How to invest in gold and key price drivers

Gold prices surged to a record high above $1,070 an ounce as dollar weakness sparked buying of the precious metal as an alternative asset.

Following are key facts about the market and different ways to invest in the precious metal.

How do I invest?

SPOT MARKET Large buyers and institutional investors generally buy the metal from big banks.

London is the hub of the global spot gold market, with some $18 billion in trades passing through London's clearing system each day. To avoid cost and security risks, bullion is not usually physically moved and deals are cleared through paper transfers.

Other significant markets for physical gold are India, China, the Middle East, Singapore, Turkey, Italy and the United States.

FUTURES MARKETS: Investors can also enter the market via futures exchanges, where people trade in contracts to buy or sell a particular commodity at a fixed price on a certain future date.

The COMEX division of the New York Mercantile Exchange is the world's largest gold futures market in terms of trading volume. The Tokyo Commodity exchange, popularly known as TOCOM, is the most important futures market in Asia.

China launched its first gold futures contract on January 9, 2008. Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.

Exchange-Traded Funds: The wider media coverage of high gold prices has also attracted investments into exchange-traded funds (ETFs), which issue securities backed by physical metal and allow people to gain exposure to the underlying gold prices without taking delivery of the metal itself.

Gold held in New York's SPDR Gold Trust, the world's largest gold-backed ETF, rose to a record high of 1,134.03 tonnes in June. The ETF's holdings are equivalent to nearly half global annual mine supply, and are worth more than $37 billion at today's prices.

Other gold ETFs include iShares COMEX Gold Trust, ETF Securities' Gold Bullion Securities and ETFS Physical Gold, and Zurich Cantonal Bank's Physical Gold.

BARS AND COINS: Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet. They pay a small premium for investment products, of between 5-20 percent above spot price depending on the size of the product and the weight of demand.

Key price drivers

INVESTORS: Rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion's rally to historic highs. Gold's strong performance in recent years has attracted more players and increased inflows of money into the overall market.

US DOLLAR: The currency market plays a major role in setting the direction of gold, with bullion prices moving in the opposite direction to the US dollar.

Gold is a popular hedge against currency weakness. A weak US currency also makes dollar-priced gold cheaper for holders of other currencies and vice versa.

OIL PRICES: Gold has historicaly had a strong correlation with crude oil prices, as the metal can be used as a hedge against oil-led inflation. Strength in crude prices also boosts interest in commodities as an asset class.

POLITICAL TENSIONS: The precious metal is widely considered a "safe-haven", bought in a flight to quality during uncertain times. Major geo-political events including bomb blasts, terror attacks and assassinations can induce price rises. Financial market shocks, which cause other asset prices to drop sharply, can have a similar effect.

CENTRAL BANK GOLD RESERVES: Central banks hold gold as part of their reserves. Buying or selling of the metal by the banks can influence prices.

On Aug. 7, a group of 19 European central banks agreed to renew a pact to limit gold sales, originally signed in 1999 and renewed for a further five years in 2004. Annual sales under the pact are limited to 400 tonnes, down from 500 tonnes in the second agreement, which expired in late September.

Sales under the agreement were low in the later years of the second pact, however. Gold sales under the second CBGA totalled only 1,883 tonnes, down from 2,000 tonnes under the first agreement.

HEDGING: Several years ago when gold prices were languishing around $300 an ounce, gold producers sold a part of their expected output with a promise to deliver the metal at a future date.

But when prices started rising, they suffered losses and there was a move to buyback their hedging positions to fully gain from higher market prices -- a practice known as de-hedging.

Significant producer de-hedging can boost market sentiment and support gold prices. However, the rate of de-hedging has slowed markedly in recent years as the outstanding global hedgebook shrank.

SUPPLY/DEMAND: Supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stocks, now estimated at around 158,000 tonnes -- more than 60 times annual mine production.

Gold is not consumed like other commodities. Peak buying seasons in major consuming countries such as India and China exert some influence on the market, but others factors such as the dollar and oil prices carry more weight.

Source:economictimes.com

Plan for a steady source of income

The economy is showing signs of a turn around and the worst may be behind us, but it is not too distant in the past that we heard of pay cuts and pink slips every other day. The loss of active income source or reduction in the monthly take-home was coupled with burgeoning costs of daily necessities .

It is in such tough times that one realises the importance of having a passive source of regular income. Gone are the days when only retirees would need a steady source of passive income. Individuals today are increasingly looking for options to supplement their active income by passive incomes such as rent, interest and dividend income.

Debt investments or fixed income instruments are the key sources of generating a regular income. Coupled with the fact that debt offers diversification and safety of capital, it proves to be an excellent case for investments . There are also a couple of other options from the mutual funds stable which can provide a regular source of income.

Here are some of the options available for a steady passive income:

Post office monthly income plan (POMIS)

The post office monthly income plan (POMIS) offers a fixed monthly return in the form of interest and you can deposit a maximum of Rs 4.5 lakhs and Rs 9 lakhs for single and joint accounts respectively.

The POMIS earns interest at eight percent per annum and though there are no tax benefits and interest is taxable , no tax is deducted at source on the interest.

The tenure is fixed for six years and there is a five percent payout in the form of bonus on maturity.

The POMIS can act as a safe source of additional monthly cash flow which can be either used to meet expenses or ploughed back into investments, depending on the situation.

Bank fixed deposit

Instead of opting for a cumulative deposit, you can opt for the monthly or quarterly interest payment facility .

Bank deposits are extremely low risk and offer good flexibility in terms of tenure, but there are no tax benefits (except five year deposits that qualify under Section 80C).

The interest rates are governed by the ongoing interest rates in the economy.

Corporate fixed deposit

Companies offer fixed deposits which usually provide a higher rate than bank fixed deposits, the reason being that they are unsecured and hence the risk is higher.

There are different options for payment of interest (monthly, quarterly etc) which can provide a regular source of income.

It is prudent to invest only in deposits of reputed companies with a superior credit rating.

Debt mutual funds

There are a wide variety of debt mutual funds such as liquid funds, short-term debt funds, income funds, and gilt funds.

These are distinguished by type, credit quality, nature of securities they invest in and length of maturity of the securities. These funds come with a dividend payout option which can be weekly, monthly or quarterly.

A portion of the total debt in your overall asset allocation can be invested in these funds to serve the dual purpose of allocation to debt as well as earning regular income.

However, you should be diligent to select the right fund based on the credit quality, average maturity of the securities and interest rate environment .

