputs on the state of accounting and corporate governance. A CFA could also highlight the need to move faster on deregulation of interest rates on small savings, making the government yield curve arbitrage free etc.

More generally, the mutually inconsistent opinions of Nobel Prize-winning economists are symptomatic of the multi-disciplinary and ever-changing confluence of factors, which drive economic outcomes even within the same country. India’s systemic shortcomings in eg providing assured irrigation, basic infrastructure, pricing of power, fertiliser and petroleum products and corporate governance (Satyam) or the problems of companies such as General Motors in the US, banks in Europe stem from a variety of factors. Clearly, purely formulaic remedies such as inflation targeting, liberalising exchange rate policies, introduction of exchange-traded forex derivatives, developing corporate bond markets, raising/lowering of interest rates and safeguarding the independence of RBI may not be sufficient or even appropriate. India-based economists and finance specialists have been relatively quiet about the applicability of recommendations based essentially on available data and static models. Further, we also need to reflect a bit more about the continuing capture of economic and financial sector policies by special interests in developed countries when thinking about solutions for comparable situations in India.

ECONOMIC GROWTH V/S DEVELOPMENT

Economic development is the development of economic wealth of countries or regions for the well-being of their inhabitants. This is the short definition of Economic Development.

Economic Growth & development are two different terms used in economics.

Generally speaking economic development refers to the problems of underdeveloped countries and economic growth to those of developed countries.

By Economic Growth we simply mean increase in per capita income or increase in GNP. In recent literature, the term economic growth refers to sustained increase in a country’s output of goods and services, or more precisely product per capita. Output is generally measured in terms of GNP.

The term economic development is far more comprehensive. It implies progressive changes in the socio-economic structure of a country.
Viewed in this way economic development Involves a steady decline in agricultural shares in GNP and continuous increase in shares of industries, trade banking construction and services.
Further whereas economic growth merely refers to rise in output; development implies change in technological and institutional organization of production as well as in distributive pattern of income.

Hence, compared to the objective of development, economic growth is easy realize. By a larger mobilization of resources and raising their productivity, output level can be raised. The process of development is far more extensive. Apart from a rise in output, it involves changes in composition of output, shift in the allocation of productive resources, and elimination or reduction of poverty, inequalities and unemployment.

In the words of Amartya Sen “Development requires the removal of major sources of unfreedom poverty as well as tyranny, poor economic opportunities as well as systematic social deprivation neglect of public facilities as well as intolerance or over activity of repressive states….”

Economic development is not possible without growth but growth is possible without development because growth is just increase in GNP It does not have any other parameters to it.
Development can be conceived as Multi-Dimensional process or phenomena. If there is increase in GNP more than the increase in per capita Income then we can say that Development is possible.
When given conditions of population improves then we can say that this is also an indicator of economic Development.

Is rising prices of food due to biofuels?

Fear of a spike in food prices has been palpable in India ever since rains have played truant in the country this year. We are well into August and monsoons have already been 29% below normal with almost 50% of the total districts in India reeling under a drought. The government has assured that it would use its reserves to put a cap on rising food prices and also increase ration supplies, especially in the case of wheat, rice and sugar which have been badly hit by the drought. Thus, the government will have to do all in its power to ensure that there is a smooth operation of the food distribution system and the national markets in the country.

Globally, the International Food Policy Research Institute has warned that even if global reserves are relied upon to curb hunger and price rises, rebuilding stocks from the low levels will be difficult. Food prices had spiked internationally in 2008 as high fuel prices and the subsequent interest in biofuels impacted production of other crops. Therefore, a lot of issues will need to be addressed if a food crisis in the future has to be prevented

Basics of Financial Markets

What is Investment?

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.

Why should one invest?

One needs to invest to:

- earn return on your idle resources

- generate a specifi ed 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.

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 (as we shall see later) increases your income, by a cumulating 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

What care should one take while investing?

Before making any investment, one must ensure to:

1. obtain written documents explaining the investment

2. read and understand such documents

3. verify the legitimacy of the investment

4. find out the costs and benefits associated with the investment

5. assess the risk-return profile of the investment

6. know the liquidity and safety aspects of the investment

7. ascertain if it is appropriate for your specific goals

8. compare these details with other investment opportunities available

9. examine if it fits in with other investments you are considering or you have already made

10. deal only through an authorised intermediary

11. seek all clarifications about the intermediary and the investment

12. 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.

