We help people to get rich !
Its not magic but simple **FINANCIAL PLANNING**.

We advise on Investing in Mutual Funds,ELSS,SIP,Insurance, Debt Products,FDs. We help people acheive there financial goals.

Contact us for Financial Advise in Mumbai.

Email :** ChetanJain111@gmail.com**

## Saturday, January 31, 2009

### Top performing ELSS funds for the month of January 2009

1) IDFC Tax Advantage ELSS (G)

2) Quantum Tax saving Fund (G)

3) UTI Long Term Advantage S2 (G)

Sensex gave a return of -3% during the month of January 2009. The above funds performed better then broader market.

## Tuesday, January 27, 2009

### What is Estate Planning ?

Estate planning distributes the real and personal property to an individual's heirs. Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death or incapacitation. An Estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.

Wills and trusts are common ways in which individuals dispose of their wealth. Power of Attorney, Gifts, Partition, Succession are other ways.

Financial Planning is the process of meeting individual life goals through the proper management of one's finances. Life goals can include buying a house, saving for your child's higher education, planning for retirement or distribution of assets among beneficiaries.

Estate planning is part of financial planning by which an individual can arrange the transfer of assets in anticipation of death or incapacitation. An estate plan aims to preserve maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.

Objectives of Estate Planning

1. Transfer of assets to beneficiaries: Almost all individuals want there accumulated wealth should go to their beneficiaries. The beneficiaries may be a family member, a friend or even other people in the society. The basic objective of Estate Planning is that all this accumulated wealth should be transferred to the beneficiaries

2. Paying least amount of taxes:

Planning should be done such that Maximum amount should go to the beneficiaries with minimum amount of tax deduction.

3. Planning for Incapacity:

There should be plan if there is incapacity to avoid court guardianship and legal battles creating unnecessary waste if time and money. This can be done through tools like Power of Attorney.

4. Orderly Business Succession:

If someone owns a business, his will should provide for management of succession plan, including who should be given management and operating powers of the company.

5. Who Shall Receive and When ?

Properly executed Will should mention all beneficiaries and who should get what and in what proportion. Also if there is a minor then there should be a trust formed to look afters his share till he gets major and can handle on his own.

6. Selecting Executor, Trustee, and Guardian:

An Executor is a clients personal representative after his death and responsible for functions such as

a) administering the estate and distributing the assets to clients beneficiaries

b) paying estate expenses and outstanding debts

c) ensuring that all life insurance and retirement plan benefits are received

d) Filing or hiring a person to file all necessary tax returns and paying the appropriate central and state taxes from estate funds. When those duties are complete, this responsibility ends.

Trustee is required if the clients will creates trusts to accomplish more long-term goals, such as providing for minor children or giving to a charity or educational institutions. Trustee is responsible for the managing the trusts assets and ensuring that the beneficiaries are provided for in accordance with the provisions of the Trust.

Guardian: is appointed to act as a surrogate parent for the clients children, ensuring that it is in the best interests of children.

Risk associated with failing to plan for Estate Transfers

- Clients property transfer wishes go unfulfilled.
- Transfer taxes are excessive
- Transfer costs are excessive
- The clients family is not provided for financially in a proper manner
- Insufficient liquidity to cover clients debts, taxes and cost at death
- Time consuming and expensive Probate.

1. Establish the client/planner relationship:

The financial planner should clearly explain or document the services to be provided to the client and define both his and the clients responsibilities. The client and the Financial planner should decide on how long the relationship should last and how is the compensation and How the the decisions will be made.

2. Gather Clients Information: Financial planner should gather all the information from the client including the cash flow , expenses, income, future long term expenses, long term goals. clients intentions and expectations.

3. Determine the clients Financial Status:

The financial planner should analyze clients information to assess his current situation and the total worth of his estate to determine what he must do to meet clients goals like analyzing assets , liabilities and cash flow, insurance coverage , investments, tax strategies etc.

4. Develop a comprehensive plan to transfers consistent with all information and objectives: The planner should address clients objectives like transfer to beneficiaries with least amount of taxes.

5. Implement the Estate Plan: There should be an agreement between the client and the planner how should the plan be implemented.

