Few of the Top performing ELSS fund for the month of January 2009.
1) IDFC Tax Advantage ELSS (G)
2) Quantum Tax saving Fund (G)
3) UTI Long Term Advantage S2 (G)
Sensex gave a return of -3% during the month of January 2009. The above funds performed better then broader market.
Saturday, January 31, 2009
Tuesday, January 27, 2009
What is Estate Planning ?
Estate is the total property, real and personal, owned by an individual prior to distribution through a trust or will. Estate includes real estate, cars, bank accounts, Insurance policies, Mutual Fund investments, FD's, stocks, provident fund, Jewellery etc.
Estate planning distributes the real and personal property to an individual's heirs. Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death or incapacitation. An Estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.
Wills and trusts are common ways in which individuals dispose of their wealth. Power of Attorney, Gifts, Partition, Succession are other ways.
Financial Planning is the process of meeting individual life goals through the proper management of one's finances. Life goals can include buying a house, saving for your child's higher education, planning for retirement or distribution of assets among beneficiaries.
Estate planning is part of financial planning by which an individual can arrange the transfer of assets in anticipation of death or incapacitation. An estate plan aims to preserve maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.
Objectives of Estate Planning
1. Transfer of assets to beneficiaries: Almost all individuals want there accumulated wealth should go to their beneficiaries. The beneficiaries may be a family member, a friend or even other people in the society. The basic objective of Estate Planning is that all this accumulated wealth should be transferred to the beneficiaries
2. Paying least amount of taxes:
Planning should be done such that Maximum amount should go to the beneficiaries with minimum amount of tax deduction.
3. Planning for Incapacity:
There should be plan if there is incapacity to avoid court guardianship and legal battles creating unnecessary waste if time and money. This can be done through tools like Power of Attorney.
4. Orderly Business Succession:
If someone owns a business, his will should provide for management of succession plan, including who should be given management and operating powers of the company.
5. Who Shall Receive and When ?
Properly executed Will should mention all beneficiaries and who should get what and in what proportion. Also if there is a minor then there should be a trust formed to look afters his share till he gets major and can handle on his own.
6. Selecting Executor, Trustee, and Guardian:
An Executor is a clients personal representative after his death and responsible for functions such as
a) administering the estate and distributing the assets to clients beneficiaries
b) paying estate expenses and outstanding debts
c) ensuring that all life insurance and retirement plan benefits are received
d) Filing or hiring a person to file all necessary tax returns and paying the appropriate central and state taxes from estate funds. When those duties are complete, this responsibility ends.
Trustee is required if the clients will creates trusts to accomplish more long-term goals, such as providing for minor children or giving to a charity or educational institutions. Trustee is responsible for the managing the trusts assets and ensuring that the beneficiaries are provided for in accordance with the provisions of the Trust.
Guardian: is appointed to act as a surrogate parent for the clients children, ensuring that it is in the best interests of children.
Risk associated with failing to plan for Estate Transfers
1. Establish the client/planner relationship:
The financial planner should clearly explain or document the services to be provided to the client and define both his and the clients responsibilities. The client and the Financial planner should decide on how long the relationship should last and how is the compensation and How the the decisions will be made.
2. Gather Clients Information: Financial planner should gather all the information from the client including the cash flow , expenses, income, future long term expenses, long term goals. clients intentions and expectations.
3. Determine the clients Financial Status:
The financial planner should analyze clients information to assess his current situation and the total worth of his estate to determine what he must do to meet clients goals like analyzing assets , liabilities and cash flow, insurance coverage , investments, tax strategies etc.
4. Develop a comprehensive plan to transfers consistent with all information and objectives: The planner should address clients objectives like transfer to beneficiaries with least amount of taxes.
5. Implement the Estate Plan: There should be an agreement between the client and the planner how should the plan be implemented.
6. Review the Estate plan periodically: The client and planner should also agree on who should monitor the progress of the plan. If the planner is in charge of the process. he should report to the client periodically to review the situation and adjust recommendations, if needed as the clients life changes.