What is meant by Interest?

When we borrow money, we are expected to pay for using it – this is known as Interest. Interest is an amount charged to the borrower for the privilege of using the lender’s money. Interest is usually calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the life of the loan, or it may be variable, depending on the terms of the loan.

What factors determine interest rates?

When we talk of interest rates, there are different types of interest rates - rates that banks offer to their depositors, rates that they lend to their borrowers, the rate at which the Government borrows in the Bond/Government Securities market, rates offered to investors in small savings schemes like NSC, PPF, rates at which companies issue fixed deposits etc. The factors which govern these interest rates are mostly economy related and are commonly referred to as macroeconomic factors.

Some of these factors are:

- Demand for money

- Level of Government borrowings

- Supply of money

- Inflation rate

- The Reserve Bank of India and the Government policies which determine some of the variables mentioned above.

What are various options available for investment?

One may invest in:

- Physical assets like real estate, gold/jewellery, commodities etc.

and/or

- Financial assets such as fixed deposits with banks, small saving instruments with postoffices, insurance/provident/pension fund etc. or securities market related instruments like shares, bonds, debentures etc.

What are various Short-term financial options available for investment?

Broadly speaking, savings bank account, money market/liquid funds and fi xed deposits with banks may be considered as short-term financial investment options: Savings Bank Account is often the first banking product people use, which offers low interest (4%-5% p.a.), making them only marginally better than fi xed deposits. Money Market or Liquid Funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. Fixed Deposits with Banks are also referred to as term deposits and minimum investment period for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and may be considered for 6-12 months investment period as normally interest on less than 6 months bank FDs is likely to be lower than money market fund returns.

What are various Long-term financial options available for investment?

Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds etc.

Post Office Savings: Post Offi ce Monthly Income Scheme is a low risk saving instrument, which can be availed through any post offi ce. It provides an interest rate of 8% per annum, which is paid monthly. Minimum amount, which can be invested, is Rs.1,000/- and additional investment in multiples of 1,000/-. Maximum amount is Rs.3,00,000/- (if Single) or Rs. 6,00,000/- (if held Jointly) during a year. It has a maturity period of 6 years. A bonus of 10% is paid at the time of maturity. Premature withdrawal is permitted if deposit is more than one year old. A deduction of 5% is levied from the principal amount if withdrawn prematurely; the 10% bonus is also denied.

Public Provident Fund: A long term savings instrument with a maturity of 15 years and interest payable at 8% per annum compounded annually. A PPF account can be opened through a nationalized bank at anytime during the year and is open all through the year for depositing money. Tax benefits can be availed for the amount invested and interest accrued is tax-free. A withdrawal is permissible every year from the seventh financial year of the date of opening of the account and the amount of withdrawal will be limited to 50% of the balance at credit at the end of the 4th year immediately preceding the year in which the amount is withdrawn or at the end of the preceding year whichever is lower the amount of loan if any.

Company Fixed Deposits: These are short-term (six months) to medium-term (three to five years) borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi10 annually or annually. They can also be cumulative fixed deposits where the entire principal alongwith the interest is paid at the end of the loan period. The rate of interest varies between 6-9% per annum for company FDs. The interest received is after deduction of taxes.

Bonds: It is a fixed income (debt) instrument issued for a period of more than one year with the purpose of raising capital. The central or state government, corporations and similar institutions sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest on a specified date, called the Maturity Date.

Mutual Funds: These are funds operated by an investment company which raises money from

the public and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of objectives. It is a substitute for those who are unable to invest directly in equities or debt because of resource, time or knowledge constraints. Benefits include professional money management, buying in small amounts and diversifi cation. Mutual fund units are issued and redeemed by the Fund Management Company based on the fund’s net asset value (NAV), which is determined at the end of each trading session. NAV is calculated as the value of all the shares held by the fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term investment vehicle though there some categories of mutual funds, such as money market mutual funds which are short term instruments.

What is meant by a Stock Exchange?

The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception.