6. Review the Estate plan periodically: The client and planner should also agree on who should monitor the progress of the plan. If the planner is in charge of the process. he should report to the client periodically to review the situation and adjust recommendations, if needed as the clients life changes.

## Saturday, January 24, 2009

### Post office Monthly Income Scheme (MIS)

**Post Office Monthly Income Scheme (MIS)**

This is one of the very good scheme from post office the best part is it gives you interest every month. you can open this account in following ways at the post office near by your home

- An adult individual in his own name
- An adult on behalf of minor
- An adult jointly with maximum joint holder restricted to three.

**How Much**

- Minimum Rs 1,000/-
- Maximum Rs. 3,00,000/- in single account
- Maximum Rs 6,00,000/- in joint account

This limit has been increased recently to 4,50,000 for individual

**Interest**

- 8% per annum payable monthly
- In some post office ECS facility is available where the interest is credited every month directly to saving bank account of the depositor.
- Depositor may open SB account with the same post office where he deposited his MIS and give standing instruction for crediting the interest amount directly to the SB account on monthly basis.

**Term**

- 6 year Interest rate remains the same for the entire period

**Withdrawals**

- No premature repayment is permitted within one year of deposit
- After one year but before completion of 3 years, premature withdrawal of entire balance is permitted with 2% penalty on the deposit amount, no deductions on interest already paid
- If withdrawn after 3 years the penalty is restricted to 1% of the deposit amount.
- Part withdrawals are not permited. (
**TIP: that is why even if you want to deposit 3 lakh , you should deposit 3 different amounts of 1 lakh)**

**Bonus on maturity**

- A bonus of 5% of deposit amount is payable on maturity (end of six years)

### Public Provident Fund (PPF)

**Public Provident Fund (PPF)**

can be opened in

1. Head Post-Office

2. GPO

3. Any branch of SBI

4. Selected branches of Nationalized bank like Central bank of India etc

**Conditions**

- Minimum investment of Rs. 500 in a financial year
- Maximum of Rs. 70,000/- in a financial year
- can be invested in lump sum or in convenient instalments
- you cannot deposit more then 12 times in a year

**Interest**

- 8% p.a credited to the account, once a year, as on 31st March of each year.
- Deposits made before 5th of every month are eligible for interest for that month. Date of deposit is considered for this purpose
- Interest can be changed by the Government of India at any time

Past Interest rate were as under

upto 14.1.2000 - 12%

15.1.2000 to 28.2.2001 - 11%

1.3.2001 to 28.2.2002 - 9.5%

1.3.2002 to 28.2.2003 - 9%

1.3.2003 onwards - 8%

**Term**

- PPF is 15 year account
- The term of the account can be extended by 5 years at a time by making an application in specified form to the deposit office, within one year
- An account can be extended any number of times
- The entire balance can be withdrawn in full after the expiry of 15 years from the close of the financial year in which the account was opened.

**Loan**

- The depositor can take a loan in the third financial year from the financial year in which the account was opened
- loan can be taken upto 25% of the amount standing at the end of the second preceding financial year
- The loan shall be repayable in 36 instalments and shall bear interest at the rate of 1%. No loan can be obtained after the end of 5th year.

**Withdrawals**

- Depositor is permited to make one withdrawal every financial year.
- withdrawal is permitted from the 7th financial year
- Amount of withdrawal can not exceed 50% of the balance to his credit at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is less

**Tax Benefits**

- The interest earned on PPF account (including interest during the extension period) is excluded from income tax u/s 10(1).
- The entire deposit in the account is exempt from wealth tax.
- The annual contribution to the account is eligible for deduction u/s 80c

**Transferability**

- A PPF account with one deposit office can be transferred to another deposit office

**Nomination**

- PPF account is necessarily opened in a single name. Nomination facility is available
- A depositor can nominate more than one person and stipulate the percentage of sharing among nominees

## Thursday, January 22, 2009

### How does Diversification help us ?

**Diversification help us when ?**

1) Combining two securities with positive correlation with each other provides no reduction in portfolio risk. as more securities are added the risk remain weighted average. There is no risk reduction.

2)Combining two securities with zero correlation

1) Combining two securities with positive correlation with each other provides no reduction in portfolio risk. as more securities are added the risk remain weighted average. There is no risk reduction.

