Models work when they are appropriate for the particular circumstance, but some of the best investment judgments over time have come when people recognized that models derived in other periods were broken or not directly relevant.” Abby Joseph Cohen

Investing in mutual funds seems interesting, with number of websites, TV and other finance and wealth magazines publishing various information. However it is a challenging task and involves knowledge regarding the shares and securities market and various laws that govern mutual funds is necessary before investing in them. Understanding the principle of mutual funds; the investment of the money of a large number of investors in stocks, bonds and money market instruments that are managed by managers makes one feel relieved. However it is best for you as an investor to make a right choice of the mutual fund that suits your need.

Choosing right MF:
Investment Objective & Time Horizon

The objective of the fund or the use to which the funds would be put to would be a vital deciding factor. Mutual funds investing in stocks would suit those that are ready to take more risks; stocks means more exposure to the volatile market though higher returns. The length of time that one has to wait to get reasonable returns also plays a vital role. So it is best to read the offer document or fund brochure carefully before making the decision.
Liquidity:
In addition whether a fund is an open-ended or close ended one points out to how liquid your investment is. Open-ended funds are preferable to close ended ones as they can be converted to cash more easily than close ended ones that involve waiting for a period of time. Historically open ended funds have performed better than closed ended funds.
Diversification:
It pays to check for diversification in mutual funds, for an optimum diversification makes for a good choice. Opting for a diversification over 8 to 10 securities would be more risky than going in for diversification of 20 to 30 stocks. The diversification of stocks over 80 to 100 securities may mean difficulty of management to the fund manager. In addition making sure to ensure that there is a balanced diversification helps.



Fund Performance:
After getting comfortable with the fund’s objective, it becomes equally important to know and analyze the fund’s performance. This involves looking at the fund’s short term and long term performance and comparing it with larger market indices or benchmarks like BSE Sensex and NSE Nifty. A higher market index over a longer period indicates better funds, however past performances in case of mutual funds can never be a guarantee of future returns and can serve only as an indicator.

Level of Risk:
The level of risk involved would be another important indicator, with higher returns available only at higher risk levels. Would you like to go for a low risk debt fund or to go for a moderate risk balanced fund or a high risk equity fund? Look before you leap.

Volatility & Consistency:
Next it is to be understood that any 2 funds giving the same return are not necessarily the same, as one fund could be more subject to market ups and downs than the other. Volatile nature of funds is more a standard deviation meaning more risk involved. In the same category of funds, an investor needs to choose funds performing consistently.

Fund management:
The management of the fund plays an important role in deciding the best mutual fund for you, with professionalism being very important. The experience of the fund manager and the number of years he/she has been associated with the fund matters. With a new manager and frequent turnover are not good for investors.

Charges:
Things seem pleasant in mutual funds; however the charges like entry load, exit load, administrative charges and fund management charges on an annual basis are to be carefully looked into. It is significant to note that these charges cannot exceed 2.5% of the fund’s assets. Most funds have uniform charges, however hidden charges need to be looked into and carefully analyzed

To conclude mutual funds may be the best investments as they can be done in small amounts as compared to other types of investment and carry a comparatively lower risk. But your ultimate success in the form of good returns can only be assured with following these steps of smart mutual investment planning.
The auth


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

Despite the US Treasury crying foul for all that it wants, the decision taken by the Standard & Poor’s to downgrade the top-notch credit rating by one notch and the ensuing plunge in the stock market are clear signs of loss of confidence and an assessment that is political and not economic. There is a small question about the technical capability of the United States of America to make a good decision about the debts but there is a big doubt in the minds of the experts about the political system of the nation to resolve the already existing financial problems and to get out of debt as soon as possible. The debt ceiling deal between the Congressional Republicans and President Obama could merely stave off the crisis of the confidence for the moment but does not really address the need to raise enough consciousness so that the nation doesn’t fall back into yet another recession. Most US economists are of the opinion that a double-dip recession is on the horizon due to the sour turn of every major economic indicator, but is this true? Read on.

Chances of the US economy to dip back into a recession – What are the possibilities?

Though it is going to be a scary time for most people, you need to analyze every particular issue that can speak about the credibility of the fact. This particular prediction varies by the forecasters but the standard range usually between 25 and 50%. There are some particular economists who are deliberately leading the entire pessimistic crowd by saying that there are more than better chances of the US headed for another recession. Especially when you look at the unemployment figure, the number of jobs that are generated, you can decipher the possibility of the US drifting to yet another recession. However, Jay Carney, the White House spokesman negates all such opinion by saying that there are no such threats of a double-dip recession.

What are the economic signs that are bothering almost everyone?