Monthly income plans of mutual funds

The monthly income plans (MIPs) usually invest 15-30 percent of the corpus in equity and the remaining in debt.

These plans have an option of monthly or quarterly dividend payment, though not assured.

With the markets gaining some momentum, these plans are back on track with respect to dividend payments.

Systematic withdrawal plans of mutual funds

A lump sum investment in a fund entitles you to withdraw regular amounts monthly or quarterly.

The returns are not assured and there may a risk of withdrawing capital itself if withdrawals exceed the returns. But it is tax-efficient as the returns are treated as capital gains.

There are other incomegenerating options such as Senior Citizens' Savings Scheme and annuities from insurance companies but these are more relevant after retirement.

While one must opt for growth of capital in the early stages of life, building up a stream of income which is not dependant on job, profession or business is equally important to provide for a rainy day.

Source:economictimes.com

The Diversification Hot Seat

The machinery of a bull run has started working again. While the pundits are talking about the extent of the recovery and the monsoon recovery and the flows and the whatnot, the punter can feel it in his bones. Every day, the brokers' boys (relationship managers, in modern language) call armed with the results of their 'research', and almost miraculously, they are right. They say a stock will move and it does move. It's almost like the good old days of 2006 and 2007 once more.

However, there's always an however. Last time around, when things started to go wrong, first in mid-2007 and then later in January, 2008, these momentum stocks were the ones that caused the deepest grief to investors. The reason is very simple. Selecting investments in this fashion invariably results in a portfolio that's composed largely of mid- and small-cap momentum stocks. These are the only type of stocks that can produce large movements quickly enough to satisfy the expectations of gains that come with the trading mindset. Not just that, such portfolios are typically also concentrated in whatever is the hot sector of the moment. Last year, more traders' were trapped into huge losses in the real estate counters than any other.

Now that we're seeing the beginning of another heady phase, there is a danger that along with the hot gains, we'll also get the same set of problems. The solution is also simple - while it's great to make money in the hot stocks, the basics of portfolio construction cannot be forgotten. And it goes without saying that the most important principle of portfolio construction is that of diversification. Diversification across companies, across sectors and across capitalisation. While an individual investor should not be expected to get into the portfolio construction theories, some basic rules of thumb should be followed.

Here are my suggested thumb rules to ensure that at least a minimum discipline is maintained:

* Own at least 10 stocks. The largest holding should be at most 15-20 per cent and the smallest no less than 5 per cent of the total;

* Own stocks in at least 3 distinct sectors, with no single sector taking up more than half of your portfolio;

* Do not have exposure only to smaller companies. Make sure that at least around half of your equity exposure is to BSE 100 companies. Alternatively, you could keep about that much of your equity exposure in a good diversified equity mutual fund that is focused on large-cap stocks.

Make sure you maintain the above rules dynamically. When changes in stock prices can take you beyond these limits, you must rebalance your portfolio to come back within the limits or it's of no use.

Psychologically, it won't be easy to stick to these rules. Without a doubt, following these rules will reduce your gains during the hot periods of the markets, the same as staying within the speed limit takes the fun out of driving a fast car on an open road. However, the purpose is the same - when there's a crash, there will be a lot less damage.

When there's trouble in the markets, following these rules will ensure that you lose less and your overall gains are actually higher.

Source: valueresearchonline.com

How to choose the right insurance policy

With the increasingly uncertain times, what with terrorist attacks and tumultuous financial markets, getting an insurance cover for you and your family has become imperative. However, many of us do not take decisions because of it being such a big ball of wax.

Choosing the right kind of insurance cover not only determines the care that we receive should our health take a wrong turn, but it can be the wild card in your financial plan.

There are many benefits of an insurance cover; however, topping the list of benefits is the financial support that a family gets in the event of the untimely death of the income provider. As getting the insurance cover is an important aspect of a sound financial future, choosing the right insurance cover is equally important.

First and foremost, choosing an insurance policy must be based on your current and projected income or simply put your current and projected ability to pay the insurance premiums, your medical state, your age, future financial plans, etc.

Secondly, you also need to look at:

Cost-Benefit Ratio

The cost of the insurance cover depends upon many reasons, some mentioned above and other factors depending on what is covered in the cover or its riders. Thus, you have to keep a close eye on the cost of buying insurance and ensure that it justifies the benefits covered under the policy. Simply put, a right balance must be struck between the cost and benefits available.

Cover

You need to ensure that the insurance covers all your dependants and that it also covers the majority of health problems.

Thirdly, the promises made by different insurance companies are all fine; however, it depends on you whether you need a pure insurance cover or you need an insurance cover coupled with an investment opportunity. The four major kinds of insurances that most people opt from are:

Term Insurance: Term life insurance or term assurance is life insurance which provides coverage for a limited period of time.

Endowment Policy: An endowment policy is a life insurance contract designed to pay a lump sum after a specified term (on its 'maturity') or on earlier death.

ULIPs: Unit Linked Insurance Plan (ULIP) provides for life insurance where the policy value at any time varies according to the value of the underlying assets at the time.

Money-back Policy: Unlike ordinary endowment insurance plans where the survival benefits are payable only at the end of the endowment period, money back policies provide for periodic payments of partial survival benefits during the term of the policy.

When comparing between these plans it is important that you keep in mind the factors that were talked about in the first point. Let's take a look at an example:

Arun is a 25 year old businessman who wishes to take an insurance cover for Rs. 20 lakh for a period of 20 years. There are two options he can choose from.

Option 1 - He can opt for an endowment/money-back policy and pay a premium of Rs 90,000 annually. If he survives through the policy term, he shall be eligible to receive the entire sum assured and vested bonuses, if the same are declared by the insurance company.

Option 2 - He pays Rs 4,000 annually and enjoys the risk cover of Rs 20 lakh. Being a term insurance cover, he is not eligible to gain any survival benefit from the insurance company and the insurance premium paid can thus be treated as the cost of covering his life for 20 years.

Whereas under Option 1, he has earned an annualized return of about 6%; Option 2 gives him about 9% returns during the period. Therefore, it is important for Arun to decide what he wants and opt for a plan accordingly.

It's important to correctly identify your dependants' financial needs to establish just how much life insurance cover to arrange. A general rule is to choose a policy providing at least ten times your salary, but more may be appropriate, with the amount varying depending on how you intend it to be used. Basically you decide how much you want your dependants to receive in the event of your death, and your premiums will be determined accordingly.

Hence, make sure you keep all these factors in mind, compare different plans and choose your cover accordingly.