2)Combining two securities with zero correlation

**(each is independent of other)**

**with each other reduces the risk of the portfolio. If more securities are added the uncorrelated returns are added to the portfolio and significant risk reduction can be achieved.**

3) Combining two securities with negative correlation with each other could eliminate risk altogether. This is the principle used in hedging strategies.

3) Combining two securities with negative correlation with each other could eliminate risk altogether. This is the principle used in hedging strategies.

Three factors determine the risk of portfolio.

1) The variance of each security.

2) The Co-variance between securities.

3) The portfolio weights for each security.

Every investor should try for an efficient portfolio defined by Markowitz's as the one that has smallest portfolio risk for given level of expected return or the largest expected return for the given level of risk.

Rupee cost averaging

The systematic investment plans in mutual funds, along with consistent periodic new purchases of shares, creates risk reduction by creating lower cost per share owned over time. This is known as rupee cost averaging.

## Tuesday, January 20, 2009

### Building of an Investment Portfolio; Asset Allocation, Security selection

- Asset Allocation
- Security Selection

Also asset allocation is closely related with the age of investor this is called Lif-Cycle theory. The investor with age of 50 nearing to retirement should take very little risk for his investments and the person who is just starting his carrer can take high risk because he has time on his hand. So ideally younger the investor more allocation to stocks and older the investor less allocation to stocks.

List out the asset classes

1) Cash or savings account

2) Stocks

3) Bonds

4) Real Estate

5) Foreign Securities

Financial planner in consultation with the investor should plan out percentages to be allocated to each of the assets. The next step would be about individual securities within each asset class.

Average portfolio risk can be reduced by 19% as we keep on adding securities to the portfolio the total risk associated with the portfolio of stocks declines rapidly. The first few stocks cause a large decrease in portfolio risk. based on actual data 51 percent of the portfolio standard deviation is eliminated as we go from 1 to 10 securities. unfortunately the benefits of adding more securities after a point is very small and it keeps getting smaller and smaller.

**Modern portfolio theory according to Markowitz**.

Markowitz developed an equation that calculates the risk of a portfolio as measured by the variance or standard deviation. His equation accounts for two factors.

1) Weighted Individual Security risks that is variance of each individual security, weighted by percentage of investible funds placed in each individual security.

2) Weighted co-movements between securities returns that is the covariance between the securities returns, again weighted by the percentage of investible funds placed in each security.

## Saturday, January 17, 2009

### Measurement of Portfolio performance

Evaluating the performance of a particular portfolio involves measuring both the realized return and the differential risk of the portfolio and recognize any constraint the portfolio manager may face. A 14% return by itself is meaningless figure unless it is viewed in comparison with benchmark figure or average return of that category over same time frame and similar level of risk taken.

Measure of return is always done in relation to risk taken.

In order to evaluate performance properly, we must determine whether returns are good enough for the amount of risk taken. We must always asses risk-adjusted returns.

An equity portfolio consisting of sensex stocks should be evaluated relative to BSE sensex. on the other hand equity portfolio of small cap stock should not be judged against sensex.

Risk-adjusted returns

It is important to evaluate portfolio not only with performance but also how much risk is taken. William Sharpe, Jack Treynor and Micheal Jensen developed the measures of portfolio performance.

Sharpe Ratio

Reward-to-variability ration (RVAR). The measure uses benchmark based on the ex post capital market line. Sharpe used RVAR to:

- Measure the excess return per unit of total risk(as measured by standard deviation)
- Rank portfolios by RVAR ( the higher the RAVR, better the portfolio performance)

Rp = Return of the portfolio

Rf = Risk free return

SD = Standard Deviation or portfolio (total risk)

Trey nor Measure

Jack Treynor measures called reward-to volatility ratio (RVOL).

RVOL = Rp - Rf

Jensen's Index

It measure the portfolio performance with differential return measure(ALPHA).

It attempts to measure the constant return that the portfolio manager earned above or below the return of an unmanaged portfolio with the same market risk.

Jensen's index = Rp - [Rf + (Rm- Rf)*B]

Rp = return of portfolio

Rf = risk free return

Rm = Market return (Index return)

B= Beta of portfolio (Beta is the measure of market risk of the portfolio)

## Friday, January 16, 2009

### Measuring Investment Returns !

Historical returns of any product plays a large part in estimating future returns.

