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Equity research involves thorough analysis and research of the companies and its environment. Equity research primarily means analysing the company’s financials and non-financial information, study the dynamics of the sector the company belongs to, competitors of the company, economic conditions etc..

The idea behind equity research is to come up with intrinsic value of the stock to compare with market price and then decide whether to buy or hold or sell the stock.

There are many frameworks/methodologies available for stock selection. You can use fundamental analysis – top-down approach or bottom-up approach – quantitative screens, technical indicators etc., to select stocks.

Fundamental analysis is the process of determining intrinsic value for the p based on the fundamentals that drive its intrinsic value. These values depend on underlying economic factors such as future earnings or cash flows, interest rates, and risk variables. By examining these factors, you can determine intrinsic value of the stock. Investor should buy the stock if its market price is below intrinsic value and do not buy, or sell, if the market price is above the intrinsic value, after taking into consideration the transaction cost.

Investors who prefer doing stock research on fundamental analysis believe that, intrinsic value may differ from the market price but eventually market price will merge with the intrinsic value. An investor or portfolio manager who can do a superior job of estimating intrinsic value will generate above-average returns by acquiring undervalued securities. Fundamental analysis involves economy analysis, industry analysis, company analysis.

Analysts follow two broad approaches to fundamental analysis—top down and bottom up. The factors to consider are economic (E), industry (I) and company (C) factors. Bottom up approach is the Beginning at company-specific factors and moving up to the macro factors that impact the performance of the company.

Scanning the macro economic scenario and then identifying industries to choose from and zeroing in on companies, is the top-down approach. You use EIC framework to understand fundamental factors impacting the earnings of a company, scanning both micro and macro data and information.

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Investors approach securities market to invest and disinvest their extra funds. They have predefined features. They are easily liquidifiable. Liquidity means the existence of sellers when one needs to buy and buyers when one needs to sell. Those who seek capital from investors issue equity and debt. These two are broad types of securities for capital funding. Companies issue equity or shares that gives rights to own small percentage of their own companies. Companies issue debt securities to provide the rights of lender to the investors. Both of these securities differ in certain features in claim of the companies.

Equity investors, also called share holders have residual claim in the business because they are owners of company but not lenders. Companies who issue securities from time to time are not liable to repay the amount it receives from shareholders. They are not liable to pay periodic payments to shareholders for the use of their funds like interest payment in case of lenders. If you are equity investors you get voting rights. When we investors get a sizeable amounts of shares in a company they get an opportunity to participate in the management of the business.

Investors make profits out of equity shares by looking for capital appreciation and dividend income. Companies don’t assure to give the both to investors. The choice of giving dividend depends on the decision of management of companies and capital appreciation depends on the conditions of stock market. It’s a trade off when you have to choose between equity and debt. Investors desiring low risk choose debt at the cost of lower stable return. However if you want higher return choose equity investment. Most investors tend to allocate their capital between these two choices depending on the expected return, their investing time period, their risk appetite and their needs.

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Behavioural finance is the study of the way in which psychology influences the behavior of market participants both at the individual and group level and the subsequent effects on financial markets.

It is a part of behavioural economics which deals with biases and cognitive errors affecting investors’ investing behavior. It makes an attempt to explain the gaps and market anomalies. Standard finance theories and framework does not explain this. Standard finance theories and models are based on certain assumptions

investors are rational

investors are risk averse

investors are self interested utility maximizers

investors update their belief, as new information comes in

investors have access to all available information

Real life behaviour of investors is different from what traditional finance models assume. Some of the example in daily life are

investors hold concentrated portfolio instead of diversifying

investors show greed and fear instead of making rationale choice of risk return

instead of accepting randomness with winning investments, investor attribute it to their skill

investors getting confused between a good company and a good stock

investors perceive domestic companies because they perceive the risk is low due to familiarity of the company

So real life investors are very different from those in standard finance theory.

Nobel laureates Daniel kahneman and Richard Thaler brought behavioural finance to forefront and attempt to integrate it with standard finance.

Bounded rationality

Most investors have limited 1.time Or 2.information or 3.ability to comprehend complex information at the time of decision making. Similarly when selecting one of many options requires meticulous analysis incorporating all the available information, people get confused.

They settle with an option possibly suboptimal which seems to be satisfactory and sufficient based on quick analysis governed by ‘thumb rules’. In other words, instead of optimizing as suggested by theories in finance, investors “satisfice” (seemingly satisfactory and sufficient).

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Step 01. Be responsible

Accepting responsibility is the first step towards financial success. You must be in control of your financial future. Every choice you make, leaves an impact on your financial goals and issue. You must be in control of your financial matters no matter your age or education.

Ask yourself these questions

1.do you do impulsive buying?

2.are you in charge of paying bills and managing your finance?

3.are you making thorough research before making a big purchasing decisions like car or company?

You must become fully aware of your responsibilities and obligations. It’s okay to ask for help but you need to do the work. If you take a loan or enter into another type of financial commitment, you need to understand your rights and responsibilities and must stick to your obligations to those loans.

This includes making payments on time and in full. Repaying debt in full including interest is also an obligation of taking a loan. If you don’t follow the obligations then the respective authority has the right to take your collateral into their own custody depending on terms of the loans. Partial payments, late payments and missed payments also affect your credit score in negative way. Credit bureau make your credit report and calculate your credit score by collecting information including payments history, borrowing history, outstanding debts.

You must estimate your monthly payments and how that payments will fit in your monthly budget in case you take student loans. Your financial responsibility report car is your credit report.

Your credit score is usually based on the following

1.if you pay bills on time

2.the total amount of debt you have and how close to your credit limit that amount is

3.the number of accounts recently opened

4.the number of recent inquiries about your credit score

5.length of time you have been building credit. Your creditors will grade you based on your performance and participants.