Courtesy: bankbazaar.com

Options in paying life insurance premiums

Who can predict where your life will take you, or how it will end?

While the question might seem somewhat morbid, you do need to consider the practical aspect of the welfare of your near and dear ones, and ensure their wellbeing, at least monetarily, in the event of your retirement, and eventually, your death.

If you've settled on the type of insurance to buy, then paying out the premium on your insurance policy needs to be factored in to your planning.

There are a number of ways in which you can make this payment.

While cash seems the easiest and most direct way to pay your premium, be aware that there are legal issues surrounding the amount of cash that your insurance agent is actually authorised to handle.

The limit for cash acceptance is Rs 50,000, to control fraudulent activities such as money laundering, so if your policy is for Rs 5 lakh and the yearly payment is Rs 60,000 over 5 years, then seek alternative means to cover the premium, either by cheque or draft.

This might lead you to review the type of policy you choose. Either choose a policy within the cash investment limit of Rs 50,000, or opt for different policies from different insurance companies so the total limit in either of the companies does not exceed Rs 50,000.

The best way to get adequate cover for your family is via a term life-without return of premiums type of policy. This is a pure risk cover without any investment option.

Review the level of cover each year. Then apply a simple formula to find out if you need more insurance or not.

If your investments are equal to or greater than the value of insurance required, you do not need to continue your insurance cover.

In single premium policies, the policyholder pays the premium just once and enjoys its benefits throughout the policy term. Earlier, single premium policies were more of an investment product, offering large returns on an assured basis.

Often there was little in terms of insurance coverage. But because that goes against a purpose of an insurance policy, which is primarily to offer coverage, conditions have evolved for these policies over a period of time. These conditions make single premium policies beneficial only to some people and not all.

A single-premium policy requires a much higher payment compared with products that require paying smaller premiums spread across several years.

But market studies show that investors are shying away from buying life cover that requires long-term financial commitment, opting instead for those that require paying premium just once.

The other ways in which you can pay your premium is on a Yearly, Half yearly, Quarterly or Monthly basis, depending on the plan that you opt for.

Remember that the type and amount of premium you pay is a direct result of the type of policy you choose, so choose very carefully. For example, with term life insurance, the premium on such type of policies is comparatively quite low when compared with other types of life insurance policies, mainly due to the fact that these policies do not carry a cash value.

With whole life policies, the premiums are usually made annually, and are fixed and known, giving you enough rope to accumulate the necessary amount to pay towards the policy.

As important as it is to buy life insurance, it is even more important to pay your premiums on time.

Courtesy: BankBazaar.com

Read the fact sheet before opting for mutual fund

The mutual fund industry thrives on transparency and disclosures. Most fund houses come out with a fund fact sheet for each scheme every month. They provide information about the investment particulars of the corpus (company and sector wise), credit ratings, market value of investments, NAVs, returns, repurchase and sale price of the schemes.

The effort is to help an existing and potential investor take an informed decision to invest, stay invested or redeem out of the fund. It is an important piece of document as it communicates the fund house’s philosophy and past performance. It is also used by distributors as a marketing tool.

Here are some important points that an investor should look at in a fund’s fact sheet:

INVESTMENT OBJECTIVE

It explains what the fund intends to do. Each category of funds is backed by an investment philosophy, which is pre-defined in the objectives of the fund. An investor can align his/her investment needs with the funds objective and invest accordingly.

Based on the investment objectives, various schemes can be broadly classified as follows:

Equity/growth schemes: These aim to provide capital appreciation over a medium to long term. In these schemes a majority of the portfolio is invested into equities.

Income/debt schemes: These aim to provide regular and steady income by investing into fixed-income instruments such as corporate and government bonds, debentures and other debt securities.

Balanced schemes: These aim to provide both growth and income. They invest in equities and fixed income securities, in a proportion which is pre-defined in the investment objective of the scheme.

Liquid funds/schemes: These aim to provide capital preservation and easy liquidity. They invest in relatively safer instruments such as inter-bank call money, T-bills, certificate of deposits and commercial papers.

PORTFOLIO & PERFORMANCE

The equity/balanced fund’s portfolio diversification can be explained under two parts:

Top 10 stocks: The percentage of the top 10 holdings accounts for of the net assets of a fund can reveal whether the fund is well-diversified or is a concentrated one. A concentrated portfolio has the potential to generate higher returns but at the same time is more volatile as compared to others. The consistency in the top stock holdings can also reveal a lot about the fund’s management style.

Sector allocation: A diversified equity fund is expected to invest across various sectors. A concentrated portfolio across a few sectors enhances the fund’s risk profile and makes it prone to volatility. Funds at times tend to have higher allocations towards a single sector.

While the same could be indicative of the fund manager’s confidence in stocks from a given sector, it also makes the fund an over-leveraged one. Income/debt schemes and liquid schemes normally invest in debt instruments of government, banks, financial institutions and corporates carrying different ratings and maturity profiles.

The portfolio is constructed depending on the risk return profile as well as the liquidity needs of the portfolio in compliance with the scheme objective.

The fact sheet contains returns of funds vis-ीं-vis the respective benchmark across various time frames. The hallmark of a good fund is in its ability to deliver superior performance year after year.

The objective of any active investment strategy is to outperform the benchmark, and this extra return is what is called as the fund managerङs alpha. It is therefore important to identify funds with a track record of beating the benchmark. Thus, an investor should ensure consistency in returns over different periods of time before investing.

EXPENSE RATIO

AMCs usually disclose the expense ratios and load structure in the fact sheets. The load and the expense ratios affect the fund’s performance. Higher expenses charged to a scheme can alter the scheme’s performance. The impact is more in case of debt funds as here the payback is less than for equity funds.

However, investors should understand that although loads and expense ratios have a direct impact on the returns, they cannot be used as the sole criterion for evaluating a fund. The fund’s investment style and performance are far key parameters than load and expenses while evaluating a fund.

PERFORMANCE EVALUATION PERIOD

This is one of the key aspects of a fund’s performance evaluation. Each type of a scheme has different investment objective and time horizon of investment for risk-adjusted return expectation.

A liquid fund’s performance should be evaluated over a short period (say for 3-6 months) and an income fund’s performance should be evaluated over 6-18 months whereas an equity/balanced fund should be evaluated over medium to long term (2-5 years). Such an evaluation is necessary to get an appropriate perspective of the fund’s performance profile and help investor to take right decision.