Returns of an Investment has two components.

1) Yield: This is periodic cash flow from any investments like interest or dividend. most FDs have interest generated yearly, or quarterly. and Stocks , Mutual funds declared dividends from time to time. Yield is the measure of cash flow to the price of a security.

2) Capital Gain (loss) : The second component is the capital appreciation(or depreciation) in the price of an asset, price of a stock.

Total return = Yield + Price Change(capital gain)

Current yeild

It is simple measure of returns on any security and is = annual interest/price of security.

Yeild to Maturity(YTM)

Returns of bonds most often quoted for investors is Yield to Maturity (YTM), It is defined as promised compounded rate of return an investor will receive from bond purchased at market rate and hold till maturity.

computation of YTM

P = C/(1+r) + C/square(1+r) + C/ntime(1+r) + M/ntime(1+r)

P= price of security

C=annual interest

r= rate of interest

M=Maturity value

n=number of years

Compounding vs Discounting

The concept of compounding, that is interest on interest is an important concept.

Post Tax Returns (Tax Adjusted Returns)

As an investor you should learn that taxes can eat up lot of your returns so what is more important is what you keep rather then what you make.

example: if you make 50% in a product 'A' , out of which 30% will go for tax payment so you have left is just 20%

If you have product 'B' which gives just 30% returns with tax being nil on it because it is tax free. so the final returns you gain is net 30% from product B.

So Definately even though product A gives more returns but for investor product B is better option.

Real Return(Inflation Adjusted return)

All the returns we calculate are Rupee returns. It does not actually talk about purchasing power of these rupees. In 1950 you could see movie for less then Rs 1 now even if your 1 rupee has grown 50 times you will still be not able to see the movie today as it cost over Rs 100.

so the inflation has killed your purchasing power instead of your wealth being increase if you look at inflation adjusted returns it has actually diminished.

Real return = { (1+ Nominal Return) / (1+ Inflation rate) } - 1

Note: merely subtracting inflation rate from the nominal return will get less accurate result.

## Thursday, January 15, 2009

### How to Manage Risk in Investments ?

**Diversification**:

Investments need to be made to get much better returns but keeping the risk to the minimum. The well know established fact of reducing the risk is through diversification.

- Diversification across different asset class - equity, debt, commodities,real estate
- Across geographies - different city, different country
- Across different securities - different stocks , different bonds, different FDs
- Across Maturities - short term, medium term, long term

**Portfolio of securities**

Investment in stocks is usually advisable to have investments in number of stocks rather then one single stock. The stocks should also be from different sectors and sectors should also be not related. If you 10 different stock but all from IT pack then if the IT sector goes down your entire portfolio will go down. so all stocks should be deversified across different sectors be IT, real estate, FMCG, OIL and Gas, Auto , manufacturing, commodities etc.

Note: Over diversification in stocks is also not good. If you diversify too much then returns will also be average your portfolio will then not outperform the markets.

Ideally for an individual investor should limit number of stocks between 5 and 30.

**Risk Reduction through Product Diversification**

It is important to have product diversification like direct equity, indirect equity through mutual funds, balanced fund, debt - corporate and government, fixed income like small savings scheme,Bank FD, PPF, post office term deposit.

Risk is in the portfolio can be reduced throught investments in different products in pre-determined proportion depending on the risk profile of the investor. The proportion should be managed periodicaly atleast once in six months.

**Risk reduction through Time Diversification**

when investing in equities it is an established fact the individual investor cannot time the market. Most of my clients will say the price of stock went down after he purchased it and whenever he sells a stock the price will go up. Rather then putting energy in predicting when the bottom is reached and when it is peak it is better to invest in equities through SYSTEMATIC INVESTMENT PLANS. All most all mutual funds have SIP facility to invest in mutual fund systematically and conveniently via ECS. Another strategy would be to park all your money in debt fund and transfer part of it regularly to an equity fund.

**Hedging**

Diversification reduces nonsystematic risk but systematic risk or market risk still exist. It cannot be diversified but systematic risk can be hedged.