There are some particular economic signs that are worrying almost every citizen within the US. The signs of slow economic growth are one of the biggest things that are being considered as the most prominent reason for the nation sliding back into another recession. As per the reports of the Commerce Department, the expansion of the Gross Domestic Product was 1.4% in the 2^nd quarter of 2011 and 0.5% in the first. Service activity and manufacturing indices were down and consumer spending has also dropped. The massive cuts in the government budget are also wiping out some of the private sector gains, including a 38,000 job-drag in July, 2011. The Labor Department said that the US employment-to-population ratio or the percentage of work-age Americans who actually hold a job has recently dropped down to 59% in July and this is the lowest figure since 1983. This is deemed to be one of the scariest signs of the double-dip recession.

Every cloud has a silver lining – What’s the silver lining here?

Yes, there are some bright spots amidst all the negative news! The sagging expectations for growth are pushing up the global oil prices to their lowest level. The lower are the oil prices, the better will be the chances of consumers to step up their spending once again. Secondly, as the corporate profits remain high compared to the relative number of employees in the private sector, this will help the economy.

The US people lost the first decade of the 21^st century by borrowing money as if there’s no tomorrow and still run the risk of losing this decade to an economic stagnation. Experts recommend citizens not to panic and to hope for the best so that the US is saved from sleepwalking into yet another financial fiasco.

Jason Holmes is a regular writer with Debt Consolidation Care and is also a contributory writer with other financial sites. His expertise is woven around various aspects of the debt industry and with his e-books he tries to impart to people the different situations and simple solutions to get out of difficult situations. Some of his works include e-books like 'Credit Score The Quintessential Therapy for a Happy Pocket', Take Creditors and Collection Agencies to Small Claims Court' and, My Story- From Depression To a Smile'.

Let’s start the useful exercise:
Finance may mean different things for different people. Some assume that they need no financial planning as they have very little finances. Still others believe that once they have invested their savings for future their task is over. In addition some pre-conceived notions that company we work for, pays our medical and hospitalization expenses so we need no reserve, combined with the notion that a life insurance policy takes care of death, disability and accidents.
The need for no financial planning is complemented with the myth especially among the young that their retirement is far away and they could easily plan for it just a few years in advance. To further complement this myth that our ancestors would leave behind estate and property for us to enjoy with a will.
Well dear friends financial planning can never be overlooked as finances invested well today could provide for good financial resources in future. It is true that a person who helps himself succeeds best in having financial stability in life.

Have a look at the myths of financial planning:
1. “I have life insurance to protect them in case of my death.”
My hearty congratulations for taking up insurance policies to protect your family needs in case of your death. But the question is do you have adequate insurance to look after your family needs for a lifetime. In addition it is worth considering if you have enough to look after your children’s education and marriage needs considering the rate of inflation. Also it is worth considering if your family would be financially secure if they have to repay loans taken by you after your death.
2. “I just make both ends meet, where is the need to go in for financial planning?”
You may be right, but if I were to tell you that we all need to provide for financial contingencies would you say financial planning is unnecessary? So all of us have to plan to make their hard-earned money to work for them, and this applies more so single income families. Financial planning makes sense not only to repay loans taken but also to get continuous supply of money for our needs. So we need to have a strict look at our expenses and find ways to minimize them. A small example could be to forego a pack of cigarette a day to save and invest in viable investment scheme.
3. “My financial planning is done as I have invested in different schemes.”
I appreciate you for taking the first step towards financial sufficiency, however believe me this is just the first step to the 1000 miles towards lifelong financial stability.
All you are investments are really supporting your financial goals or not? Is the schemes in which you have invested is really performing or not? Is the maturity value from the schemes is sufficient to meet the goals or not?
A financial need analysis to cover various short term and long term needs could be best accomplished with a financial expert’s advice.
4. “Youth is to enjoy, retirement is far away. It will look after itself.”
Let us face this myth headlong with analyzing that retirement is not a contingency, but a necessity that is to be provided for right from the time one starts earning. It is advisable and much easier to start saving when young, as savings become difficult with additional expenses.
Saving for retirement starting from youth through retirement plans seems much easier when the amount to be put aside for the corpus is much less every year and it is also possible to save through various investment avenues. Starting to invest for retirement when young gives one the advantages of compounding of savings. This would also help take care of inflationary tendencies.
5. “I have enough health insurance, and my company gives me coverage too.”
Being covered with health insurance and medical expenses at work is great, but this would not cover all your health expenses. It is always good to take additional coverage and provide for unforeseen contingencies like critical illness that would not only involve expenses on treatment, but also on maintaining the lifestyle of the family till one is ready to go to work.
Being young does not prevent you or any of your family members from getting a critical illness with the present lifestyle. With fresh insurance coverage over the age of 45 being tough it is best to save for this period.