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Financial success

Step 2. Plan the goal

Careful planning is the next step. It’s not possible to have effective management over your finances if you don’t know how much money you have available to spend or have a plan on how to spend, invest and save. You need to create a checklist by defining your financial goals. Use a copy or mobile app or both where you can write your monthly budget, all expenses (mandatory, discretionary expenses, utilities, entertainment costs) and savings. Savings is monthly income minus all expenses.

Three steps to goal setting:

1.be specific- write the time when you want to achieve your goals. Goals can be short term it can take a few days, months, or year. It can also take long term ie 5,10,15years.

2.Be realistic- setting highly unrealistic goal will only lead to disappointment, anxiety and sadness. So make your goals attainable. Saying you want to be rich is vague term but saying I will be millionaire within 4-6years is achievable. 3.Write down your goal- keep records of your goals in a separate diary and mark them off when you achieve them. Regularly review them to make necessary changes.

Step 3. Understand your income

Calculate your income in net pay. Don’t calculate your income in gross pay. You net pay is the amount you receive after deductions like tax happens. There are lots of standard deductions which is federal income tax, social Security, medicare, income tax, gst. Review your paystubs when you receive them. Understand each deduction and report any discrepancies if you find them immediately. Talk with employer if your company doesn’t have a human resource department.

Step 04. Open a savings account

A savings account is a secure place to keep your money and helps you track your money. A savings account helps you to see how much money is available to spend. Before opening a savings account, research thoroughly to find a bank, other type of financial institutions that best suits your needs. Check for a account that don’t charge monthly. Choose a lowest service fees applicable account. You can withdraw money from bank using checks, ATM, debit card. In addition to writing checks, ATM(automatic teller machine) & debit card are commonly used to withdraw money from your account. If you don’t pay via checks then you can only order ATM card or debit card.

Tips for ATM and debit card usage

1.never share your PIN number

2.always record your transaction

3.it takes time to reflect the transaction in your account balance.

4.don’t go to unknown link. Avoid overdraft at all costs. Never spend more money than you have in income. Review your online account balance once a week. This will help you keep track of how much you have. You will quickly identify errors or possible fraudulent transaction. Beware of digital arrest. If someone calls you pretending to be the police , demands money. Simply disconnect the call. Report it to the relevant authorities.

Step 5. Start saving and investing

Creating a savings account is the best way to help you financially deal with uncertainties such as job loss or medical expenses, helping you achieve your financial dreams like pay for college, purchase a car, travel or save for retirement. Make sure you are able to save every month. At least you should save a balance that cover six to twelve months of your expenses. Small amounts add up and make a difference over time. A savings account with compounding interest will help you account balance grow. In compound interest you earn interest on principal amounts. Later you earn interest on new principal which is the total of previous principal and interest.

Invest wisely

Investing is a great way to have your money work for you. Before you start your investing journey you need to understand your risk appetite & different investment products. Start investing as soon as possible. Best time is now. Think about your retirement. The sooner you start the bigger corpus you will have in future. There are stocks, bonds, gold, mutual funds, certificate of deposit. Make your investment plan by setting your goals, learning about investing and options. Determine if you need a stock broker, make a plan, stick to it. Don’t change the plan on daily basis.

Step 6. Create a budget

Make a budget and stick to it. It’s not easy but it’s the best way to control your finances. Think of your budget as a spending plan as it will help you be aware of how much money you have and how much you need to achieve certain goals.

So how to create budget?

1.Calculate your income Add all your regular income, don’t add irregular income like dividends, overtime pay.

2.determine your expenses See all the payments history of all payment apps,credit card,debit card, store receipts, biling statements. See all expenses like rent, auto, student loans, foods that must be paid every month. Let’s call it mandatory expenses. Try to keep them low if your overall expense is too high by substituting them with another alternative. You can use local transportation if transportation costs is high. move the costs of dining in the expensive restaurants with home cooked meal. You can also substract all unnecessary subscription plans of all apps that don’t serve your purpose or just provide entertainment. Always remember that savings must be first on list of expenses.

Now create the budget. Budget should meet the needs first then the wants that you cannot afford. Your expenses should be less than your total income. Reduce the expenses to adjust to your budget. When you divide your expenses into mandatory needs, necessary and unnecessary needs. You will be able to minimize expenses. You can use calculator, ms Excel spreadsheet, diary, money management apps. Use one or multiple depending upon your choice.

Review your budget

Does budget meet your needs, help you achieve your goals? If not then make necessary changes. Always carry a notebook in case you can’t track where your money is going

Step 7. Use debt smartly

At some point you may need to take out a loan. It’s imperative that you borrow smart otherwise it can make you bankrupt. We need to use loans to buy house, automobiles, fund education. When considering the purchase of any item, ask yourself “do you really need this item?”

When taking loans you should consider several factors like interest rate, additional fees, down payment. When you borrow the money you need to pay the interest and the principal. Higher the interest rate more you will pay.

Some loans have closing costs. Auto loans may include additional insurance or warranty costs. Student loans may have default fees. Before you take a loan make sure to understand the payments retirement and all of the fees associated with the loan. It’s important to know how much you need to pay.

Down payment are the large payments amounts paid toward your purchase. It reduces the amount you have to borrow. The more money paid up front toward the purchase, the more money you will save over the life of loan. Pay at least 20% for down payment for most large purchase. Monthly payments must fit into your monthly budget.

Few guidelines to guide you thoroughly

1.Your housing expenses should be less than 33% of your gross income. Many lending institution look at this factors in determining your loan eligibility. 2.other loan installment like student loans, auto loan, credit card, should not exceed a combined total of 20% of your gross income.

3.Loan installment of student loans credit card should not exceed a combined total of 20% of your gross income.

