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Weapon to fight Inflation

admin — Sun, 22 Aug 2010 15:41:27 +0000

Weapon to fight Inflation

We normally play three roles saver, borrower and investor; keep on switching between these three.

Savers: the saved money is used in future for satisfying needs when the earnings get stop and rainy days starts.

Borrowers: spends more than his earnings. He hopes in future he will earn enough to fulfill his primary requirements and also repay his creditors.

Investors: have sparkles in their eyes. He invests in his business and figures out that he has taken up the biggest challenge and has to prove himself.

Let’s see the example to see the relationship between the borrower, saver and investor.
You have Rs 500; you have two options either buy shirt or buy it after six months. It’s true that the same shirt will cost you Rs. 550 after six months. So, what to do? First answer will be to buy a shirt today; thereby you will save money by buying shirt of Rs. 500.

Now, assume that your friend needs that Rs 500 urgently and willing to return Rs 550 after six months. What will you do then? You will give him Rs. 500 and buy the same shirt when he returns money back.

Now, assume that your friend promises to return you Rs. 600 instead of Rs. 550 after six months. You will give him Rs. 500 without a second thought and buy same shirt after six months at Rs. 550 and save Rs. 50.

In the example, borrower is willing to repay higher sum to compensate lender for the loss of his purchasing power. Hence, from this we learnt that:

• Savings does not make any sense if it does not compensate inflation.
• You need to be compensated at least for the loss of your purchasing power to boost you saving instinct. Here you compensate for inflation.

Now, let’s have a look on simple arithmetic:

In first assumption, you lend Rs. 500 to your friend and he returns Rs. 550 after six months; thereby he gives you Rs. 50 extra when he returns your money. While in second assumption, he returns Rs. 100 extra. The money you lent him is “principle” which Rs. 500. And the extra is the “interest”. Interest paid on the principal is the percentage of the principal. In first assumption, interest rate is Rs. 10% and in second it is 20%.

Hence Interest Rate is the aid to the saver by compensating the damages caused by inflation. While borrower has to think twice before borrowing as he has to pay the cost.

Now, what is the relation of Investor with the borrower in inflation? Investor uses his money to invest in his business. In above example, we have seen that investing is uncertain as many things may go wrong. Hence investor will go ahead expecting rewards offset the risk. Hence he will opt to lend his money to borrower to make as much as profit out of interest.

Conclusion:

Borrower rush to borrow more to spend now; Investor finds higher profit from its business. Saver is at the receiving end and insists on higher Interest Rate reestablishing the balance. Borrower and Investor have a distinct advantage when Inflation rises and interest swings the balance of power back in Saver’s favor.

What are mutual funds?

admin — Tue, 17 Aug 2010 13:05:50 +0000

Mutual funds are collection of money came from investors with an intention to invest into the industries having better prospectus. It is a pool of money invested in stocks, bonds, securities, infrastructure, telecommunication, energy, short-term money-market instruments and so on.

In eighties, process of economic liberalization brought dramatic changes in Indian industry, corporate sectors and the capital market. With this there was a demand for new financial services such as issue management, corporate counseling, capital restructuring and loan syndication. In eighties, UTI was holding the monopoly in mutual funds market but in nineties several public and private organizations took permission to setup mutual funds.

There are large number of investors who does not have enough time, knowledge, experience and ability to take financial risk to play a monetary game in stock exchange and earn income from the same. They do not have capability to manage their money. Mutual funds came into the market and penetrated so quickly to satisfy the investment need of these investors. Investors can seek a guidance of portfolio manager to minimize financial risk and ensuring safety and steady returns on investment. Portfolio managers are the professional fund managers who work on behalf of Asset management Company (AMC), guide you and manage your investments. AMC gives a management fees to these managers. Investors make money by earning dividends or on the investments and by selling securities that are appreciated in value.

There are two types of mutual funds: Open-Ended and Close-Ended funds. Investors can buy or sell open ended mutual funds at any time for the market price i.e. it does not have any locking period; they does not have a set of numbers of shares, they are always open to accept investment from investors. Normally, fund managers are the major players in open-ended mutual funds. Whereas Close-end mutual funds has a fixed number of shares and the value of shares fluctuates with the market. The investors can go for close-end mutual fund at the time of launching or buy from the current investors. Mutual fund is a piece of investment portfolio, investors’ gains and losses in share and expenses in amount of proportion of their investment.

Financial Planning- The earlier you start the better for you.

admin — Sun, 13 Jul 2008 15:31:02 +0000

What us financial planning?
Financial planning consists of a complete evaluation of your financial profile and your financial aspirations from a long term point of view. Financial planning is not simply putting your money into some investment avenues and then sitting back and relaxing. It involves an understanding of your current financial position, an objective assessment of your financial goals- short, medium and long term and finally devising a strategy to help you achieve your goals. If also helps you in bridging the gaps between your aspirations and your position and hence is a good tool for all those who want to have peace of mind at least on this account. Financial planning in a sense means creating your financial profile based on your current and expected earnings and expenditure. This will help you save and build long term assets and investments for meeting your investment objectives.

Let us have a look at why we need to go for financial planning and why it is important for us.

Meeting the inflation blues
The rising cost of living needs higher cash inflows. It also means that you will need to save more to maintain or improve your current living standards in future. Inflation eats away whatever paltry returns you make out of traditional bank deposits and small savings. You must devise effective and high paying strategies for better yields on your savings to avoid that.
Growing aspirations
The growing aspirations of people require higher outlays. Be it your first car or house, your dream foreign holiday, education for your children, their wedding expenses, an early retirement or meeting other needs, it requires money and a lot if it. As aspirations grow, so does the need to be careful in your financial position and status.
Longer life span
Improved health standards have meant longer life span, which requires larger investments and post retirement income to sustain and maintain your standards. Needless to say that you need to work and rework your strategies to take you through at all times. you need to plan your finances and constantly review it to understand where you stand. It is not a one off task. It is rather a continuum. Make sure that you have a healthy balance when you need it most. As the saying goes—you can be without money when you are young, but you can certainly not grow older without it.
Low interest rate regime
Gone are the days of double digit interest income when your bank saving account and PPF and NSC used to pay 12% or more after tax returns. The measly returns offered by most of the bank deposit and small saving instruments require a fresh outlook, a change in strategy and rework your portfolio. You can no longer afford to be complacent or laid back. You can no be a passive investor. You need to be an active financial planner. This is not a choice but a requirement. Nothing can be left to chance. It requires strategizing and implementing your decisions.
Tax Liability
Effective tax liability is increasing due to introduction of new taxes such as fringe benefit tax, education cess and so on. You also need to do financial planning so that you can take tax neutral decision as far as possible and reduce your liability wherever possible. This will also lead to compulsory saving and risk free return, which should also form part of your total investment portfolio.