6. “I do not have to worry as I will inherit from my parents as my children will inherit from me.”
Inheritance has neither been a cake-walk, and a will is very important for inheritance. Financial planning involves the making of a will to avoid disputes between the heirs. Making a will is not about how big your property or estate is, it is more about necessarily making a will about the inheritance.
Financial planning is not just the forte of finance professionals alone, but is judicious and smart planning of finances for a lifetime. Lastly financial planning is not an end but a means to an end of financial stability and security.


The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

Happy Diwali; let us discuss fireworks, Diwali and great financial planning.
As we start our festivities of Diwali 2011, my mind went to the powerful lessons that Diwali taught us all. These thoughts gathered momentum when I started thinking about the similarities of Diwali and financial planning. It made me realize that financial planning lessons were so simple, yet enlightening that even a 12 year old could master its principles and start financial planning for a lifetime.
Fireworks and Diwali
I have always enjoyed fireworks, both as a child as well as a parent and found that mine as well as my children’s safety and comfort lay in obeyed certain rules while handling fireworks. This included avoiding loose and flowing clothes and wearing appropriate footwear, goggles and protection for the ears. Next noisy crackers caused hearing, ENT and nervous problems, with smoke causing ENT and allergic problems. This made me come to the conclusion that we need to enjoy crackers and fireworks, but were excesses were to be avoided.

Safety applies to all Diwali, as it does to other aspects of life with our requiring reading and following instructions on the boxes. Next keeping of a bucket of water handy to put off fires and keeping numbers of fire stations proves handy. In addition vigilance and safety of children while using fireworks is to be adhered to, with keeping fireworks out of reach from children when not in use. My dear friends now is the right time to view the great co-relation between crackers/fireworks and financial planning.

Grasp the financial planning lessons Diwali teaches us:

 Modern science with its developments have been able to render us some very useful lessons like noise pollution that could affect not only infants, the old, and those with nervous, heart and psychiatric problems, but also cause slow declining abilities in many others.

This applies to noisy stocks also; this noise pollution in the form of everyone talking about hot stocks and best next issue. This information could also affect us with its full impact. This inside information may at times prove very dangerous if acted upon. We have observed many investors not only being be charged with fines and/jail, but it has been harmful to financial professionals as well. Next if they are rumors the financial harm could be too large to recoup and rejuvenate easily and quickly. It is worth understanding also that some information could be stale and if acted upon cause indigestions of the worst order.

 The next most close and interesting co-relation of fireworks and the colorful nature of the festival Diwali are being prepared for emergencies, with this meaning keeping water and the numbers of the nearby fire stations handy. This applies to also using long sparklers and incense sticks, avoiding the use of metal and glass containers and using fireworks in open grounds.
It is true that emergencies and contingencies are a part of everyone’s life and being a wise and smart financial planner requires not only planning for emergencies, but also for contingencies in the form of death. Finances in the form of term insurance could provide for the stable lifestyle of your loving family on death. Health insurance and critical health insurance plans would provide for health and critical illness coverage and stable lifestyle in such contingencies. The youth could benefit also with investing surplus funds on land in remote places and allow it to appreciate. Creating contingency funds could act as emergency fire extinguishers.
 I appreciate those who have listened to the experienced regarding wearing appropriate clothing, footwear and other safety accessories while enjoying fireworks. Financial planning for a lifetime also requires certain measures.
Understand that investing is different from financial planning for a lifetime. Financial planning requires clear understanding of the risks and returns available on the different investments like shares, mutual funds and fixed deposits in companies and banks So you need to draft a clear risk management strategies in while constructing your portfolio.
 Storing of fireworks out of reach of children properly requires as much innovation as children are very smart to fool parents now-a-days and get into accidents and dangers. Parents need to be smart and creative to find out what works and what doesn’t. The same thing dear chums apply to safety and security of our investments.
Safety and appropriate storage of our precious investments in the form of shares, mutual funds, land and flat documents, gold and gold ETF, insurance and other investments lies in storing them in separate places in lockers at home/banks and other places. In addition to storage, the information regarding where we have stored these documents should be a family information and secret for safety.
Finally, we were taught by wise parents to not make our own fireworks, as it is not our expertise. Similarly a financial expert is the best person to advice us on financial planning for a lifetime. Finding and engaging a financial planner would be best to create and make changes in your financial planning according to your life’s changing circumstances.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

In the last 10 years, sensex gas grown at 17.79% CAGR. That means, if someone could have invested Rs. 1 lac 10 years back, it could have grown to 5.14 lacs. In the last 10 years one third of diversified equity mutual funds have delivered a CAGR of more than 25%. That means if someone could have invested 10 years back in these mutual funds Rs.1lac, it could have grown to Rs.9.31 Lacs.