4.save money and have 6-12months in emergency savings. Always consider the guidelines above when inserting the figures in the new purchase. If amount of payments for the purchase exceed the recommendations then you do not allow yourself to save money,you may want to postpone your purchase until you have more money saved.

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Financial success of your depend on following factors

Step 8.Manage your credit card wisely

It’s easy to get credit card and managing it isn’t always easy. Credit card are borrowed money and you must repay them. Don’t spend more than you can afford to pay in full. If you don’t pay the amount in full each month interest will accrue and will be added to total amount you owe. You can build the discipline of paying the balance regularly and build a good credit score. Consider all consequences of a credit card. Careful use of credit card will help you to build a solid credit rating. Poor use of credit card can rapidly place you in debt. When selecting a credit card make certain that you have selected the one with most affordable options and no hidden costs.

Look for the following

1.a low annual percentage rate(APR). The lower the rate the less interest you have to pay. Interest calculation method affects how much interest is paid, even when APR is identical. Annual fees Or any fees should not be charged. If they charge it ask them to waive it or return it.

2.late payments or transaction fees over the limit fees etc will increase the total cost of your charges.

3.a grace period is often provided if you agree to pay off your balance before interest charges begin to accrue.

4.Various services and feature such as cash rebates frequent flyer miles, extended warranties, etc may have hidden future costs.

Think carefully about the true costs of these programs.

Limit the number of credit card.

Having only a few credit card will make it easier to manage your spending and prevent overspending. You need to make payments for each credit card with balance preferably to pay the balance in full each month. Don’t always carry your cards with you. It gives you easy access to money you don’t have. Don’t carry it then you will think twice before buying items you don’t really need.

Track your spending. Save receipt, maintain a ledger to track your expenses and match it with monthly statement. Photocopy the front and back of your card and store it in safe place at home.

Step9. Understand credit report

A credit report is a collection of information about you and credit history and will have a significant impact on your financial future. Potential creditors will review your credit report to determine the eligibility for a loan. Landlords, potential and current employers, government licensing agencies, insurance underwriters also may view your credit report. Credit bureau report answers to the following questions

How promptly are your bills paid?

How many credit card do you hold?

What’s the total amount of credit that is extended?

How much is owned on all of your outstanding account?

Negative information like late payments, bankruptcies, too much debt found on your credit report can have serious impact on your ability toborrow loans, seek employment in certain occupation, receive a promotion, purchase or rent a home. Positive information will remain on your report indefinitely.

A credit report typically include the following

Personal identifying information- name, social Security number, date of birth, current and previous addresses, employers.

Credit account information-date opened, credit limit, balance, monthly payments, payments history. Public record information- bankruptcy, tax and other liens, judgement, in some states, overdue child support

Inquiries-name of the companies that requested your credit report.

You should review your credit report at least once per year, verifying that all of information is accurate. You can request your credit report annually free of charge. Report all inaccuracies on your credit report to the agency immediately. Be certain to notify both credit bureau and information provider, in writing, of the discrepancy.

Include the following in the notification Name, complete address, a summary of information that you are disputing and why, a copy of credit report with information highlighting, copy of any supporting documents.

When dispute is received, credit agencies have 30days to investigate and respond to you in writing. Review and contact all respective credit agencies when disputing information. Your credit score evaluates your credit worthiness by assigning values to factors such as income, existing debts and credit reference. Bank and lending institution use the score to evaluate the risk of loaning money.

Credit score is based on credit history. There are five components of credit history weighing some higher than others.

Payments history-35%

Debt owned-30%

Length of credit history-15%

New credit-10%

Types of credit used-10%

FICO score range from a low of 300 to max of 850.Most lenders will not use your FICO score alone to determine your eligibility for a loan but it can have a significant impact on interest rate you receive. Higher score typically results in lower interest rates- which result in lower monthly payments and less interest paid over the life of loan.

Step 10. Protect yourself from identity theft

It’s fastest growing crime. Perpetrators borrow money in someone’s name and leave their victims with mountains of debt and serious credit problems. They may commit crime using someone’s identity.

To prevent identity theft it’s critical to keep the information safe

1.shred financial documents and paperwork with personal information before you discard them

2.protect your social Security number, don’t always carry it, use it only when it’s necessary.

3.don’t give personal information over phone, through mail, over internet, unless party is known and reputable.

4.never click link in unsolicited email message

5.protect your computer using strong anti virus software

6.donot use an obvious password like date of birth, names, mother’s name

7.keep all personal information in a secure place at home.

Step 11. Understand your tax liability

Calculate taxable income. Tax slab vary from country to country.

Step 12. know when to ask for help

The final step on the path to financial success is knowing when to request assistance. These warnings signs may help you

1.are you living paycheck to paycheck with no money going into saving?

2.are you alternating which bills to pay each month,leaving some unpaid?

3.are late making payments?

4.are you using one credit card to make payments on another?

5.do you have creditors calling you?

6.are you being denied credit?

A plan of action1.review your budget and make changes where necessary

2.increase your income

3.decrease your spending

4.look into debt consolidation, carefully weighing the pros and cons,

5.look for creative ways to change your financial situation. Eg sell unused items on ebay

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Investment in sector funds should be made when the fund manager expects the related sectors, to do well. They could out-perform the market, if the call on sector performance plays out. In case it doesn’t, such funds could underperform the broad market.

An open end sector fund should invest at least 80% of the total assets in the equity and equity-related instruments of the identified sector. XYZ Banking Fund, ABC Magnum Sector Funds are examples of sector funds.

Based on Themes

Theme-based funds invest in multiple sectors and stocks that form part of a theme. For example, if the theme is infrastructure then companies in the infrastructure sector, construction, cement, banking and logistics will all form part of the theme and be eligible for inclusion in the portfolio. They have more diversification than sector funds but still have a high concentration risks.