Portfolio 50 Nifty stocks now this portfolio has dependence of failure of fortune for each company with a chance of 1 in 50. but if the market will swing each way then the portfolio will fluctuate with overall market. Now this risk cannot be reduced but hedged.

If your portfolio of 30 lacs and NSE nifty is trading at 3000 then 10 futures contracts of nifty can be sold to effectively offset the market risk. So if your portfolio decreases by 5% then the nifty contracts will increase by 5% as you have already sold it. hence your portfolio is immuned to market movements.

## Wednesday, January 14, 2009

### How do you measure Risk ? Standard deviation and Beta

**Measurement of Risk:**

The investment risk is the probability of actually not earning the expected returns or maybe earning even lower returns. The investment is considered riskier if the chances of lower then expected returns are higher.

**Standard deviation (si)**measures total risk.

The larger the si, the lower is the probability that actual returns will be close to the expected returns.

Probabilities represent the likelihood of various outcomes and are typically expressed as decimal. The sum of all probabilities must be 1.0. because they must completely describe all possible outcome.

The probabilities are obtained on the basis of past occurrences with modification for any changes expected in the future. Investing for some future period involves uncertainty and therefore subjective estimates.

probability distribution can be either discrete or continuous. With a discrete probability distribution, a probability is assigned to each possible outcome. with continuous probability distribution an infinite number of possible outcome exists.

**Expected Return**

The expected value is the average of all possible return outcomes, where each outcome is weighted by its respective probability of occurrence, for investors this is expected return.

Government bond or fixed income security like bank FD the expected return is the rate of interest. there is no uncertainty about the expected returns. Stocks on the other hand give returns depending on the market conditions and one will have to estimate the possible returns and the probability of each of the possible returns.

Expected return = Sum (returns * probability)

example: returns 4%,8%,12%,16%,20% with probability of 0.1 ,0.2 ,0.4 ,0.2 ,0.1 respectively.

expected returns = (0.04*0.1 + 0.08*0.2 + 0.12*0.4 + 0.16*0.2 + 0.2*0.1)

= (0.004 + 0.016 + 0.048 + 0.032 + 0.02) = 0.12 = 12%

Standard Deviation

**It is the measurement of the dispersion of random variable around its mean**.

standard deviation is sqare root of variance

variance = sum of { probabilties * square(actual return - expected return)}

example taking the previous example

variance = { (-8*-8)0.1 + (-4*-4)0.2 + (0)0.4 + (4*4)0.2 + (8*8)0.1}

={ 6.4 + 3.2 + 0 + 3.2 + 6.4 }

= 19.2

standard deviation = square root of variance = square root(19.2) = 4.3817

NOTE: Variance,risk, volatility can be used synonymously, larger the standard deviation the more uncertain the outcome is.

standard deviation of large well diversified portfolio will be more stable then an individual stock.

hence for future estimation standard deviation of a diversified portfolio is better then an individual stock's standard deviation.

**Beta**

Beta is the measure of systematic risk of a security that cannot be avoided through diversification. Beta shows the price of an individual stock which performs with changes in the market. **The more responsive the price of a stock to the changes in the market the higher is the beta.**

Beta is relative measure of risk - the risk of an individual stock relative to the market portfolio of all stocks.

Beta 1 = Means every one percent change in markets return this security's returns changes by 1 percent

Beta 1.5= Means every 1 percent change in market returns this security's returns changes by 1.5 percent both up and down this would be considered an aggresive security meaning if market changes by 10% this security will change by 15% up or down.

Beta 0.5 or less then 1 = means the stock is more conservative investment then overall market.

Beta is mostly positive which means when the markets are rising the stock also rising and falling when the markets are falling. Negative beta means the stock is moving in opposite direction to the overall market.

To determine beta we use a graph we plot market returns on x-axis and the returns of actual stock on y-axis over certain period. upon plotting all the monthly returns over 1 year or certain period. we draw a line the comes closest to all the points this is called a regression line. Beta is the slope of this regression line. IF it is 45 degrees then the slope is 1 and beta is 1.

The more steeper the slope then more is the risk relative to the market. lesser the slope then more conservative the stock is compared to market.