But how many investors have REALLY got these kinds of returns…?

In this context knowing about the study conducted by Dalbar to determine how the investment behavior and decisions impacted the overall investment performance would be advisable. Dalbar, Inc. is a US based leading financial services market research firm. They have done comparative study on the returns of S&P 500 Index and the returns of the investors for a 20 year period ending 31-12-10.
The study revealed the following two important facts.
• The average return of the S&P 500 during this 20 year period is 9.14%.
• The average return of the equity investor during the same period is only 3.27%
When the market is delivering so much, why is that the investor is making out less? What are all the factors contributing for this gap in the market returns and the investor returns?
Though the market is delivering returns, investors were not able to benefit. Why is it so? What went wrong? It is because of the nature or character of the investor.
Agriculture is getting affected by nature, either because of excess rain or no rain. But we found out a system to fight against this nature. We built dams. So whenever there is excess rain, dams retain water to save agriculture and whenever there is no rain, it releases water to help agriculture.
Similarly investors are supposed to find and build a dam against their nature and behaviour towards stock market investing in order to get better returns.
What are the natures or behaviours of an investor that blocks him from getting the market return?
Fear:
When stocks suffer large losses for a sustained period, the overall market can become more fearful of sustaining further losses. At that point in time everyone will come with their own logic, reasoning, and statistical evidence on the chances of further losses. Fear stands for “False Evidence Appearing Real”.

Greed:
Most of us have a desire to acquire as much wealth as possible in the shortest amount of time. This get-rich-quick mentality makes it hard to maintain gains and keep to a strict investment plan over the long term.

An investment portfolio based on ones personality

Basing investment portfolios on one’s personal likes and dislikes are the first of the powerful influences. It is like investing in cars and fancy gadgets just because you love them. Investing on shares just because you think they are smart or flashy is ambiguous, for they could sink in the long run. It is better instead to invest in profitable ventures that pay in the long run. It is true; our investment fancies make us pay a heavy price.

Follow the flock policy

The follow the flock for fear of being the black sheep policy makes you as an investor to believe in following others in the share markets. The pitfalls of group behavior lead us to buying high and selling less.

It also leads to unbalanced investment emotions of black or white (wrong or right) with no shades of objectivity and rationality. Buying high and selling low has made many investors suffer heavy losses in the long run.


A look at positive investment behavior:

It is good to be investment smart with humility and reasonable aspirations that makes achievement of financial goals a reality. I have never known of any high return investments that did not have high risks.

Patience over a lifetime and being able to assume stress helps in aiming for long term positive returns and contributes to assuming less financial stress after retirement.

Positive investment behavior requires balanced moods, one of neither elation nor panic. Neither selling in a panic due to share market positions or adverse world or country conditions is advisable, nor is a reaction of extreme financial prosperity, both can destroy a lifetime of healthy investment. A long-term investor needs to realize that neither despairing nor elation of situations in civilization proves worthy for long term financial portfolios.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

"Someone's sitting in the shade today because someone planted a tree a long time ago." Warren Buffet

This quotation, it made me think that this is what children that were taught to be financially smart turned out as adults. This next made me feel that it was just not important to send children to school to learn how to count and write, but as parents to teach them about the value of certain aspects in life. With consumerism overtaking the economy even in developing countries of the world like India, many youngsters are having easy accessibility to credit cards and EMI’s, making our children realize the difference between a real want and need would make them financially smart for a lifetime.