An open-end thematic fund should invest at least 80% of the total assets in the equity and equity-related instruments of the identified sector. Under Thematic Category of mutual funds, any scheme under the ESG category can be launched with one of the following strategies –

a.Exclusion b.Integration c.Best-in-class & Positive Screening d.Impact investing e.Sustainable objectives f.Transition or transition related investments.

Based on Investment Style

The strategy adopted by the fund manager to create and manage the fund’s portfolio is a basis for categorizing funds. The investment style and strategy adopted can significantly impact the nature of risk and return in the portfolio. Passive fund invests only in the securities included in an index and does not feature selection risks. However, the returns from the fund will also be only in line with the market index.

On the other hand, active funds use selection and timing strategies to create portfolios that are expected to generate returns better than the market returns. The risk is higher too since the fund’s performance will be affected negatively if the selected stocks do not perform as expected.

The open-end equity funds (based on strategies and styles for selection of securities) are classified by SEBI as follows:

Value funds

Value Funds seek to identify companies that are trading at prices below their inherent value with the expectation of benefiting from an increase in price as the market recognizes the true value. Such funds have lower risk. They require a longer investment horizon for the strategy to play out. At least 65% of the total assets of the value fund should be invested in equity and equity-related instruments.

Contra fund

Contra Funds adopt a contrarian investment strategy. They seek to identify under-valued stocks and stocks that are under-performing due to transitory factors. The fund invests in such stocks at valuations that are seen as cheap relative to their long-term fundamental values. Mutual fund houses can either offer a contra fund or a value fund.

Dividend yield fund

Dividend yield funds invest in stocks that have a high dividend yield. These stocks pay a large portion of their profits as dividend and these appeals to investors looking for income from their equity investments. The companies typically have high level of stable earnings but do not have much potential for growth or expansion.

They therefore pay high dividends while the stock prices remain stable. The stocks are bought for their dividend pay-out rather than for the potential for capital appreciation. At least 65% of the total assets of the dividend yield fund should be invested in equity and equity-related instruments.

Focused fund

Focused funds hold a concentrated portfolio of securities. SEBI’s regulation limits the number of stocks in the portfolio to 30. The risk in such funds may be higher because the extent of diversification in the portfolio is lower.

Debt Funds

Debt funds invest in a portfolio of debt instruments such as government bonds, corporate bonds and money market securities. Debt instruments have a pre-defined coupon or income stream. Bonds issued by the government have no risk of default and thus pay the lowest coupon income relative to other bonds of same tenor. These bonds are also the most liquid in the debt markets.

Corporate Bonds

Corporate bonds carry a credit risk or risk of default and pay a higher coupon to compensate for this risk. Fund managers have to manage credit risk, i.e. the risk of default by the issuers of the debt instrument in paying the periodic interest or repayment of principal. The credit rating of the instrument is used to assess the credit risk and higher the credit rating, lower is the perceived risk of default. Government and corporate borrowers raise funds by issuing short and long-term securities depending upon their need for funds.

Debt instruments may also see a change in prices or values in response to changes in interest rates in the market. The degree of change depends upon features of the instrument such as its tenor and instruments with longer tenor exhibit a higher sensitivity to interest rate changes

Fund managers make choices on higher credit risk for higher coupon income and higher interest rate risk for higher capital gains depending upon the nature of the fund and their evaluation of the issuer and macro-economic factors.

Debt Fund

Debt funds can be categorized based on the type of securities they hold in the portfolio, in terms of tenor and credit risk.

Short Term Debt Funds aim to provide superior liquidity and safety of the principal amount in the investments. It does this by keeping interest rate and credit risk low by investing in very liquid, short maturity fixed income securities of highest credit quality. The objective is to generate a steady return, mostly coming from accrual of interest income, with minimal NAV volatility.

The open-end debt schemes (investing in securities with maturity ranging from one day to one year) are classified by SEBI as follows:

Overnight Funds invest in securities with a maturity of one day.

Liquid Funds invest in debt securities with less than 91 days to maturity.

Ultra Short Duration Funds invest in debt and money market instruments such that the Macaulay duration of the portfolio is between 3 months and 6 months.

Low Duration Fund invest in debt and money markets instruments such that the Macaulay duration of the fund is between 6 months to 12 months.

Money Market Fund invest in money market instruments having maturity up to one year.

The next category of debt funds combines short term debt securities with a small allocation to longer term debt securities. Short term plans earn interest from short term securities and interest and capital gains from long term securities. Fund managers take a call on the exposure to long term securities based on their view for interest rate movements. If interest rates are expected to go down, these funds increase their exposure to long term securities to benefit from the resultant increase in prices. The volatility in returns will depend upon the extent of long-term debt securities in the portfolio.

Short term funds may provide a higher level of return than liquid funds and ultra-short term funds, but will be exposed to higher mark to market risks.

Open-end debt schemes investing in the above stated manner are categorised by SEBI in the following manner:

Short duration funds invest in debt and money market instruments such that the Macaulay duration of the fund is between 1 year – 3 years.

Medium duration fund invests in debt and money market instruments such that the Macaulay duration of the fund is between 3 years- 4 years.

Medium to Long duration fund invests in debt and money market instruments such that the Macaulay duration of the fund is between 4 years- 7 years. If the fund manager has a view on interest rates in the event of anticipated adverse situations then the portfolio’s Macaulay duration may be reduced to one year for Medium and Medium to Long duration funds.

Corporate bond fund

Corporate bond fund invests at least 80% of total assets in corporate debt instruments with rating of AA+ and above. Credit Risk Funds invest a minimum of 65% of total assets in corporate debt instruments rated AA and below. Banking and PSU fund invests a minimum of 80% of total assets in debt instruments of banks, Public Financial Institutions and Public Sector Undertakings and municipal bonds.

