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