Hence smart parents should assume a vital role to render useful lessons of financial management to their children. Smart parents would not only render useful finance lessons, but would also be a prominent example and take effective feedback by making their children a partner in their financial decisions.
Let’s look at how we can make parenting to raise children, who are financially smart, an interesting and enjoyable experience.
Have a look at these aspects in inculcating learning about personal finance:
 Simple living: My grandfather has always been a part of my learning principles of smart financial management and I respect him for what he always told us as children, “Simple living and high thinking are the essence of life. We should be able to live with minimum wants if we wish to have an umbrella over us for a lifetime.” He was a standing example or what he preached, making me feel we could make our children lead better lives if we rendered these lessons to our children and practiced it ourselves to set an example.
 Setting Financial Priorities: Setting priorities in our children such as ‘having basic necessities of life like food, clothing, and shelter were more essential than fancy and fashionable articles’ would surely help. The habits built at the cradle carry on to the death bed. This applies in educating our children about the clear demarcation between wants versus needs.
Setting up financial priorities in children could start off with teaching them budgeting that is appropriate to their age. Inculcating the habit of budgeting in our children would start off with working together with them and making a child friendly budget. Young children are very happy to have budgets prepared with bright colors, graphs and other visuals. A joint effort would make them feel a part of it and be ready to cooperate and learn.
 Goal Oriented: My observation of financially smart adults made me understand that they believed in saving for a goal. So we need to involve our older children by involving them in budgeting for costlier possessions like car, a house, new furniture or probably saving for a sound education or marriage. It is true that even younger children need to be encouraged to save for small fancy needs like probably going for a movie, an evening having pizza or that remote control toy or Barbie doll. Their achievement would give them a sense of fulfillment that could make them feel motivated and focused to save for bigger goals.
 Rewards: Motivation has always been the keyword to progress, so praise and rewards could also make a great impact on children learning and implementing financially smart objectives. In addition teaching our children of how to survive and earn would help. So suggesting alternative ways to earn, like helping in the cleaning of the car, helping younger siblings with homework, running errands like shopping for essential or helping in small household chores in an age appropriate manner would surely help.
 Banking: “Putting your savings in the bank would help you earn more money to meet your financial goals,” is what most financially smart parents would have instilled in their children right from childhood. A savings bank account started with parents being a guardian would help overlook their children’s spending habits and guide them.
 Financial Learning: In addition instilling a habit of reading articles and reviews on finance have helped many financially smart children to save for their future once they started earning.
Stocks, shares and other financially appreciating instruments are best taught to older children, with involving them in real life examples of your investments helping a lot. Next is to introduce them to credit cards and loans. When they should be taken and when they should be avoided need to be taught well in advance.
Experience makes principles of smart financial planning more deep. So allowing our children to borrow money from us and repay it back with/without interest makes them realize the impact of loans.
Lastly do realize that each child is made in a different way with different spending and savings traits. Identifying each child’s financial habits early in life would help us to guide them tactfully without being imposing on them. I have known of children who have learnt better by their falls in financial decisions, so just rest assured that experience sometimes renders the best lessons for a healthy financ

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

Buying insurance for protection and wealth creation has always been a very complicated task involving careful analyzes. The analysis involves the amount of coverage, reason for coverage and the term/time that the cover is required. Term policies taken for a specified period of time like 5, 10, 15, 20, or even 30 years helps to look after family’s financial commitments like education and marriage of our children and the day to day expenses for a reasonable standard of living.

Term insurance policies that resemble motor/house insurance are not subject to the law of indemnity as damage due to human life cannot be measured. Taken for a specified period when financial obligations have to be met, no money is generally paid back if death does not occur in the period.


A bird’s eye view of term insurance policies would tell you:

• Term policies are cheaper as they cover only the risk of death happening within a specified period. In addition the premium charged depending on the age of the person insured and time of coverage required with medical examination being compulsory in most of the cases.

• With very competitive premium rates being the present scenario of the insurance sector, it is found that most companies encourage insurers to take a much higher coverage for extended period of time even up to 35 years or 65 years of age. This accounts for popularity of these policies for people with long term financial commitments.

• Term life policies can be bought very easily either online or through life advisors that market and service these policies. You would benefit buying term insurance policies online as this does away with the expenses of agents/life advisors commission. This accounts for discount in premium.

• In addition a check of the insurer’s 'claim settlement' ratio or the percentage of claims settled by the insurer of the total received would help, with this available on the IRDA website.







• Once death occurs and claim is to be settled this is done in a lump-sum to the nominees or beneficiaries. This depends on the terms of the policy that the insured has taken, with the settlement free of tax payments.
• Term plans suit young earning members with dependents, with the low premium allowing them with additional funds to invest in lucrative equity-linked savings schemes that provide tax breaks


Deciding different factors about term life insurance:

• Term insurance serves as the best life cover for large amounts and extended terms to meet your family’s financial commitments if you are not there. Insurance experts suggest about 12 times your annual income added to your total liability less investment in various assets.
• It is important to note that liabilities include loans taken for house/ personal/ vehicles/and other obligations.
• You should also consider amounts required for the education and marriage of your children, healthcare needs for your spouse and dependents and other amounts that would be required to maintain a reasonable lifestyle.
• Term life insurance policies are mainly meant for earning members of the family, whose financial commitments have to be meant on his/her death. It is however not meant for the young, unmarried working people that have no dependents or financial commitments.
• Term plans are best taken for amounts that consider not only the present financial needs, but also inflation, increase in salaries and lifestyle needs. The premium could rise with age and with increase in the amount of insurance taken and with riders/ additional benefits like personal accident insurance and critical illness coverage.

• Insurance contracts being contracts of utmost good faith require revealing of material facts that would influence its acceptance. This could include your existing health conditions, family history and details of other insurance contracts that have been rejected in past. Undergoing a medical examination if necessary may help reduce chances of claims being rejected in future.