Open-end gilt funds invest at least 80% of the total assets in government securities across maturities. There is no risk of default and liquidity is considerably higher in case of government securities. However, prices of government securities are very sensitive to interest rate changes.

Long term gilt funds have a longer maturity and therefore, higher interest rate risk as compared to short term gilt funds.

Gilt funds are popular with investors mandated to invest in G-secs such as provident funds or PF trusts. Gilt fund with 10 year constant duration invest a minimum of 80% of total assets in government securities such that the Macaulay duration of the portfolio is equal to 10 years.

Dynamic bond funds seek flexible and dynamic management of interest rate risk and credit risk. That is, these funds have no restrictions with respect to security types or maturity profiles that they invest in. Dynamic or flexible debt funds do not focus on long or short term segment of the yield curve, but move across the yield curve depending on where they see the opportunity for exploiting changes in yields duration of these portfolios are not fixed, but are dynamically managed. If the manager believes that interest rates could move up, the duration of the portfolio is reduced and vice versa.

Fixed maturity plans (FMPs) are closed-end funds that invest in debt securities with maturities that match the term of the scheme. The debt securities are redeemed on maturity and paid to investors. FMPs are issued for various maturity periods ranging from 3 months to 5 years.

Hybrid Funds

Hybrid funds invest in a combination of debt and equity securities. The allocation to each of these asset classes will depend upon the investment objective of the scheme. The risk and return in the scheme will depend upon the allocation to equity and debt and how they are managed. A higher allocation to equity instruments will increase the risk and the expected returns from the portfolio. Similarly, if the debt instruments held are short term in nature for generating income, then the extent of risk is lower than if the portfolio holds long-term debt instruments that show greater volatility in prices. SEBI has classified open-end hybrid funds as follows:

Conservative hybrid fund

Conservative hybrid funds invest minimum of 75% to 90% in a debt portfolio and 10% to 25% of total assets in equity and equity-related instruments. The debt component is conservatively managed with the focus on generating regular income, which is generally paid out in the form of periodic dividend. The credit risk and interest rate risk are taken care of by investing into liquid, high credit rated and short term debt securities.

The allocation to equity is kept low and primarily in large cap stocks, to enable a small increase in return, without the high risk of fluctuation in NAV. These attributes largely contribute accrual income in order to provide regular dividends.

Debt oriented hybrid fund

Debt-oriented hybrid fund are designed to be a low risk product for an investor. These products are suitable for traditional debt investors, who are looking for an opportunity to participate in equity markets on a conservative basis with limited equity exposure. These funds are taxed as debt funds.

Balanced hybrid fund

Balanced Hybrid Fund invests 40% to 60% of the total assets in debt instruments and 40% to 60% in equity and equity related investments.

Aggressive hybrid fund

Aggressive Hybrid Funds are predominantly equity-oriented funds investing between 65% and 80% in the equity market, and invest between 20% up to 35% in debt, so that some income is also generated and there is stability to the returns from the fund.

Mutual funds are permitted to offer either an Aggressive Hybrid fund or Balanced Hybrid fund.

Dynamic Asset Allocation or Balanced Advantage fund dynamically manage investment in equity and debt instruments

Multi Asset Allocation Funds invest in at least three asset classes with a minimum of 10% of the total assets invested in each of the asset classes. The fund manager takes a view on which type of investment is expected to do well and will tilt the allocation towards either asset class. Within this, foreign securities will not be treated as separate asset class.

Arbitrage fund

Arbitrage funds aim at taking advantage of the price differential between the cash and the derivatives markets. Arbitrage is defined as simultaneous purchase and sale of an asset to take advantage of difference in prices in different markets. The difference between the future and the spot price of the same underlying is an interest element, representing the interest on the amount invested in spot, which can be realized on a future date, when the future is sold. Funds buy in the spot market and sell in the derivatives market, to earn the interest rate differential.

For example, funds may buy equity shares in the cash market at Rs. 80 and simultaneously sell in the futures market at Rs.100, to make a gain of Rs. 20. If the interest rate differential is higher than the cost of borrowing there is a profit to be made.

Thanks for reading. This blog is big but it’s really vast topic.

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Retirement planning pose a critical role for an individual due to increase in life expectancy. If you don’t start to invest for retirement corpus early in life then you will have few years to achieve your goals. In that case you will get smaller amount in retirement corpus. With increase in life expectancy along with difficulties to estimate it accurately, there’s a need to sustain expenses post retirement.

Need for retirement planning

Let’s say if you are in your 20s , you have 40years of work life assuming your retirement age is 60 years. If life expectancy is 80years then you have to save money for 20years post retirement. Thus you need to plan for retirement to sustain those years. So retirement planning is not about money accumulation but living a life of your own’s choice, doing things you like to do post retirement. This can only happen when retirement planning starts in early stage.

People generally wait too long before they think about retirement, therefore they fall short of time to sufficient fund calculation. At younger age too many responsibility like house marriage kids along with other expenses keep the idea of retirement planning at the back. But there responsibility are the exact reason one should plan for retirement. Inflation, taxes, pension, are the factors that affect retirement. Definition of retirement is also changing from time to time. People want no work in retirement time. Everyone wants to enjoy their retirement time with travel, leisure, social activities, pursuing hobbies, spending time with children. People now look more at relaxation.

Please go to above link to read the full article. Thanks for reading.

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Insurance is basic form of risk management that provides against the loss of the economic benefits. You can enjoy that from assets. Assets may be physical assets such as building, machinery, or they may be human assets such as employees. There is financial or economic consequences to the risk. Insurance protects against these risks. You can minimize the events but you cannot prevent it totally with no such history. In absence of insurance, person has to bear the loss.

Certain requirements are necessary for a risk to be insurable: an insurance company is able to offer the protection against perils, because it operates a common pool in which only a few is expected to suffer loss in any one year.