Rs = estimated return on stock

a = estimated return when the market return is zero

Bs = measure of stocks sensitivity to market index

Rm = return on the market index

e= random errors**Rs = a + BsRm + e**If we consider return on security compared to risk free return then

**Rs = Rf + Bs (Rm-Rf)**

where Rf = risk free return - return that can be obtained by investing in risk free securities like treasury bills.

## Saturday, January 10, 2009

### what are the Returns of Jeevan Astha single premium policy from LIC ?

According to the LIC brochure, one will get Rs 100 per Rs 1,000 maturity sum assured per year for a policy of 10 years and Rs 90 per Rs 1,000 maturity sum assured per year for a policy for five years. This where people make mistake of doing the simple calculation and assume that the rate of return is 9% for fiveyear plan and 10% for 10-year .

A 13-year-old (minimum entry age) who opts for a cover of Rs 1.5 lakh by paying a premium of Rs 24,668 would get around 7.32%, whereas a 60-year-old (maximum age) who pays Rs 29,145 as premium would get around 5.55%.

NOTE: People who want to park there money in debt product for 10 year expecting an assured return of between 5% to 9% along with some insurance can go for it.

## Friday, January 9, 2009

### Satyam fiasco ; I had kept on buying satyam stock regularly over the years !

There is this person who says let us take a good bluechip company and keep investing and buying there stock regularly every month for a certain period and if you were the one who was investing in the Satyam stock might have lost more then 90% of your value in few trading sessions.

Does this prove that buying stock regularly or investing regularly is wrong strategy ?

No. The strategy is not wrong what the IMPORTANT LESSON to learn is that there was no diversification. yes you will find few companies doing wrong but there will be many more good companies out there. how do you know ? when even a index stock can behave like that.

Well the answer is you have to have DIVERSIFICATION. you need to shortlist 5 to 10 good scrips and invest for a long term. Another way would be to invest regularly in a index fund. Index does take care of this abberation like this time satyam is kicked out of NIFTY. so you dont have to worry about any company specific issues here also NIFTY is well diversified portfolio of 50 top stocks.

But then too much diversification also reduces your profit. well but that also reduces your risk also.

Well there are many small investors out there in the market who have full faith in Reliances and L nT's and Infosys and Tata's but I would strongly recommend dont have all your money in just one scrip.

## Wednesday, January 7, 2009

### Types of Investment risk

There are two types of risk one risk is pervasive in nature such as market risk or interest rate risk and the other is that are specific to the issuer risk, business or financial risk.

Total Risk = Systematic risk + Nonsystematic Risk

= Market risk + Issuer risk

All securities have some systematic risk whether be it bond or stocks, it encompases interest rate, market and inflation risk. This part of the risk cannot be avoided because know matter how diversified your portfolio, the overall risk cannot be avoided. If the stock market falls sharply most stocks will be affected and if it rises most stocks will rise.

Nonsystematic Risk

The variability in a securities total returns not related to market risk is called non market risk or nonsystematic risk. The risk is unique to a particular security and is associated with such factors such as business of financial, liquidity etc.

Systematic risk is associated to broad macro factors affecting all securities and nonsystematic risk is attributed to factors unique to a particular stock or security.

Market Risk

Market risk is non diversifiable risk. This risk is a systematic risk and it is exposed market conditions including recessions, wars, changes in economy, tax law changes, even consumer preferences.

Reinvestment Risk

In the context of bonds there is YTM (Yield to Maturity) . YTM is promised yield if the bond is held till the maturity. The bonds declare periodic interest the periodic interest should also be reinvested at the same rate as YTM but since the interest rate fluctuates this reinvestment may not get the same rate and hence it is called reinvestment risk.

The other way out is opting for a cumulative option were compounding of interest is done automatically and paid to the investor on maturity. This risk here is the opportunity loss of being able to invest the periodic receipt at higher rate then the current bond rate.

Interest Rate Risk

The variability in a security's return resulting from the changes in the level of interest rates is called interest rate risk. Interest rate generally affects securities inversely. Financial planner while considering fixed income securities should opt for short term debt product if he thinks the price might rise in near future and on the other side it would be good idea to commit for long term funds of interest rates have reached historic peaks and may fall in the future.