• Term policies are best taken in blocks and increased or decreased according to need. Reviewing insurance needs every 3 to 5 years is ideal to adjust insurance needs. Taking insurance in blocks provides for flexibility to discontinue some in case of decreased financial obligations with time.

Finally take care to ensure that you have read and understood all the information to the best of your knowledge and disclosed the correct material facts like age, income and present health status. In addition carefully go through the signed proposal form and policy document and inform the insurance company in case of discrepancies within 15 days of issue of policy.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

IPO’s or initial public offering is best understood as the first public offering of shares by a private limited company before listing in a stock market. Looking down IPO’s history of success and failure stories, you would be smart to first fully understand the various aspects behind such offerings and makes the right choice to invest or not in IPO’s. It is advisable to understand that
investing in IPO’s could prove risky with unfavorable market situations and sentiments and when the fundamentals of the company and industry are weak. It is best to go by facts, avoid being influenced by rumors and have a closer look at the past performances also.

Understanding the concept of investing in IPO does require a clear look into these factors:

 It is not wise to believe rumors and success stories of IPO’s at face value, for investing in IPO’s is not easily learnt and there could be some misconceptions. So it is best to venture into IPO’s only after you have learnt the art of investing your hard earned money in them.

 It is wrong to be overwhelmed with hearing general statements that some IPO’s are attractively priced. You would be smarter comparing the price earnings ratio that helps get the relationship between the stock price and the company’s earnings and comparing it with those of competitive companies.

 Beware of being under the misconception that investing in IPO’s could give you great gains on listing. It has been noticed by both amateur as well as experienced investors that sometimes high losses are also made. It would be safer and secure not gambling in the shares of new issues.

 It is good to experiment with new products in the market. But I would say that it is not smart to have this attitude with shares and invest in IPO’s. Investing is about getting effective and safe returns on the hard earned money that you put into shares, so it would be smarter putting your money to work in index stocks that have been in the market for a long time and have survived the volatile economic market for long.

 Beware of being influenced by the favorable feeling and trend in the investment market to borrow money from financial institutions of brokerage companies for getting higher allotment of shares. It is sometimes very difficult to judge the trend of the market especially as an amateur and this could make you end up in huge losses coupled with the repayment of the loan with interest.

 Some assume that investing in IPO’s would surely bring about gains in the long run. However I would suggest that you would definitely be much better off investing in good listed shares that have a proven record, though they sell at a higher price. However you may invest with sufficient information of the IPO’s, but could not always be sure that the listing will not bring down the issue price.

So it is best to be prudent and informative before investing in IPO’s.

Factors that have a bearing on analyzing investments in IPO’s:

 It is first important to know that companies are required to file their draft red herring prospectus (DRHP) with SEBI while floating an IPO. Analyzing this document would give you financial and other information about the company. The highest percentage of shares held by institutional investors, banks and financial institutions could be a positive indicator to invest in IPO’s.

 The draft red herring prospectus (DRHP) would also provide other important information and indicators like the quality of management. The quality of management like their work experience, their past history or work experience, qualifications and projects handled would help in the decision to analyze IPO’s.

 Another factor having a bearing is strong promoter backing. Big companies like Tata and Birla bring about credibility and also add a premium to the price of IPO’s. The ownership by the government and public sector undertakings are also an indicator of high level of safety of returns.

 The other major, though not the only indicator though is grading, with a higher grading being good. However also could be false as seen with the IPO of Vasvani Industries that had a 2/5 grading. Similarly high graded companies like Galaxy Surfactants with a CRISIL rating of 4/5 withdrew its IPO. So it is best to understand that even some good companies withdraw their IPO’s due to poor public sentiments and difficulty experienced in raising funds in the market.

 The objective for raising funds would prove to be an important indicator to its profitability and time for return. Finding out this objective looking at various factors like the businesses past performance, future growth prospects, potential rate of return and profitability. In addition it is best to avoid investing in businesses that you cannot understand.

 Last, but most important a periodic review would help you understand how your investment in IPO’s are fairing and help effect follow-up. However it is advisable to avoid taking hasty decisions to sell, as some IPO’s have underperformed initially but has given consistent returns in the long run. But prompt follow-up action would be required in case of IPO’s that lose very badly or are fundamentally wrongly invested.

To conclude investing in IPO’s is best kept to the minimum as they involve a high level of research and uncertainty. However if they are selectively chosen they would help avoid investments with bad performance.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

The month of annual bonuses seems like paradise when we start planning in advance on how to spend it. This excitement will get us into impulses of spending on things that give momentary pleasure only. This leaves us regretting for our decisions later. Wise money management and productively using annual bonuses will help us to take care of not just present needs but also of future needs and contingencies.