Estate planning distributes the real and personal property to an individual's heirs. Estate planning is the process by which an individual or family arranges the transfer of assets in anticipation of death or incapacitation. An Estate plan aims to preserve the maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.
Wills and trusts are common ways in which individuals dispose of their wealth. Power of Attorney, Gifts, Partition, Succession are other ways.
Financial Planning is the process of meeting individual life goals through the proper management of one's finances. Life goals can include buying a house, saving for your child's higher education, planning for retirement or distribution of assets among beneficiaries.
Estate planning is part of financial planning by which an individual can arrange the transfer of assets in anticipation of death or incapacitation. An estate plan aims to preserve maximum amount of wealth possible for the intended beneficiaries and flexibility for the individual prior to death.
Objectives of Estate Planning
1. Transfer of assets to beneficiaries: Almost all individuals want there accumulated wealth should go to their beneficiaries. The beneficiaries may be a family member, a friend or even other people in the society. The basic objective of Estate Planning is that all this accumulated wealth should be transferred to the beneficiaries
2. Paying least amount of taxes:
Planning should be done such that Maximum amount should go to the beneficiaries with minimum amount of tax deduction.
3. Planning for Incapacity:
There should be plan if there is incapacity to avoid court guardianship and legal battles creating unnecessary waste if time and money. This can be done through tools like Power of Attorney.
4. Orderly Business Succession:
If someone owns a business, his will should provide for management of succession plan, including who should be given management and operating powers of the company.
5. Who Shall Receive and When ?
Properly executed Will should mention all beneficiaries and who should get what and in what proportion. Also if there is a minor then there should be a trust formed to look afters his share till he gets major and can handle on his own.
6. Selecting Executor, Trustee, and Guardian:
An Executor is a clients personal representative after his death and responsible for functions such as
a) administering the estate and distributing the assets to clients beneficiaries
b) paying estate expenses and outstanding debts
c) ensuring that all life insurance and retirement plan benefits are received
d) Filing or hiring a person to file all necessary tax returns and paying the appropriate central and state taxes from estate funds. When those duties are complete, this responsibility ends.
Trustee is required if the clients will creates trusts to accomplish more long-term goals, such as providing for minor children or giving to a charity or educational institutions. Trustee is responsible for the managing the trusts assets and ensuring that the beneficiaries are provided for in accordance with the provisions of the Trust.
Guardian: is appointed to act as a surrogate parent for the clients children, ensuring that it is in the best interests of children.
Risk associated with failing to plan for Estate Transfers
- Clients property transfer wishes go unfulfilled.
- Transfer taxes are excessive
- Transfer costs are excessive
- The clients family is not provided for financially in a proper manner
- Insufficient liquidity to cover clients debts, taxes and cost at death
- Time consuming and expensive Probate.
1. Establish the client/planner relationship:
The financial planner should clearly explain or document the services to be provided to the client and define both his and the clients responsibilities. The client and the Financial planner should decide on how long the relationship should last and how is the compensation and How the the decisions will be made.
2. Gather Clients Information: Financial planner should gather all the information from the client including the cash flow , expenses, income, future long term expenses, long term goals. clients intentions and expectations.
3. Determine the clients Financial Status:
The financial planner should analyze clients information to assess his current situation and the total worth of his estate to determine what he must do to meet clients goals like analyzing assets , liabilities and cash flow, insurance coverage , investments, tax strategies etc.
4. Develop a comprehensive plan to transfers consistent with all information and objectives: The planner should address clients objectives like transfer to beneficiaries with least amount of taxes.
5. Implement the Estate Plan: There should be an agreement between the client and the planner how should the plan be implemented.
6. Review the Estate plan periodically: The client and planner should also agree on who should monitor the progress of the plan. If the planner is in charge of the process. he should report to the client periodically to review the situation and adjust recommendations, if needed as the clients life changes.