Source: economictimes.com

Mistakes you must avoid while investing

Investing is like reality gameshows such as Kaun Banega Crorepati and Dus Ka Dam. You continue answering right and the winning amount keeps growing but make a single mistake and you lose substantially.

While it might not be possible to be always right while investing in the stock market, one must avoid making common mistakes. SundayET lists some mistakes that one can and must avoid while investing.

There’s a common belief that a share with lower price is cheaper and can multiply faster. However, one forgets that the price in rupee terms is not the right criteria to decide which stock is cheaper.

According to Kishor P Ostwal, CMD at CNI Research, this is the psychology of small investors and also one of the reasons why they may not be able to buy stocks in lots of a company whose share price is high. However, one should look at price to earning (PE) ratio and other fundamental factors to judge.It is usually seen that companies with relatively low share price are less traded and hence less liquid. Even the BSE 100 companies show a similar trend.

For instance, 50 companies with lower share price had a trading volume of Rs 1,468 cr, whereas, the other 50 companies with higher share price enjoyed a trading volume of Rs 1,849 cr on September 2. In fact, a similar trend has been observed in the last one month. Hence, one may face difficulties in selling very low priced stocks.

Many investors also get attracted towards stocks that have been witnessing a price rise, thinking that the rally will continue. However, by following this strategy investors end up buying shares at a very high price or end up with losses.

Also, one must understand that the same stocks and sectors will not continue heading north. Under any given economic condition, only a few sectors and stock do well. As soon as the economic scenario changes, new sectors and stocks shine out.

For instance, during 2007, metals, capital goods, oil and gas and realty outperformed the Sensex, whereas, these underperformed the Sensex during 2008. While, BSE Realty and BSE Metal lost as much as 83% and 74% in 2008, they appreciated by 70% and 119% in 2007, respectively.

Blind faith in a particular person is a sure shot way to lose money in the stock market. Several brokers and financial planners say a large set of investors tend to believe strongly in their advisers and follow them religiously.

Also, there is a belief among a few investors that if a particular investment bank comes out with an initial public offering the market price of that stock will never come down below the issue price. All these are misconceptions. One should not believe anyone blindly when it comes to investing your hardearned money.

Stock tips are enchanting for investors. Relationship managers (RM) send stock tips on a daily basis to ensure that their trading targets are achieved. Many of these tips don’t even come from the research desk that brokers have.

Investors willing to make serious gains should avoid these tips as these are in more favour of RM than investors. One must do a thorough research before investing in any stock rather than just seeing the SMS sent by his/her RM.

Also, it is seen that generally people go for a second opinion before investing. A broker who did not wish to be identified said, “Many of our clients are very intelligent and have a good understanding of the stock market. But even after doing a detailed analysis, they always ask their RM that ‘chalega na’ (will it go up) and the answer is always yes.”

“Taking a second opinion is not a bad idea but one must seek a second advice from the right person,” Ashish Kapur, CEO of Invest Shoppe India, said.

Never get carried away by vague terms such as long-term and shortterm. Ask an investment adviser and he will advise you investing for longterm. The words long-term or shortterm do not say anything. One must be very particular about the investment horizon. According to Kapur, rather than following such terms one should have return estimation in mind and strictly follow that.

Since, prices may not continue moving up, one should not be greedy and the moment a stock touches the targeted level one should exit. Similarly, one must know how much loss one can afford to absorb.

Once prices fall below that level one should get out of it rather than turning it into long-term investments to avoid booking the losses. If the investment objective is very important like children’s marriage or education, it is better to invest in other financial instruments.

Many small investor believe that shares with lower price are cheaper and can multiply faster.

Look at PE ratio to decide which stock is cheaper. Cos with relatively low share price are less traded.

Don’t get attracted towards any stock by just seeing its rising price. Don’t have blind faith in a particular person. Stock tips are enchanting but may not be in investors’ interest.

Seek second opinion from the right person. Rather than following a long-term or shortterm strategy, have your own return estimation.

Know how much loss you can afford & sell if prices fall below that target.

Source:economictimes.com

Fix your income with securities

If your heart beats faster with the swinging prices of stocks and equity indices. If you prefer earning a fixed return rather than following the ‘high-risk-high-return’ policy, it is advisable you park your money in fixed income securities.While the list of fixed income securities is long, SundayET brings a ready reckoner on non-convertible debenture (NCD), a fixed income security.NCDs are debentures issued by a company which do not get converted into equity shares. On maturity investors get the principle and the interest amount either periodically or in the end depending on the terms and condition mentioned. The year 2009 has seen several corporates issuing NCDs as these provide fixed returns to investors.

Tata Capital raised around Rs 500 cr in February through NCDs. Shriram Transport Finance and Tata Motors also raised funds by issuing NCDs. HDFC recently raised around Rs 4,000 cr through NCDs.Recently, L&T Finance has issued its NCDs to raise around Rs 1,000 cr. The issue is going to close on September 4. According to Veer Sardesai, MD of Sardesai Finance, the tax payable under the cumulative option is liable to only capital gains tax at 10% on maturity. This would give it a post tax yield of almost 9% per annum.Before investing in an NCD, one should look at several things such as credit ratings, credit-worthiness of the company and sector that the issuer belongs to. According to Zankhana Shah, head of Moneycare Financial Planning, rating of the NCD is important. The higher the rating better is the quality of the paper.

Many experts believe that parentage is very important. Rajiv Deep Bajaj, VC & MD of Bajaj Capital, the primary thing to look at is the company issuing the NCDs and the business group it belongs to. Also, one should check whether the NCD is secured or unsecured. Secured NCDs should be preferred for investment.Even in case of secured NCDs, the assets on which the charge has been created should be of good quality. Fixed assets such as land and building, plant and machinery are normally considered to be of good quality whereas inventory and receivables come lower down the order.The maturity period of NCDs is very important. The term of these securities should match your investment horizon so that the objective can be achieved. Experts emphasise on diversification. According to Shah, one should go for diversification within the NCDs. Not all NCDs should be from same sector and of same maturity plans.

According to Dhruv Agarwala, co-founder of iTrust Financial Advisors, there are many companies that have lined up NCD issues. Each issue needs to be judged on its own merits. One should carefully analyse the company’s strengths and weaknesses, financial strength and debt servicing capability.Some metrics to look at would be debt equity ratio and interest coverage ratio that give an indication of the company’s ability to service its debt. Other things to look at would be the yield at maturity, the maturity period, frequency of interest payments and ability to liquidate the investment to ensure that one’s specific requirements in terms of return expectations, time horizon, need for regular income and liquidity are met.A close comparison can be drawn with different kind of fixed deposits (FDs) to find out the advantages and disadvantages of NCDs over them. According to Sardesai, the main difference between a company FD and an NCD is that a company FD is not secured.