Purchasing Power Risk (Inflation risk)

There is a chance that purchasing power of invested money may decline.

example to explain say today you have Rs 100 and you can buy 5kg of Sugar (Rs 20 per kg) , This money is invested at the rate of 8% and it will become Rs 108 after one year. The inflation rate is say 10% and after one year price of sugar is Rs 22 per kg. Now after one year with Rs.108 you can buy only 4.9 kg of sugar. so your purchasing power has decreased. basicaly value of your money has eroded.

Liquidity Risk

Liquidity is being able to sell and realize cash value of an asset with least possible loss of time and money. An investment that can be bought or sold quickly without significant loss is called liquid. Treasury bill has no liquidity risk were as a small cap stock listed on regional stock exchange may have substantial liquidity risk.

Regulation Risk

Investment in PPF is tax free and even the interest earned is tax free. now if the govenrment changes the law then this can have huge effect on the final earning of this investment. Dividends from stocks and mutual funds are tax free in the hands of the investors hence they are investor friendly (This rules can be changed by goverment and are matters of regulation) This investment products are attractive because of tax concessions. this is the risk associated with investments in such products.

Business Risk

The risk of doing bussiness in a particular industry or environment is called business risk example commodities like oil and petrol are highly price sensitive and government policy of subsidising this products sustantially affect the profitability on companies engaged in manufacturing and marketing this products.

International Risk

It includes country risk as well as exchange rate risk.

Exchange rate risk

All global investors faces the prospect of uncertainity in the returns after they convert the foreign gains back to their own currency. it is also called currency risk.

If indian investor invest in abroad in dollars now afterwards he has to convert back to indian rupees and the mean while dollar - rupee exchange rate can have a big impact on the final returns.

Country Risk

It is more of political in nature. People always consider investing in more stable and growing economy. It is more risky to invest in a country were there is no political or economical stability.

Conclusion

Every investor has his own comfort level with risk. The is no "right or wrong" amount of risk, it is very personal in nature. however more younger you are more risk you can take and as you grow old you can take less risk.

Most investor should consider and proper mix of stocks and bonds. The younger you are ratio of stocks should be higher and the more older you are ratio of debt products should be higher.

## Thursday, January 1, 2009

### Top performing equity diversified Mutual Fund in the month of December 2008

1) JM Multi strategy fund - 23.9%

2) JM Contra Fund - 18.0%

3) DBS Chola Oppurtunities - 17.7%

This is just one month performance give for reference this cannot be used to make long term decision for investing.

### Top performing ELSS Mutual Fund for the month of December 2008

1) Can Robeco Equity Tax Saver Fund - 17.2%

2) DBS Chola Tax saver(G) - 14.7%

3) ICICI Pru Tax saver (G) - 14.0%

This rankings are just based on monthly performance this cannot be the basis for investing in this funds.

### Investment planning: Understanding Investment Risk involved in financial planning

The investment products are

1. Fixed income instruments

2. Market oriented investments

There is always a risk/return trade-off. The greater risk taken the greater must be the potential return as reward for committing funds.

**Risk Avoidance**

If we know that eating outside food is not healthy so there is a risk that we may fall ill but if we dont eat outside completely we are avoiding the risk totally. If we dont invest in equities we are completely avoiding the risk of market downturn. but sometimes not investing in equities can be risk because of value of money reducing via inflation.

**Risk Transfer**

This is a better way to handle risk then risk avoidance. an easy example to understand risk transfer is concept of insurance. We have a chance of getting ill and getting hospitalised and exposed to the risk of high medical bills. we can transfer the risk of high medical bills to an health insurance company by taking a health cover for some fee called premium. There are many such examples in investing of risk transfer.

**Influence of time on Risk**

Investors need to think about time period in there investment plans. In case of an individual it may be planning for retirement, or down payment of home purchase or marriage on the cards. The longer the time horizon the more risk can be incorporated into financial planning.

Generally it is well established that equities as an asset class has outperformed all other asset classes and delivered superior returns over longer periods of time. with this statistics available, why wouldnt everybody invest 100 percent in stocks ? The fact is while over a longer term period stocks have outperformed but there have been may short term periods in which they have underperformed and infact had negative returns. Thus if you have long term then your risk is less but if you have short term horizon then your risk is high in holding stocks. Financial planner has to take into account the time horizon while structuring investment portfolios and the general rule is younger the person the longer is the time horizon and hence more exposure to equities.