Saturday, January 24, 2009
Post office Monthly Income Scheme (MIS)
Post Office Monthly Income Scheme (MIS)
This is one of the very good scheme from post office the best part is it gives you interest every month. you can open this account in following ways at the post office near by your home
This is one of the very good scheme from post office the best part is it gives you interest every month. you can open this account in following ways at the post office near by your home
- An adult individual in his own name
- An adult on behalf of minor
- An adult jointly with maximum joint holder restricted to three.
How Much
- Minimum Rs 1,000/-
- Maximum Rs. 3,00,000/- in single account
- Maximum Rs 6,00,000/- in joint account
This limit has been increased recently to 4,50,000 for individual
Interest
- 8% per annum payable monthly
- In some post office ECS facility is available where the interest is credited every month directly to saving bank account of the depositor.
- Depositor may open SB account with the same post office where he deposited his MIS and give standing instruction for crediting the interest amount directly to the SB account on monthly basis.
Term
- 6 year Interest rate remains the same for the entire period
Withdrawals
- No premature repayment is permitted within one year of deposit
- After one year but before completion of 3 years, premature withdrawal of entire balance is permitted with 2% penalty on the deposit amount, no deductions on interest already paid
- If withdrawn after 3 years the penalty is restricted to 1% of the deposit amount.
- Part withdrawals are not permited. ( TIP: that is why even if you want to deposit 3 lakh , you should deposit 3 different amounts of 1 lakh)
Bonus on maturity
- A bonus of 5% of deposit amount is payable on maturity (end of six years)
Public Provident Fund (PPF)
Public Provident Fund (PPF)
can be opened in
1. Head Post-Office
2. GPO
3. Any branch of SBI
4. Selected branches of Nationalized bank like Central bank of India etc
Conditions
Past Interest rate were as under
upto 14.1.2000 - 12%
15.1.2000 to 28.2.2001 - 11%
1.3.2001 to 28.2.2002 - 9.5%
1.3.2002 to 28.2.2003 - 9%
1.3.2003 onwards - 8%
can be opened in
1. Head Post-Office
2. GPO
3. Any branch of SBI
4. Selected branches of Nationalized bank like Central bank of India etc
Conditions
- Minimum investment of Rs. 500 in a financial year
- Maximum of Rs. 70,000/- in a financial year
- can be invested in lump sum or in convenient instalments
- you cannot deposit more then 12 times in a year
Interest
- 8% p.a credited to the account, once a year, as on 31st March of each year.
- Deposits made before 5th of every month are eligible for interest for that month. Date of deposit is considered for this purpose
- Interest can be changed by the Government of India at any time
Past Interest rate were as under
upto 14.1.2000 - 12%
15.1.2000 to 28.2.2001 - 11%
1.3.2001 to 28.2.2002 - 9.5%
1.3.2002 to 28.2.2003 - 9%
1.3.2003 onwards - 8%
Term
- PPF is 15 year account
- The term of the account can be extended by 5 years at a time by making an application in specified form to the deposit office, within one year
- An account can be extended any number of times
- The entire balance can be withdrawn in full after the expiry of 15 years from the close of the financial year in which the account was opened.
Loan
- The depositor can take a loan in the third financial year from the financial year in which the account was opened
- loan can be taken upto 25% of the amount standing at the end of the second preceding financial year
- The loan shall be repayable in 36 instalments and shall bear interest at the rate of 1%. No loan can be obtained after the end of 5th year.
Withdrawals
- Depositor is permited to make one withdrawal every financial year.
- withdrawal is permitted from the 7th financial year
- Amount of withdrawal can not exceed 50% of the balance to his credit at the end of the fourth year immediately preceding the year of withdrawal or at the end of the preceding year, whichever is less
Tax Benefits
- The interest earned on PPF account (including interest during the extension period) is excluded from income tax u/s 10(1).
- The entire deposit in the account is exempt from wealth tax.
- The annual contribution to the account is eligible for deduction u/s 80c
Transferability
- A PPF account with one deposit office can be transferred to another deposit office
Nomination
- PPF account is necessarily opened in a single name. Nomination facility is available
- A depositor can nominate more than one person and stipulate the percentage of sharing among nominees
Thursday, January 22, 2009
How does Diversification help us ?