In an NCD apart from the name there also some physical security provided, which makes it a bit less risky. According to Shah, within the fixed income securities bank FDs are always referred as these give higher safety. According to Kartik Varma, co-founder of iTrust Financial Advisors, FDs offer more flexibility in terms of tenure.You can have a tenure of as low as 15 days and up to 5 years. NCDs tend to have longer time horizons and may go up to 10 years. According to experts, investors with fair knowledge of debt instruments should go for NCDs.According to Shah, many people even don’t know what is an NCD. Also, very conservative investors will not go for NCDs as they prefer bank FDs or other known debt instruments.

source:economictimes.com

The Perfect Investor

Being a skilled and successful investor in stocks requires a combination of different skills. Unfortunately, the different sets of skills don’t seem to often occur in combination in the same person, and that’s especially problematic nowadays. Broadly, successful stock investors need to be competent in several different activities which are layered on top of one another.

At the first level they need to be able to tell good companies from the non-good. Here, good is defined as those that will make increasingly more money with a constant or higher efficiency in capital use. This tells them which companies can be invested in. At level two, they need to identify whether the good companies are available at a low enough price to make gains a likely occurrence. This tells them when and at what price they should invest in these companies. At level three, they need to combine these stocks into a portfolio. Here, they need to understand how various stocks counterbalance each other’s strengths and weaknesses and how different combinations make sense for disparate kinds of investors and dissimilar investment goals.
At level four, the nature of the game changes fundamentally. Investors need to predict how the ebb and flow of broader economic forces affects their portfolio. Just as an example, you could have a great selection of infotech (IT) services stocks which get knocked over backwards when the dollar gets cheap at a fast rate. And at level five, investments get impacted by non-economic forces: elections, epidemics, terrorists — some foreseeable and others not — all belong at this level.

The problem with almost all investors — individual and professional — is that there’s a sharp fracture between level three and four. Those who are good at levels one, two and three can rarely figure out what’s going on at the higher levels. In recent times, this has become an even greater problem than it used to be. The oil price shock, the global credit crisis, the deep recession in the western economies, the surprises in Indian politics, and the United Progressive Alliance’s (UPA) leftward lurch in the budget have all been events entirely outside the competence of even the best stock pickers to figure out.

Some big institutional investors have in-house economists who do this part of the job, but I don’t know with what degree of success. The result is that even investors and investment managers, who have got good portfolios, keep swinging between holding their stocks and taking shelter in cash in order to limit their losses when they think the markets will head broadly downwards. But markets turn up when least expected and the managers, in their quest to avoid losses, end up avoiding gains.

This is a losing game. You invest in equity not to lose less, but to earn more. No matter what type of investor you are, it’s better to make sure that you are holding stocks that are worth holding and not dabble in guessing the unguessable.

source:valueresearchonline.com

IPO: Offer price is not the only deciding factor

IT is said that Initial Public Offerings, popularly known as IPOs, can be a safe stepping stone for the first timers, who are entering the equity market. IPOs are supposed to be cheap and provide good upside potential to investors if they hang around long enough.

For first time investors or those lacking enough experience, the trickiest part is to assess the fair value of the shares on offer in an IPO. This is important as it determines whether you should subscribe to the offer or instead bet your money on a related company already listed on the stock exchanges. But it is easier said than done. Most often prospective investors either get seduced or intimidated by the offer price.

This should not happen in an ideal world. After all an offer price or market price of a share is nothing but a company’s expected or total market value divided by the number of shares. This means that two companies with similar market value may trade at different prices simply due to difference in the number of shares available for trading. But most of the new investors fail to determine this link between the market value and the share price.

This was clearly visible in the recent IPOs of the power sector companies. The investors have been baffled by the sheer variance in offer price of IPOs and the market price of their listed peers. For instance Adani Power was offered to the investors at Rs 100 per share. In comparison, Tata Power, which in the same line of business (i.e in thermal power) and of similar size (in terms of capacity), is right now trading in the range of Rs 1,200 per share.
On the other side of the spectrum is NHPC, which is being offered to the investors in the price band of Rs 30-36 per share. In comparison, another public sector power utility NTPC is trading at around Rs 210 per share. To a trained eye, there’s nothing unusual in the variation in the market price of various companies in a sector.

But for a retail investor, market price is the most visible and appealing information about the real worth of a company or business that is taken easily without much pondering.

Most retail investors and especially the first time investors in IPOs associate the offer price with the relative cheapness of the stock. To them, NHPC is so much cheaper than NTPC, while Adani Power IPO is a steal compared to Tata Power. They don’t care about the fact that at its lower price band NHPC is asking for around 30 times its earning per share (EPS) in FY09 while NTPC is available at a P/E multiple of just 20.

This brings us to the crux of the issue. How should retail investors with limited resources and experience assess the fair value of an IPO and compare it to related companies already listed on the bourses?

The starting point is to get hold of the company’s red herring prospectus (RHP), which contains all the relevant financial and operational details of the company . RHP as it’s called is freely available on SEBI’s website or the company’s portal.

The first item to look for in the RHP is the face value of the share. Next thing the investor should look for is the company’s capital structure represented by subscribed paid-up capital divided into certain number of shares. These two variables will help us to calculate the total number of shares that will be available for trade. This is important, as it is one of the key determinants of its offer price.

The other factor is earning per share, i.e., total profit divided by the total number of shares. Just to illustrate consider Adani Power IPO. Post IPO, Adani Power’s paid-up equity capital is around Rs 2,180 crore divided into 218 crore shares with face value of Rs 10 each. Now compare it to Tata Power’s capital structure.

At the end of June ’09 quarter, Tata Power’s paid-up equity capital is around Rs 222 crore represented by 22.2 crore equity shares with face value of Rs 10 each. Simply put, Adani Power has nearly ten times more equity shares than Tata Power. This means that for the same market value, Adani Power’s share price will be one-tenth that of Tata Power’s share price.

For instance at Rs 100 per share, Adani Power’s total market capitalisation will be Rs 21,800 crore (Rs 100 multiplied by 218 crore shares). If Tata Power gets the same market capitalisation, its share price would work out to be Rs 982 (Rs 21,800 crore divided by 22.2 crore shares).