My idea of being a financially prudent and smart person would involve wise money management of bonus according to the life’s priorities and expenses. It is true worldwide that living in uncertain economic times after the global economic turndown, we all need to learn powerful lessons on wise money management. Every individual has his/her own peculiar set of priorities, but I believe that some suggestions would be well appreciated by all.


Ways that have helped in wise money management of annual bonuses include:

 Tax planning has and will always play a role in saving taxes and making meaningful investments for the future such as investing in mutual funds, fixed deposits and insurance related investments to save taxes under Section 80C. However I would suggest investing in mutual funds is best done through Systematic Investment Plans (SIP) or Systematic Transfer Plans (STP) that is best accomplished with opting for systematic transfer of funds kept in a savings bank account spread over a year. This helps to take advantage of market fluctuations and get good returns.

 I am sure we all realize the great benefit of living a life free of debt, than having to worry about expensive loans taken like credit card debts, personal loans, and low priced loans like education loans, home loans and vehicle loans. The priority should be on utilizing annual bonuses to first pay off loans carrying a high rate of interest, with it giving the advantage of saving on higher amount of money being paid towards interest on such loans.

 Life has never been certain and it is futile to expect it to be certain at any time, so wise money management needs to take care of unexpected and expected contingencies that could arise at any time. Being financial smart requires every person to set aside at least 3 to 4 months of one’s monthly income for contingencies like loss of job, illness, and accidents that could leave you in a financial crunch for a few months. This is best accomplished with setting aside some portion of the annual productivity bonus towards the maintenance of a contingency fund in the form of liquid and semi liquid funds like mutual funds and bank deposits.

 “Live in the present” is what many psychologists would tell you, but I would say it is best to take lessons from our past mistakes and set the stage to meet some of our future expenses and financial goals. The past is gone and would never come back again, but it is never too late to start saving for future goals like retirement, higher education of children, their marriage or maybe your goal to start a consultancy business based on your experiences. This requires carefully planning the period that you would not need the money and setting aside a portion of your annual productivity bonus in bonds and mutual funds with the correct allocation between equity and debt to meet your needs.

However I do not mean to say that enjoying life or luxuries like a dream vacation, an LCD TV or home theater should not be your cup of tea, because all of us earn and perform well at work to live life and not just to exist as some suppose. Enjoy your annual bonus king size with planning your financial priorities with the advice of your financial planner.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

Most of us are aware of Form 16 given by our employers before April 30th each year that give details of the income earned, and tax deducted at source and paid to the government. This certificate proves useful in filing income tax returns. In addition banks also issuing Form 16 and Form16A to pension holders and those that earn interest income, with no Form 16 required when TDS is not deducted from salary. Knowing about Form 16 helps us to be a well-informed taxpayer and do better tax planning.
The 13 components of Form 16 are:
1) PAN that stands for Permanent Account Number, a 10 digit alpha-numeric code that is generated by the Income Tax Department of India. It is mandatory for everyone- NRI, PIO & companies that wishes to conduct business, file and pay taxes, invest, buy and sell property, open a demat or bank account to have this number in India. The need

2) TAN is best known as Tax Deduction and Collection Account Number is another mandatory 10 digit alpha-numeric number that is very necessary for all persons and companies that are responsible for collecting taxes. It proves useful to note that this number is unique in case of different companies.
3) Gross salary, the common term used in practice includes all regular incomes in an employee’s remuneration. It would include allowances, overtime pay, commissions, and bonuses, with all other amounts before the deductions are made.

4) It is best to know that perquisites are just additional benefits in addition to the fixed salaries. Known popularly as perks this term could include rent free accommodation, loans at subsidized rates and others.

5) Profits in lieu of salary are just payments given instead of salary that is given by at or in connection with retrenchment or termination of employment. This item forms a part of taxable income and includes gratuity, commuted value of pension, retrenchment compensation. However the contribution made by the employee or interest thereon is not taxed.
6) Next allowances in Form 16 are certain payments made or allotted to employees for bearing of certain expenses. It could include allowances like medical allowances, and travel allowances that are generally taxable in the hands of the employees.

7) House rent allowance or HRA In Form 16 refers to a special allowance paid to employees to meet the cost of housing. There is tax exemption on HRA and it is limited to the least of either the HRA received from employer, or rent paid in excess of 10% of the salary, or 50% of salary in metropolitan cities and 40% in other cities. The term salary here includes basic, dearness allowance and other commissions put together, this exemption not available to those that do not pay rent.

8) It is best to understand conveyance allowance as an allowance paid to an employee to meet commuting expenses between his/her home and place of work. There is a maximum exemption of Rs.800, with a special provision for an orthopedically handicapped employee until Rs.1600.