Diversification help us when ?
1) Combining two securities with positive correlation with each other provides no reduction in portfolio risk. as more securities are added the risk remain weighted average. There is no risk reduction.
2)Combining two securities with zero correlation (each is independent of other)with each other reduces the risk of the portfolio. If more securities are added the uncorrelated returns are added to the portfolio and significant risk reduction can be achieved.
3) Combining two securities with negative correlation with each other could eliminate risk altogether. This is the principle used in hedging strategies.
4) In real world this extreme cases are rare, most of the securities typically have positive correlation with each other. So risk can be reduced but it cannot be eliminated. Other things being equal investor should find securities with least positive correlation possible. Ideally they should look for negative of low positive correlation. 1) Combining two securities with positive correlation with each other provides no reduction in portfolio risk. as more securities are added the risk remain weighted average. There is no risk reduction.
2)Combining two securities with zero correlation (each is independent of other)with each other reduces the risk of the portfolio. If more securities are added the uncorrelated returns are added to the portfolio and significant risk reduction can be achieved.
3) Combining two securities with negative correlation with each other could eliminate risk altogether. This is the principle used in hedging strategies.
Three factors determine the risk of portfolio.
1) The variance of each security.
2) The Co-variance between securities.
3) The portfolio weights for each security.
Every investor should try for an efficient portfolio defined by Markowitz's as the one that has smallest portfolio risk for given level of expected return or the largest expected return for the given level of risk.
Rupee cost averaging
The systematic investment plans in mutual funds, along with consistent periodic new purchases of shares, creates risk reduction by creating lower cost per share owned over time. This is known as rupee cost averaging.
Tuesday, January 20, 2009
Building of an Investment Portfolio; Asset Allocation, Security selection
While Building an Investment portfolio two major things you should consider
Also asset allocation is closely related with the age of investor this is called Lif-Cycle theory. The investor with age of 50 nearing to retirement should take very little risk for his investments and the person who is just starting his carrer can take high risk because he has time on his hand. So ideally younger the investor more allocation to stocks and older the investor less allocation to stocks.
List out the asset classes
1) Cash or savings account
2) Stocks
3) Bonds
4) Real Estate
5) Foreign Securities
Financial planner in consultation with the investor should plan out percentages to be allocated to each of the assets. The next step would be about individual securities within each asset class.
Average portfolio risk can be reduced by 19% as we keep on adding securities to the portfolio the total risk associated with the portfolio of stocks declines rapidly. The first few stocks cause a large decrease in portfolio risk. based on actual data 51 percent of the portfolio standard deviation is eliminated as we go from 1 to 10 securities. unfortunately the benefits of adding more securities after a point is very small and it keeps getting smaller and smaller.
Modern portfolio theory according to Markowitz.
Markowitz developed an equation that calculates the risk of a portfolio as measured by the variance or standard deviation. His equation accounts for two factors.
1) Weighted Individual Security risks that is variance of each individual security, weighted by percentage of investible funds placed in each individual security.
2) Weighted co-movements between securities returns that is the covariance between the securities returns, again weighted by the percentage of investible funds placed in each security.
- Asset Allocation
- Security Selection
Also asset allocation is closely related with the age of investor this is called Lif-Cycle theory. The investor with age of 50 nearing to retirement should take very little risk for his investments and the person who is just starting his carrer can take high risk because he has time on his hand. So ideally younger the investor more allocation to stocks and older the investor less allocation to stocks.
List out the asset classes
1) Cash or savings account
2) Stocks
3) Bonds
4) Real Estate
5) Foreign Securities
Financial planner in consultation with the investor should plan out percentages to be allocated to each of the assets. The next step would be about individual securities within each asset class.
Average portfolio risk can be reduced by 19% as we keep on adding securities to the portfolio the total risk associated with the portfolio of stocks declines rapidly. The first few stocks cause a large decrease in portfolio risk. based on actual data 51 percent of the portfolio standard deviation is eliminated as we go from 1 to 10 securities. unfortunately the benefits of adding more securities after a point is very small and it keeps getting smaller and smaller.