But what determines company’s market valuation or market capitalisation? At the most simplest level, market cap is directly depended on company’s earnings or profitability in the preceding 12 months. Higher the net profit, higher will be its market value. Total net profit divided by the number of shares gives us earning per share. Now consider the case of NHPC and compare it to National Thermal Power Corporation (NTPC).

During the year ended March 2009, NHPC earned a net profit of Rs 1244 crore, which translates into a earning per share of Rs 1.01 per share (Rs 1244/1230). Post IPO NHPC paid-up equity capital will rise to Rs 12,300 crore represented by 1,230 crore shares with face value of Rs 10 each. In comparison, NTPC earned a net profit of Rs 8,201 crore during FY09, which works out to be Rs 9.95 per share.

Now divide NHPC offer price with its EPS and its gives you price to earning multiple, commonly known as P/E multiple. In case of NHPC, it works out to be 30 at the lower price band and 36 at the upper price band. In contrast NTPC is trading at around 21 times its EPS in FY09. Obviously, latter is cheaper than the former.

If we set aside other complex issues involved in valuations such as quality of management, earnings quality and growth prospects, a company with lower P/E is preferable. And in the end, it is always preferable to invest in a company whose business is up & running, rather than a company, which promises to use the proceeds to set-up a business that will generate profits and cash flows in future. As they say, there is many a slip between the cup and the lip!

Source:economictimes.com

8 common mistakes equity investors usually make

Equity investment has always been a risky proposition. Investors, however, lose money in stock markets more because of their own mistakes, rather than any market turmoil and other such things.

It has generally been observed, for instance, that many investors lose money in stock markets due to their inability to control fear and greed.

They also keep looking for tips and often resort to speculation, which is not in any way a good investment strategy.

Here we take a look at 8 common mistakes which stock market investors usually make in a bid to maximize their gains:

1. Timing The Market
   
   One thing that the world’s greatest investor Warren Buffett doesn’t do is try to time the stock market, although he does have a very strong view on the price levels appropriate to individual shares.
   
   A majority of investors, however, do just the opposite, something that financial planners have always been warning them to avoid, and thus lose their hard-earned money in the process.
   
   For market timing to be an effective investment strategy, “you need to have a 70 per cent accuracy rate or better,” says global financial expert Ted Cadsby.
   
   That is what makes it virtually impossible. But, sadly, a good number of investors are yet to see any merit in Cadsby’s advice.
   
   
2. Following Herd Mentality
   
   Following herd mentality is another reason for the investors’ losses. “It has been witnessed that the typical buyer’s decision is heavily influenced by the actions of his acquaintances, neighbours or relatives. So, if everybody around is investing in a particular stock, the tendency for potential investors is to do the same. But this strategy may backfire in the long run,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
   
   
3. Too Much Relying On Tips
   
   Too much relying on tips or on even educated professionals in a public forum (like TV channels) is another big error that people make. No expert can profess what every individual who is hearing the channel needs to follow. “Beware of the glib helper who fills your head with fantasies while he fills his pockets with fees,” warns Warren Buffett.
   
   “You should, therefore, never invest on recommendations alone. Instead always have proper analysis before investing,” advises Sameer Bhargava, Regional V-P – North, Principal PNB Asset Management Company. If you are unable to do that, you can take the help of a qualified financial planner.
   
   
4. Putting All Eggs In One Basket
   
   Think of the old saying, “Don’t put all your eggs in one basket”. However, another mistake which investors generally make is non-diversification of their portfolio.
   
   They generally put all their money in limited and favourite stocks which are in momentum, and thus also increase the chance of losing their money in case of any market turmoil. This explains why investors should diversify their portfolio across industries and size of the companies.
   
   “There are two primary reasons to diversify your portfolio- one is to take maximum advantage of the market conditions and the other is to protect yourself against downturns. The basic concept is to divide your investments amongst asset classes where the returns made are inversely proportional to each other,” says Lovaii Navlakhi, MD & Chief Financial Planner of the Bangalore-based International Money Matters.
   
   
5. Being Guided By Fear & Greed
   
   Many investors have been losing money in stock markets due to their inability to control fear and greed. In a bull market, for instance, the lure of quick wealth is difficult to resist.
   
   Greed augments when investors hear stories of fabulous returns being made in the stock market in a short period of time.
   
   “This leads them to speculate, buy shares of unknown companies or create heavy positions in the futures segment without really understanding the risks involved,” says Kapur.
   
   Instead of creating wealth, such investors thus burn their fingers very badly the moment the sentiment in the market reverses. In a bear market, on the other hand, investors panic and sell their shares at rock bottom prices, thus losing money again.
   
   
6. Lack Of Research
   
   Proper research should always be undertaken before investing in stocks. But that is rarely done. Investors generally go by the name of a company or the industry they belong to. But this is not the right way of putting one’s money into the stock market. “Therefore, if one doesn’t have time or temperament for studying the markets, one should always take the help of a suitable financial advisor,” advises Kapur.
   
   
7. Investing Without Patience & Discipline
   
   Historically it has been witnessed that even a great bull runs have shown bouts of panic moments. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull run.
   
   The investors who put in money systematically, in the right shares and held on to their investments patiently can generate outstanding returns. Hence, it is prudent to have patience besides keeping a long-term broad picture in mind.
   
   
8. Having Unrealistic Expectations
   
   There’s nothing wrong with hoping for the ‘best’ from your investments, but you could be heading for trouble if your financial goals are based on unrealistic assumptions.
   
   For instance, lots of stocks have generated more than 50 per cent returns during the great bull run of recent years. However, it doesn’t mean that you should always expect the same kind of return from the stock markets.
   
   Therefore, when Warren Buffett says that earning more than 12 per cent in stock is pure dumb luck and you laugh at it, you’re surely inviting trouble for yourself.

Source:economictimes.com

Should ratings be sole criterion to make investment decisions?

It was the retirement party of Rakesh Chopra when his ex-boss, who had been specially invited, took him aside for a piece of advice. "Chopra, don't repeat the mistake I committed. Consequent to my retirement three years back, I invested my entire savings in mutual funds and stocks. When the need arose last year for funding my wife's prolonged illness and my son's tuition fees abroad, I was in for some harsh reality check. The market value of my investments had halved and I had to book losses to generate cash. I strongly advise you to put your funds in AAA rated bonds, post office schemes and fixed deposits of PSU banks only post retirement," said his ex-boss.These words kept on ringing in Chopra's mind when he sat down the next morning to plan his portfolio with an investment adviser. He planned to explore putting money in those star-rated companies. But first lets introduce you to one concept: credit rating.