9) The term medical allowance paid for medical treatments and medicines is fully taxable. However reimbursement of medical expenses against submission of bills could get you a maximum exemption of Rs.15000 annually.

10) The allowance received to employees for entertainment services or entertainment allowance is allowed as a deduction for government employees. However in other cases one can avail of deduction as a least of actual allowance received, or 1/5th of salary excluding all other allowances and perquisites or Rs.5000.

11) Deductions as in Form 16 is given as an incentive given by the government to invest in certain long term savings schemes. This includes long term savings for retirement, insurance schemes and others that give tax breaks.

12) All taxes in India are subject to an education cess that is 3% of total tax payable. This contribution is made towards the Secondary and Higher Education development in the Indian economy.

13) It is lastly important to understand the relief granted to employees when salary is paid in arrears in a lump sum best known as Relief u/s 89. This includes salaries received in arrears/advance, family pension received in arrears, retirement benefits such as gratuity, commuted pension, VRS and retrenchment compensation.

Understanding your form 16 helps you in many ways like planning for taxes, filing your income tax and so on.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in

Stock Market has lead to tendency of many to go in for much safer investments that gives a reasonable return. This is the reason for gold gaining popularity as one of the safest avenues for investment.

Gold has always held importance as a good investment proposition since the days of our ancestors. But the recent trends of daylight robbery, murders and greed for the precious yellow metal with the difficulty of storage and safety of physical gold had made gold a cumbersome proposition. In addition, fraudulent and not uniform practices followed by jewelers and difficulty in establishing the purity of gold contributed to the popularity and desirability of gold ETF’s.

Gold ETF’s or gold exchange-traded funds are instruments investing in gold of 99.5% purity. Investing and maintaining these funds just required demat account and a trading account with a registered stockbroker. Gold ETF’s are more ideal than physical gold due the following reasons:
• Gold ETF’s are investments in gold of 99.5% purity only. It prevents one from falling into the clutches of some jewelers that fool customers with smooth and artistic talk. This avoids chances of misplacement of trust, as only a goldsmith could find out the exact purity.
• Owning something virtual like gold ETF’s does away with the difficulty of storage and security experienced in possessing physical gold. The units of gold ETF’s can easily be stored in both demat and trading account without being known to the greedy, cheaters, robbers and looters. A word of caution here, you could be sure of it all when you keep your units in accounts with privacy of user name and password.
• Gold ETF’s are most ideal for small investors as they can be purchased in small denominations sometimes of even 1 gram or ½ a gram. So ETF’s can be bought easily in small installments regularly and increased in the virtual form. This advantage is not available when investing in physical gold.
• Low cost, with affordability in dealing with gold ETF’s contributes to their desirability over physical gold. These instruments are listed in exchanges; the exchange traded mechanism helping to reduce processing charges, disbursements and collection charges. Gold ETF’s also help do away with the carry charges in gold futures.
• The ease to convert gold ETF’s into liquid cash easily at real time prices on the stock exchange avoiding charges like commission, and unnecessary fuss over quality and price by jewelers make them a desirable investment. This makes buying and selling these units easy.
• Right and uniform pricing in Gold ETF’s offered no scope for price discrimination that is experienced in encasing physical gold at the jewelers. One lacking knowledge and experience in dealing in gold would do best to invest in good gold ETF’s.
• Gold ETF’s offer protection from the liability of taxes. The taxation system for gold ETF’s is similar to non-equity mutual funds. One only needs to pay the lower of the two, long-term capital gains tax of 10 per cent without indexation or 20 per cent with indexation on profits made.
• Gold GTF’s are likely to show lesser tracking errors as compared to normal funds as the creation and redemption of units are done with units of the same type. This accounts for lesser liquid cash being required and the short time interval between buying and selling of units.

However some may disagree with me and say that the psychological satisfaction of seeing and feeling physical gold in the physical form is important and gold ETF’s are a fictitious concept. It is purely a question of ones own perception, but I would strongly contest gold ETF’s if investment, safety and security is ones objective.

If you keep gold in the form of ETF, you will not have any emotional attachment towards that. You will really consider it as an investment. If you need money for buying a property or kid’s higher education you will feel free to encash it. But in the case of physical gold, we will not be prepared to sell it because we will have emotional attachment towards physical gold.

So, Gold ETFs are the better way to invest in gold.

The author is Ramalingam K, an MBA (Finance) and Certified Financial Planner. He is the Founder and Director of Holistic Investment Planners (http://www.holisticinvestment.in/) a firm that offers Financial Planning and Wealth Management. He can be reached at ramalingam@holisticinvestment.in