Modern portfolio theory according to Markowitz.
Markowitz developed an equation that calculates the risk of a portfolio as measured by the variance or standard deviation. His equation accounts for two factors.
1) Weighted Individual Security risks that is variance of each individual security, weighted by percentage of investible funds placed in each individual security.
2) Weighted co-movements between securities returns that is the covariance between the securities returns, again weighted by the percentage of investible funds placed in each security.
Saturday, January 17, 2009
Measurement of Portfolio performance
It is very simple to measure Individual security's measure. It is also good to measure the performance of an entire portfolio.
Evaluating the performance of a particular portfolio involves measuring both the realized return and the differential risk of the portfolio and recognize any constraint the portfolio manager may face. A 14% return by itself is meaningless figure unless it is viewed in comparison with benchmark figure or average return of that category over same time frame and similar level of risk taken.
Measure of return is always done in relation to risk taken.
In order to evaluate performance properly, we must determine whether returns are good enough for the amount of risk taken. We must always asses risk-adjusted returns.
An equity portfolio consisting of sensex stocks should be evaluated relative to BSE sensex. on the other hand equity portfolio of small cap stock should not be judged against sensex.
Risk-adjusted returns
It is important to evaluate portfolio not only with performance but also how much risk is taken. William Sharpe, Jack Treynor and Micheal Jensen developed the measures of portfolio performance.
Sharpe Ratio
Reward-to-variability ration (RVAR). The measure uses benchmark based on the ex post capital market line. Sharpe used RVAR to:
Rp = Return of the portfolio
Rf = Risk free return
SD = Standard Deviation or portfolio (total risk)
Trey nor Measure
Jack Treynor measures called reward-to volatility ratio (RVOL).
RVOL = Rp - Rf
Jensen's Index
It measure the portfolio performance with differential return measure(ALPHA).
It attempts to measure the constant return that the portfolio manager earned above or below the return of an unmanaged portfolio with the same market risk.
Jensen's index = Rp - [Rf + (Rm- Rf)*B]
Rp = return of portfolio
Rf = risk free return
Rm = Market return (Index return)
B= Beta of portfolio (Beta is the measure of market risk of the portfolio)
Evaluating the performance of a particular portfolio involves measuring both the realized return and the differential risk of the portfolio and recognize any constraint the portfolio manager may face. A 14% return by itself is meaningless figure unless it is viewed in comparison with benchmark figure or average return of that category over same time frame and similar level of risk taken.
Measure of return is always done in relation to risk taken.
In order to evaluate performance properly, we must determine whether returns are good enough for the amount of risk taken. We must always asses risk-adjusted returns.
An equity portfolio consisting of sensex stocks should be evaluated relative to BSE sensex. on the other hand equity portfolio of small cap stock should not be judged against sensex.
Risk-adjusted returns
It is important to evaluate portfolio not only with performance but also how much risk is taken. William Sharpe, Jack Treynor and Micheal Jensen developed the measures of portfolio performance.
Sharpe Ratio
Reward-to-variability ration (RVAR). The measure uses benchmark based on the ex post capital market line. Sharpe used RVAR to:
- Measure the excess return per unit of total risk(as measured by standard deviation)
- Rank portfolios by RVAR ( the higher the RAVR, better the portfolio performance)
Rp = Return of the portfolio
Rf = Risk free return
SD = Standard Deviation or portfolio (total risk)
Trey nor Measure
Jack Treynor measures called reward-to volatility ratio (RVOL).
RVOL = Rp - Rf
Jensen's Index
It measure the portfolio performance with differential return measure(ALPHA).
It attempts to measure the constant return that the portfolio manager earned above or below the return of an unmanaged portfolio with the same market risk.
Jensen's index = Rp - [Rf + (Rm- Rf)*B]
Rp = return of portfolio
Rf = risk free return
Rm = Market return (Index return)
B= Beta of portfolio (Beta is the measure of market risk of the portfolio)
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