Credit rating

It is an independent opinion on the relative ability and willingness of a borrower to meet the maturing debt obligations in a timely manner. The rating scale starts with AAA (lowest credit risk) and ends at D (default grade, highest credit risk). Going by the normal yardstick, one should always go for the best. So, should all the investors invest only in AAA rated issues? To fathom this paradigm, we have to understand the riskreturn relationship.

Risk-return & risk aversion

Generally, AAA rated issuers/issues offer lower coupon rates i.e. the return for the investor is less as compared to issues rated lower. As one moves down the rating scale, the benchmark interest rates increase. Why so? It is because of the relationship between risk and return — higher the risk, greater has to be the expected return on that investment and vice versa. An investor hoping for higher returns has to embrace the risks that are attached to it.

That brings us to another factor — risk aversion.

Risk aversion

Risk aversion means that, in general, investors tend to choose a less risky alternative when choice exists that will allow for the same degree of benefit. Higher the risk aversion, lower is the risk tolerance. From the perspective of financial markets, investors scout for either similar return for lower risk or similar risk for a larger return.Most investors are risk averse. But how does an investor decide how much risk to be taken? In reality, there is nothing like optimal risk-return trade off. It is often a derivative of various factors like time horizon, liquidity, and some investor specific circumstances

What to look for

Having viewed the investment decisions from this perspective, can we now say that credit rating should be the sole criteria for investment decisions? The answer is clearly no. Credit rating has to be necessarily seen as one of the inputs for informed decision making by investors.For someone in the high tax bracket, AA rated tax free municipal bonds might be an attractive investment option as compared to AAA rated corporate bonds. To investors like life insurance companies, matching their assets and liabilities is paramount. Based on their own actuarial inputs, they could be more inclined towards longer tenure debt as compared to say, commercial banks. However, in the process, they could be required to look at lower rating categories.It would be incorrect to say that they have gambled by not investing in only the AAA rated issues. Depending upon their own underlying objective of investment decision, they try to strike a proper balance between risk and return. In case of banks, if the entire lending is to AAA rated clients only, one can assume the kind of impact it could have on their yield since such borrowers typically get the funds at rates much lower than the bank

The risk-return trade off is extendable to equities as an asset class also. The relative safety of investing in blue chips may not result in highest returns. In case of IPOs also, the IPO grading is an opinion on the relative fundamentals of the company. The investor decision is guided to a large extent by the valuation and risk tolerance. Even a highly graded IPO can fail to enthuse investors if the valuation is too high.Credit rating is a culmination of analysis covering various factors like industry, management , business, financial and project risks. The analysis not only looks at the past performance, but the projected operations also. As such, it does involve certain set of assumptions to arrive at the future estimates.In the dynamic world of business, assumptions can go wrong at times and the projected performance could be lower than projected. Depending upon the changed credit profile and outlook, ratings can potentially change. Hence, an investor needs to juxtapose the resultant changes against investment criterion. So, returning to our example, Chopra needs to look at the risk-return trade off as also a proper asset allocation. As they say, there are no free lunches in this world!

Child Plans - Are they worth?

Children's plans are insurance-cum-investment plans

You have welcomed your new bundle of joy in this world with a lot of enthusiasm. You intend to give them the best of everything. In order to help you achieve this objective, you start investing in various instruments on your child’s behalf.To capitalize on the parents’ intentions about giving the best for their children, many insurance companies have introduced children’s plans. These plans have enticed many parents to invest on behalf of their children, under the impression that their child’s future is secure.But is it true? Are they worth investing? Is this the best investment option for your child? Let’s take a look at what these plans are all about.

What are children's plans?: Children's plans are insurance-cum-investment plans offered by insurance companies are similar to ULIPs.However the difference between a ULIP and a children's plan is that the parent starts investing in the children's plan right from the time the child is born and can withdraw the savings once the child reaches adulthood.Of course, some plans do allow intermediate withdrawals, at certain intervals.

Buy life cover of 7-10 times annual income of earning parents

How much insurance do I get?: These plans do come with inbuilt insurance component in order ensure the sum payable to the child is insured against the premature death of the earning parent. The least life cover you have to select in these plans is: Sum Assured = Term * Annual premium / 2. But in most instances this sum assured is inadequately woeful. Experts recommend that it is necessary to buy a life cover of minimum of 7-10 times the annual income of the earning parents.This is to ensure that in case if the earning parent meets untimely death, his/her spouse and the child are adequately provided for.So if you are relying only on the life cover provided by these plans, then remember you will always remain under insured.

Returns from children's plan tend to be low

What about the investment?: When you pay the premium for this plan, part of the premium amount goes towards paying for the life cover. Remaining part of the premium is invested in various instruments either debt or equities. However this portion is quite small, as the insurance companies tend to deduct premium allocation charges upfront.These charges are meant to pay the distributor commissions. As a result, very small part of the premium gets invested during the initial years.Also if you opt for any features provided by the insurer like waiver of premium, switching option etc., the charges for the same are deducted from the amount invested. So the returns from these plans tend to be very low in the initial years and if you stop the plan without completing the entire tenure, you might end up suffering loss.

Children's plans rate poorly both in terms of life cover and investment option

Disadvantage of the children's plans: These plans do rate poorly both in terms of life cover and investment option. You can buy plain term insurance at lower premium that provides you with very high life cover. For investments, equity mutual funds are the best.You can invest the highest possible amount in these funds at very low fees. Also if the fund tends to perform poorly, you can stop your investment and switch over to another fund, without paying any penalty.This is not possible in case of children’s plans as there are heavy surrender charges applicable.

Planning for your child; Go for term plan and MFs

Are they right for me?: One needs to evaluate if they are an ideal option. More often no they are not.While they do provide you with tax benefits, you can get the same tax benefits with a combination of term insurance and mutual funds.Also, term insurance + mutual fund combination beats the children's plans on the fronts of costs and returns. So it is better to give these plans a miss and instead go for term plan and mutual fund.

Source: bankbazaar.com

Smart Investing

There are two principles of investing that we strongly advocate — diversification and asset rebalancing. An investor’s problem is not solved when he narrows down on his specific investments and decides how much must go to equity and debt. He must periodically rebalance his portfolio too.

Ironically, though asset allocation (and its subsequent rebalancing) is one of the most important aspects of investing, it is also one of the most frequently overlooked. The underlying logic behind it is relatively simple: Have a portfolio that matches your tolerance for risk while enabling you to meet your future financial goals. That’s right. Asset allocation is important because it has a big impact on whether or not you will meet your financial goals.