Entire pool pays premium but liability for insurance company will be only to few in a year.

Interest Insurable

Interest implies that the individual seeking insurance will face financial loss in the event of loss or destruction of the subject matter of insurance. The loss should be monetary in nature and not merely emotional or related to feelings. The interest must be lawful.

Accidental and unintentional

Loss must be accidental, unintentional and uncertain. The only exception is life insurance where the event being insured against, namely death, is certain. However, the time of death is uncertain, which makes it insurable. Loss should be fortuitous and outside the insured’s control.

Determinable and measurable

Loss should be definite as to cause and amount. The cause must be known, such as death in the case of Life Insurance or fire in the case of property Insurance. It means that loss must be calculatable based on some definite evidence.

For example, in case of health insurance, it is determinable with the help of medical bills.

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The value of money does not remain the same at all points of time. The money available at the present time is worth more than the same amount in the future. Itt has the potential to earn returns (or interest as the case may be).

Consider the following options, assuming there is no uncertainty associated with the cash flow: Receiving Rs.100 now. Receiving Rs.100 after one month. All investors would prefer to receive the cash flow now. Rather than wait for a month, though the amount to be received has the same value. This preference is attributed to the following reasons:

Instinctive preference for current consumption over future consumption.

The Ability to invest the Rs.100 for a month like a bank account or deposit. It earn a return so that it grows in value to more than Rs. 100 after one month. Clearly, Rs.100 available now is not equivalent to Rs.100 received after a month. The value associated with the same sum of money received at various points on the timeline is called the time value of money (popularly known as TVM). The time value of money received in earlier periods as compared to that received in later time periods will be higher. Since most decisions in finance involve cash flows spread over more than one period (monthly, quarterly, yearly etc.). The time value of money is a key principle in financial decision-making.

Present value

Present value is the amount that you would pay today for a cash flow that comes in the future. It brings the future value down to today’s price. It is based on the basic principle of time value of money that value of money keeps reducing as time passes. There are two ways in which the present value can be calculated. If there is a future value that has been given then this can be brought to the present by discounting it by the rate of return. This will give an idea of what the value of the future amount is worth today.

PV = FV/(1+r)^n Where FV= Future Value

PV= Present Value

r = rate of return for each compounding period

n = number of compounding periods For a one time receipt,

PV is calculated as per the following formulae:

PV = C/(1+r)^n

In case of a regular cash flow the present value can be calculated by the following formula

PV = C * ((1-(1/(1+r)^n))/r) Where C is the regular cash flow

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When available funds are insufficient then we can use debt to finance goals. we earn more than spends. our income is still not enough to fund or buy assets using existing savings.

Mortgage

Most people cannot buy a house without loan. This is because cost of a house is huge. if people waited till they had enough savings to buy a house then it is likely that this would not be possible till they near retirement. Lenders protect themselves by securing their loan against a charge or security or pledge or mortgage on the property. Such loans are also called mortgages.

Other debt includes auto loan, credits taken for buying consumers durables, personal loans and credit card outstanding. However debt comes at a cost and imposes a repayment obligation on the borrower. The decision on whether or not to use debt will depend upon the ability of the available income to bear the additional charge of interest cost and repayment.

Leverage

Debt is not always bad. in some cases the decision to use borrowed funds over own funds, also called leverage. It may actually increase the return made on investment. In some cases a loan may make more sense in a given situation. For example education loans is better choice than drawing from a retirement account to fund the children’s education. The future income would be easily able to repay the loan. t the same time the existing funds can continue to earn without losing the benefits of compounding.

Sometimes we need debt under various circumstances for example like temporary use of funds. This kind of short term needs might arise due to some emergency or some cash flow mismanagement. But it can ensure that an individual is able to continue on their lifepath without facing sudden disruptions

Debt to income ratio

A good indicator is the debt to income ratio(DTI). It meansure tha ability to meet the obligations arising from debt with the available income. There is no perfect or optimal DTI ratio that lenders require, but all lenders tend to agree that a lower DTI is better. Depending on the size and type of loan they’re using, lenders set their own limits on how low your DTI must be for loan approval. Consider a salaried employee rajesh who draws a salary of rs 15000 per month and is paying rs 7500 towards debt servicing. Debt servicing ratio comes to 7500÷15000=50%.This is too high if 50% goes toward debt servicing it affects the ability to meet other regular expenses, provide for emergencies and the person may have nothing left to invest for the future.

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https://investmoneyhub.com/the-ultimate-guide-to-mutual-fund-investment-everything-you-need-to-know/

Mutual funds are investment products available to investors through which they can invest in an asset class of their choice such as equity, debt, gold or real estate. Investors who may not want to invest directly in financial markets may instead get exposure to the same securities through a mutual fund.Similarly, investors can diversify their portfolio holdings even with small amounts, by investing in gold and real estate through mutual funds. There are multiple entities involved in the activities of a mutual fund business. All these entities are regulated by SEBI for their eligibility in terms of experience and financial soundness, range of responsibilities and accountability.

How mutual funds operate?

The mutual fund appoints trustees to take care of various rights of investor when launching various schemes. Mutual fund appoints an asset management company (AMC) to manage the activities related to launching a scheme, marketing it, collecting funds, investing the funds according to the scheme’s investment objectives and enabling investor transactions.

New Fund offer (NFO)

The mutual fund invites subscription from investors by issuing an offer document that gives all details of the proposed fund, including its investment objective, investment pattern in different asset classes to reflect the objective, the strategy of the fund manager to manage the fund, the costs and fees associated with managing the fund and all other information prescribed by SEBI as essential for an investor to make an investment decision. This is the New Fund Offer (NFO) of the scheme.