What is an ‘Equity’/Share?

Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000 units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 11 said to have 20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have voting rights.

What is a ‘Debt Instrument’?

Debt instrument represents a contract whereby one party lends money to another on pre-determined terms with regards to rate and periodicity of interest, repayment of principal

amount by the borrower to the lender. In the Indian securities markets, the term ‘bond’ is used for debt instruments issued by the Central and State governments and public sector organizations and the term ‘debenture’ is used for instruments issued by private corporate sector.

What is a Derivative?

Derivative is a product whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be equity, index, foreign exchange (forex), commodity or any other asset. Derivative products initially emerged as hedging devices against fluctuations in commodity prices and commodity-linked derivatives remained the sole form of such products for almost three hundred years. The financial derivatives came into spotlight in post-1970 period due to growing instability in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about twothirds of total transactions in derivative products.

What is a Mutual Fund?

A Mutual Fund is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors. The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. Mutual Funds invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equity

and bonds. Investors are also given the option of getting dividends, which are declared periodically by the mutual fund, or to participate only in the capital appreciation of the scheme.

What is an Index ?

An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.

What is a Depository?

A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government securities, units etc.) in electronic form.

What is Dematerialization ?

Dematerialization is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).

What is the function of Securities Market?

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’.

Which are the securities one can invest in?

- Shares

- Government Securities

- Derivative products

- Units of Mutual Funds etc.,

are some of the securities investors in the securities market can invest in.

What is the role of the ‘Primary Market’?

The primary market provides the channel for sale of new securities. Primary market provides opportunity to issuers of securities; Government as well as corporates, to raise resources to meet their requirements of investment and/or discharge some obligation. They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.

Why do companies need to issue shares to the public?

Most companies are usually started privately by their promoter(s). However, the promoters’ capital and the borrowings from banks and financial institutions may not be sufficient for setting up or running the business over a long term. So companies invite the public to contribute towards the equity and issue shares to individual investors. The way to invite share capital from the public is through a ‘Public Issue’. Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid down by SEBI.

What is meant by Market Capitalisation?

The market value of a quoted company, which is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization. E.g. Company A has 120 million shares in issue. The current market price is Rs. 100. The market capitalisation of company A is Rs. 12000 million.

What is an Initial Public Offer (IPO)?

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. It is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities. The sale of securities can be either through book building or through normal public issue.

What is a Prospectus ?

A large number of new companies oat public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of 23 information to the public. This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc. This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.

What is meant by Secondary market?

Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

What is a Contract Note?

Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.

What precautions must one take before investing in the stock markets?

Here are some useful pointers to bear in mind before you invest in the markets:

-Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries.

-Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades.

-All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that matches their risk tolerance.

-Do not be misled by market rumours, luring advertisement or ‘hot tips’ of the day.

-Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor. If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing.

-Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock.

-Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.

-Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.

-Be cautious about stocks which show a sudden spurt in price or trading activity.

-Any advise or tip that claims that there are huge returns expected,especially for acting quickly, may be risky and may to lead to losing some, most, or all of your money.

Economic Conditions Snapshot, August 2009: McKinsey Global Survey Results

Executives’ optimism about their nations’ economies and their companies’ prospects continued to grow over the past six weeks, and many companies are focusing more on growth. Yet full recovery, executives say, remains far off.

Executives’ optimism about the economy has continued to grow over the past month and a half, according to the results of a McKinsey Quarterly survey in the field during the week that US stock markets hit their highest point so far in 2009.¹ More companies are pursuing a range of growth initiatives than were doing so six weeks ago, and the proportion expecting increased profits this year has risen to 40 percent, from 33 percent. Similarly, the share of those saying that their nations’ economies have improved since September 2008 has risen, though only to 26 percent, from 20 percent.

More executives—42 percent—pick the description “battered but resilient” for the global economy than any other. Yet their other responses indicate that they see the economy as battered enough to prevent a large-scale economic recovery from arriving anytime soon. The share expecting an upturn to begin in 2009, for example, has fallen to 20 percent, from 28 percent, over the past six weeks, and the percentage of respondents who think that their national economies will be better at the end of the year—37 percent—equals the percentage who think their national economies will be worse.