If you don’t include enough risk in your portfolio, your investments may not earn the return required to meet your goal. That is why when you save for big-ticket items such as a college education for your child or even your retirement, you must include some exposure to equities in your portfolio. But that does not mean you should go overboard. If you include too much of risk in your portfolio, the money for your goal may not be there when you need it. This is where rebalancing plays an important role. Because once you decide on an asset allocation, you have picked a mix of assets that have the highest probability of meeting your goals at a level of risk you can live with. So when the allocation gets skewed, it is your responsibility to fine tune it back into place.

ULIPs vs MFs: The best investment

ULIPs vs MFs

Unit-linked insurance products (ULIPs) and mutual funds have always been compared. While some experts think insurance and investment objectives are two different things and rather than buying ULIPs they recommend MFs for investment and term plans for insurance, others prefer ULIPs. Regulators of both industries — insurance and mutual fund — have issued new guidelines related to cost structure. While in MFs, there is no entry load, in the insurance sector, the Insurance Regulatory and Development Authority (IRDA) has capped the maximum cost of ULIPs.

New cost structure

In view of the change in the cost structure, SundayET discusses the issue with experts to find out which of the two is a preferred product and for whom. But first let’s take a look at the new guidelines issued by IRDA. Come October and the new guidelines of the IRDA on the cap on charges on ULIPs, would be implemented. According to the new guidelines, insurance companies are required to put a charge in a way that the difference between the gross yield and net yield should not be more than 3% in case the tenure is equal or less than 10 years. Also, out of this, the fund management charges should not be more than 1.5%. According to a certified financial planner, currently the difference between gross and net yield is over 4% in certain cases.

Gross yield

Gross yield means the overall return and is the difference between the money that an investor invests and that generated by the fund manager. Net yield is the return that an investor gets in his hand after deducting all charges. According to the IRDA guidelines, however, if the policy tenure is more than 10 years, the difference between gross yield and net yield should not be more than 2.25%. Also, out of this, the fund management charges should not be more than 1.25%. Any new product that gets launched from October will have to follow these rules. Also, insurance companies will have to implement these measures for their existing policies. However, they need to do it by year end.

Debt vs equity

According to Malay Ghosh, president at Reliance Life Insurance, the current guidelines aim to ensure that you get a fair deal irrespective of the company and scheme you choose. The guidelines, however, may have a negative impact on the distributors in the short term, but they certainly benefit the existing and new investors of ULIPs, according to K Venkatesh, national head distribution at Geojit BNP Paribas Financial Services. According to Veer Sardesai, MD, Sardesai Finance, a financial planning company, MFs and ULIPs are of two categories : those that invest in debt or fixed income instruments and those that invest in equities. In the equity segment, the capping of expenses of ULIPs at 3% or 2.25% pa makes it costs competitive with equity MFs. ULIPs will also provide insurance. Since this cost involves the mortality charge as well, it could probably be a good product for an older person whose insurance or the mortality charges are higher. You can benefit from lower cost of insurance and get investments managed at competitive costs.

Time frame

However, one must not forget that ULIPs are long-term products. For a shorter duration it is always advisable to go with equity mutual funds as in case of ULIPs, the cost in initial years is relatively much higher. Nevertheless, in case of in the debt segment, the cap on ULIPs remains quite high for a pure debt based fund and in these circumstances a mutual fund will probably be preferred. Currently , many of the mutual fund companies charge fund management of around 2.5%. But as per the recent guidelines of IRDA, insurance companies are allowed to charge not more than 1.5% in case the tenure up to 10 years and 1.25% if the tenure is more than 10 years. However, though the recent developments are expected to benefit investors but mutual fund and insurance companies are yet to come out with new funds and policies under the new rules. According to Sardesai, one will have to pursue the new ULIP policies and the new MF documents, once they are launched, before concluding which of the two is the preferred product.

Source:economictimes.com

Teaching your child value of money

How important is it to teach your children about money, its place, and its value? Considering that money does, in a lot of ways, make the world go round, you might think it one of life's obvious lessons, gained through experience. Or you might assume that money management is tackled in school.

Think again. Arming your child with the right attitude and necessary skills at the right time will afford them with the greatest possible advantage: the opportunity and power to make decisions.
How, and when to communicate money values to children is, however, one of the toughest challenges that parents face.

Educating, motivating, and empowering children to become regular savers and investors will enable them to keep more of the money they earn and do more with the money they spend.

Children learn faster by observing

How do you actually go about doing this?Discuss money openlySo many parents do not discuss finances within the family either because it's considered inappropriate, or personal. Consider this: if you don't actively provide the correct information to your child, how is he/ she to know, understand and inculcate your values? Therefore, as soon as your child can count, introduce him/ her to money. Observation and repetition are two important ways in which children learn.As they grow older, have frank discussions about how to save it, how to make it grow, and how to spend it wisely.

Help distinguish between needs and wants

These are habits that die hard, and influence how your child will approach money and its place in his/ her life.If they can differentiate between need-to-have and nice-to-have, then they're halfway to a solid and secure future.

Set goals for your child

Better still, help your child set his/ her own goals. If it's a toy that they must have, then regard this as a good opportunity to teach your child how to be responsible with money, and prioritise between what they want, and mindless spending. Allow your child to make spending decisions, which means that they will learn from the choices they make.And learn that it's to their advantage to do a little homework before buying, waiting for the right time to buy, and actually deciding if the product selected is what they really want.

Encourage your child to save

Begin simply, as your parents might have done, with a piggy bank. If you do give your child an allowance, get them to set aside a small portion of it every time. Explain and demonstrate the concept of earning interest income on savings. Incentivise it; offer to match what your child saves on his/ her own.

Teach your child to maintain record of money

Help your child maintain a record of money saved, invested, or spentTo make it easy, use 12 envelopes, 1 for each month, with a larger envelope to hold all the envelopes for the year.Encourage your child to save receipts from all purchases in the envelopes and keep notes on what he/ she does with his/ her money.

Learning by observing is the most powerful tool

Use real-life experiences to demonstrate everything you want to teachLearning by observing and doing is the most powerful tool. Such as when you go grocery shopping, and can use the opportunity to showcase planned spending, or how to recognise value for money. Or if you decide to use a credit card at a restaurant, you could show your child how a credit card works, when it can be used, and how to calculate a tip!Finally, your child needs to understand that spending money can be fun and very productive when spending is well-planned, and that a penny saved is, indeed, a penny earned!

Source: BankBazaar.com