The investor will assess the suitability of the fund for their investment needs and make an investment decision. The application form along with the abridged offer document called the Key Information Memorandum (KIM) is available with the AMC, investor service centres and other distribution points, the details of which are available in the KIM. The activities related to maintaining investor records and investment details and communicating with the investors is done by the R&T agent of the scheme.

Investment objective

An investor should decide to invest in a mutual fund scheme after following the suitability of the scheme to their needs. A investment objective defines the scheme of mutual fund. The investment objective states what the scheme intends to achieve. The asset class that the fund will invest in, the type of securities that will be selected and the way the fund will be managed will depend upon the investment objective.

What are the units of mutual fund?

Just as the number of shares of company represents the investors’ investment, or number of bonds or debentures represent investments in debt, units represent each investor’s investments in that mutual fund derived from the amount invested. Each unit represents one share of the fund. For example, A & B invests in SBI Equity fund when the price of each unit is Rs.10. A invests Rs.5,000 and B Rs.10,000. The number of units allotted is calculated as amount invested/price per units. A : Rs.5,000/Rs.10 = 500 units B : Rs.10,000/Rs.10= 1000 units. Through a new fund offer (NFO) investor gets offer of units. Subsequently, depending upon the structure of the scheme, the fund may or may not issue fresh units to investors.

Net assets

The assets of a mutual fund scheme are the current value of the portfolio of securities held by it. There may be some current assets such as cash and receivables. Together they form the total assets of the scheme. From this, the fees and expenses related to managing the fund such as fund manager’s fees, charges paid to constituents, regulatory expenses on advertisements and such are deducted to arrive at the net assets of the scheme.

Net assets of the scheme will go down if investors take out their investments from the scheme by redeeming their units or if the securities held in the portfolio fall in value or when expenses related to the scheme are accounted for. The net assets of the scheme are therefore not a fixed value but keep changing with a change in any of the above factors.

Net asset value (NAV)

The net asset per unit of a scheme is Net assets/Number of outstanding units of the scheme. This is the Net asset value (NAV). The NAV of the scheme will change with every change in the Net Assets of the scheme.

A redemption or additional investment will not directly affect the NAV since the transactions are conducted at the NAV.The time when a request for a purchase or redemption or switch of units is received by a mutual fund will determine when it is processed. This is a standard that is followed across all mutual funds so that there is equity and fairness in allocation and that no investors gets a preferential treatment over others. The NAV that will be applicable would thus be determined by the time when the request is received by the mutual fund.

The current value of the portfolio forms the base of the net assets of the scheme and therefore the NAV. It means that if the portfolio was to be liquidated, then this would be the value that would be realised and distributed to the investors. Therefore, the portfolio has to reflect the current market price of the securities held. This process of valuing the portfolio on a daily basis at current value is called marking to market.

Open- ended and Closed-end Schemes

Mutual fund schemes can be structured as open-ended or closed-end schemes. An open-ended scheme allows investors to invest in additional units and redeem investment continuously at current NAV. The scheme is for perpetuity unless the investors decide to wind up the scheme. The unit capital of the scheme is not fixed but changes with every investment or redemption made by investors.

A closed-end scheme is for a fixed period or tenor. It offers units to investors only during the new fund offer (NFO).The scheme is closed for transactions with investors after this. The units allotted are redeemed by the fund at the prevalent NAV when the term is over and the fund ceases to exist after this. In the interim, if investors want to exit their investment they can do so by selling the units to other investors on a stock exchange where they are mandatorily listed. The unit capital of a closed end fund does not change over the life of the scheme since transactions between investors on the stock exchange does not affect the fund.

Interval fund

It is a variant of closed end funds which become open-ended during specified periods. During these periods investors can purchase and redeem units like in an open-ended fund. The specified transaction periods are for a minimum period of two days and there must be a minimum gap of 15 days between two transaction periods. Like closed-ended funds, these funds have to be listed on a stock exchange

Exchange Traded Funds(ETF)

These are mutual funds that have the features of a mutual fund but can be traded. Like a stock they are listed on the stock exchange so they can be traded all day long. Beneath this feature is the fact that the ETF is a mutual fund that has its value derived from the value of the holdings in its portfolio. ETFs usually track some index when it comes to equity oriented funds while they can also track the price of a commodity like gold.Instead of a single NAV for a day that the investor gets in a normal open ended fund there are multiple prices they can get in an ETF. In an ETF it is actually investors trading with each other while in case of an open ended fund it is the investor on one side of the transaction and the mutual fund on the other side.

Regulator

The Securities and Exchange Board of India (SEBI) is the primary regulator of mutual funds in India. SEBI’s Regulations called the SEBI (Mutual Funds) Regulations, 1996, along with amendments made from time to time, govern the setting up a mutual fund and its structure, launching a scheme, creating and managing the portfolio, investor protection, investor services and roles and responsibilities of the constituents. Apart from SEBI, other regulators such as the RBI are also involved for specific areas which involve foreign exchange transactions such as investments in international markets and investments by foreign nationals and the role of the banking system in the mutual funds industry in India.

Association of Mutual Funds in India (AMFI) is the industry body that oversees the functioning of the industry and recommends best practices to be followed by the industry members. SEBI has defined the process of categorizing open-end mutual fund products broadly as equity schemes, debt schemes, hybrid schemes, solution oriented schemes and other schemes.

Open-ended schemes are classified based on the asset class/sub-asset class, the strategy adopted to select and manage the schemes or the solutions offered by the scheme. Only one scheme per category is permitted for each mutual fund. The exceptions are Index funds and Exchange Traded Funds (ETF) tracking different indices, Fund of Funds with different underlying schemes and sectoral/thematic funds investing in different sectors or themes.

Equity Funds

Equity funds invest in a portfolio of equity shares and equity related instruments. Since the portfolio comprises of the equity instruments, the risk and return from the scheme will be similar to directly investing in equity markets. Equity funds can be further categorized on the basis of the strategy adopted by the fund managers to manage the fund.

a) Passive & Active Funds

Passive funds invest the money in the companies represented in an index such as Nifty or Sensex in the same proportion as the company’s representation in the index. There is no selection of securities or investment decisions taken by the fund manager as to when to invest or how much to invest in each security. Active funds select stocks for the portfolio based on a strategy that is intended to generate higher return than the index. Active funds can be further categorized based on the way the securities for the portfolio are selected.

b) Diversified Equity funds

Diversified equity funds invest across segments, sectors and sizes of companies. Since the portfolio takes exposure to different stocks across sectors and market segments, there is a lower risk in such funds of poor performance of few stocks or sectors. Some equity diversified funds can also be closed ended schemes which are in operation for a specific time period. The assets are redeemed after the time period of the scheme is over and returned to the investors.

c) Based on market capitalisation

Equity funds may focus on a particular size of companies to benefit from the features of such companies. Equity stocks may be segmented based on market capitalization as large- cap, mid-cap and small-cap stocks. The open-end equity schemes (based on market capitalisation) are classified by SEBI as follows:

Large cap

Large cap funds invest in stocks of large, liquid blue-chip companies with stable performance and returns. Large-cap companies are those ranked 1 to 100th in terms of full market capitalization in the list of stocks prepared by AMFI. To be classified as a large cap fund, at least 80% of the total assets should be invested in such large cap companies.

Mid cap

Mid-cap funds invest in mid-cap companies that have the potential for faster growth and higher returns. These companies are more susceptible to economic downturns and therefore, evaluating and selecting the right companies becomes important. Funds that invest in such companies have a higher risk of the companies selected not being able to withstand the slowdown in revenues and profits.

Similarly, the price of the stocks also fall more when markets fall. Mid-cap companies are those ranked 101st to 250th in terms of full market capitalization in the list of stocks prepared by AMFI. To classify as a mid-cap fund, at least 65% of the total assets should be invested in such companies. Large and Mid-cap funds invest in equity-related securities of a combination of large and mid-cap companies. To be classified as a large and mid-cap fund, a minimum of 35% of the total assets should be invested in large cap companies and a minimum of 35% in mid-cap companies.

Small cap

Small-cap funds invest in companies with small market capitalisation with intent of benefitting from the higher gains in the price of stocks. The risks are also higher. Companies ranked from 251 onwards in terms of total market capitalization in the list of stocks prepared by AMFI are defined as small-cap companies. To be classified as a small cap fund, at least 65% of the total assets should be invested in such companies.

Multi cap

Multi cap funds invest across large, mid and small cap companies. Earlier to be classified as a multi cap fund at least 65% of the total assets should be invested in equity related instruments of such companies. At least 75% of the assets to be invested in equity related instruments with a minimum of 25 % in large caps, 25% in mid-caps and 25% in small caps. In Flexicap funds there is no minimum investment limits across market caps and the funds are free to invest according to their requirements. Overall at least 65% of the corpus has to be invested in equities.

d) Based on Sectors and Industries

Sector funds invest in companies that belong to a particular sector such as technology or banking. The risk is higher because of lesser diversification since such funds are concentrated in a particular sector. Sector performances tend to be cyclical and the return from investing in a sector is never the same across time. For example, Auto sector, does well, when the economy is doing well and more cars, trucks and bikes are bought. It does not do well, when demand goes down.

Banking sector does well, when interest rates are low in the market; they don’t do well when rates are high. Investments in sector funds have to be timed well.

Thanks for reading.

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Your expertise in personal finance determine its ability to manage it’s current and future needs and expenses. You get money from salary business or profession or from assets created over time by saving and investing a portion of income. Creating assets to meet future income of household is good idea. If your income is insufficient, you can take loans to meet all these needs. This creates a liability for household. You need to settle that in future from the income. You also need to think about insurance. Meeting income needs in retirement is an important concerns and should be of paramount importance to household.Investment advisor use various financial ratios to assess the financial position of the client like the analyst use various financial ratios to assess the financial position of company.

If you get the data of your income, expenses, savings, investment portfolio, then you can get numerical snapshot of your current situation. It can help you to identify the areas that require changes and help set the course of action for the future. This gives you an important input in your situation.

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https://investmoneyhub.com/how-to-set-the-budget-in-proper-way/

Personal finance means analyzing various sources of incomes & expenses making sure there’s enough saving for different goals in future. There’s several factors associated with managing cashflow in person finance. Cash flow is main point of whole personal finance. Time & the amount of income spent as income is critical to maintain that there’s proper balance between two.

Even slight miscalculation in cash flow management can result in accumulation of debt which is costly for individuals. Debt also comes with extra interest outgo which affects your savings further. There must be adequate income coming in at all points of time so that a surplus called saving is generated which is essential for difficult times. Mismanagement in cashflow can be a headache for owner of family. It can disrupt normal flow of life and peace which becomes a crucial factor to consider. This can also cause health problems.

Important key points

1. Understand cashflow management. Use it to your advantage.

2.make a budget for your life considering future goals & stick to it

3.use forecasting method

4.make an emergency fund

Cash flow management gives you a sense of empowerment which boosts your confidence.

Preparing household budget

You can take the help of investment adviser or you can do it all by yourself. Prepare a list that contains all income sources & application of these typical funds. Some of the income might be regular in nature while there might be investment income which is irregular & small like dividends.

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https://investmoneyhub.com/the-importance-of-adopting-a-good-financial-plan/

Are you tired of living from paycheck to paycheck? Do you shop impulsively? Do you have  any control over your expenses? Do you struggle with reaching your financial goals? If it's you then you need to adopt few habits & learn the need of personal finance so you don't go bankrupt. Before you declare yourself broke and bankrupt, read this blog and make necessary changes in your life.

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