Why Lender and Investor Use Ratio Analysis Differently

The same set of financial statements is perused by the lenders and investors for arriving at their informed decisions. However, modus operandi of subjecting this information for analysing various ratio analysis differs considerably. A Business model normally reminds us of a “Tripod” which has three legs to stay stable as the collapse is imminent if any of these legs is snapped or shattered for any reason whatsoever.

image courtesy: bing.com

The promoter, Investor, and Lender/Banker form the three legs of any business which compliment each other. They have their own roles and responsibilities to keep the company afloat during the turbulent times enkindled due to market conditions or internal risks like labor problems and worn out technology issues etc.

Image courtesy: bing.com

Whereas, the promoters conceive business ideas and make them operational through their experience hiring a team of skilled workers/executives and garnering the required capital from their own resources, the investors join to supplement the company’s capital by subscribing to Shares/Debentures/Bonds/Commercial Papers. However, Lender/ Banker extends their support by financing day-t0-day working capital requirements. We will try to communicate by elaborating the significance of Financial Accounting from the investors and lenders perspectives

Financial Accounting or analysis is a connection between the company and professionals through Financial Statements like Balance Sheet, Income/Expenditure, and Cash Flow statements of a particular business. Analysis of these statements provides the health of the business as investors or lenders don’t have access to the day to day operations of the company. It’s like a mirror showing you the exact replica of your own self.

Whereas, an investor would like to see which company has performed consistently well, earned profits, paid dividends during the year before taking an informed decision by comparing with the industry data. The lender/Banker looks at these statements from a different perspective as they are more concerned with the cash flow, leverage, and overall solvency as calculated through various ratios. They delve into the data for a broader outlook as to whether the business is adequately prepared to meet its short-term and long-term commitments.

Stock holder’s equity is another very important and, relevant factor that helps both investors and lenders to peep through the health of the business. Normally (Total Assets=Total Liabilities=Capital/Equity) the difference between total assets and total liabilities provides an idea of stakeholder’s equity. If it works out to be positive, it’s good but sometimes this figure looks alarmingly negative indicating the imminent possibility of not meeting their long-term liabilities. A warning signal!!

The following ratios are taken into consideration by the lenders/Bankers before taking their call on approving the requested working capital requirements. Thankfully, all companies are required to submit their quarterly financial statements to the regulator regularly. The lender can keep a hawk’ eye on the various parameters and take corrective measures before it is too late

• Current ratio: Total Current Assets/Total Current Liabilities. Theoretically, the 2:1 ratio is considered good but from Banker’s prudent perspective 1.33 ratio is acceptable being more efficient.
• Quick Ratio: Cash or cash equivalents/Current liabilities, it should not be less than 1 as the figure suggests the availability of sufficient liquidity in hand to pay of current liabilities immediately.
• (Debt Service Coverage Ratio)DSCR Ratio: Net operating income/Total debt servicing; More than 1 looks good, otherwise it will be difficult for the company to repay the future loan installments.
• Assets Turnover Ratio: Net Sales/Average Assets; Higher the better as it shows more efficiency of the business
• Inventory Turnover: Cost of Goods Sold/Average inventory; Shows how many times the inventory has been cycled in one year, the more the better. The number of more cycles means that the stock is being cycled more bringing more sales and revenue for the company
• Interest Coverage ratio: (EBIT) Earning before interest and taxes/Interest expenses. Any figure more than 1 meets the qualifying standards.
• Receivable(Debtors) turnover: Net credit sales/Average Receivables, higher the better showing more efficiency by the company. If we divide 365 by this ratio, you will get the average time for realizing any credit sales. The increasing figures vouch for efficient realization of debtors
• Creditors/Account Payable(Creditors) ratio: Net credit purchases/Average Creditors; If we divide 365 by this figure we will come to know how many days do a company takes to pay its creditors
• Debt Equity Ratio: Total Liabilities/Total Share Equity, though more than 1 is not considered good this should be compared in comparison with the type of business and industry. Some high infrastructure like companies engaged in road transport, Air and other capital intensive companies need huge borrowings for running their business
• Debt Ratios: Total Liabilities/Total Assets, Lower is the better

Image courtesy: bing.com

Now let’s have a close look at the ratios which help the investors to arrive at a calculated and informed decision for putting their money in the stock markets:

• (Price to Earning)PE ratio: Share Pice/EPS; It’s a measure of the company’s share price in comparison to earning per share. Though no benchmark fixed PE ratio of 10 to 15 is considered a good valuation.
• (Price Earning to growth)PEG Ratio: PE ratio/EPS Growth; it gives a more clear picture than the PE ratio as it is linked to performance of the company.
• (Return on Equity)ROE: Net Income/Shareholder’s equity x 100 indicates how much the shareholders equity is earning and the increasing figure means better working of the company. ROE value of 10 and above is considered good by the investors.
• Price to Sales: Share Price/sales per share, compared with industry to find out whether the share is undervalued or overvalued.
• Price to Book Value: Share Price/Book value of the share; if it comes to less than 1 means the stock is undervalued otherwise it’s a overvalued stock.
• Profit Margin: Net Profit/Total Revenue x 100
• Dividend Yield: Dividend Per-share/Share Price x 100, higher the better
• Dividend Payout Ratio: Total Dividend paid/Net Income, Normally 30 to 40 % is better
• (Return on Capital Employed)ROCE: Net Profit/Total capital employed; It’s better to have this figure increasing every year
• (Earning per Share)EPS: Net Income/Total number of ordinary shares
• (Return on Assets)ROA: Net Income/Total Assets x 100 indicates for every Rupee invested, how much income is generated by the company. Higher is the better

Image courtesy: bing.com

Conclusion: I have tried to interpret Financial Statements from an investor as well as a lender’s perspectives. These are just a few tips which may help in arriving at the right decision by the concerned parties. Every ratio and information needs to be co-related and read in conjunction with other industry-wise data and future potential for all practical purposes.

Tesla to make India debut ‘early’ next year — TechCrunch

Tesla will begin operating in India in “early” 2021, a top Indian minister said on Monday, a day after the tech-centric carmaker said it was confident it would enter the world’s second most populated market next year. Tesla’s operations will begin with sales in early 2021 and then “maybe” look at assembling and manufacturing vehicles…

Tesla to make India debut ‘early’ next year — TechCrunch

RETIRING SOON or Restarting Your Re-tyred Life?

Hey!! Feeling young at 60? I know you are surprised at your retirement transpiring too early but in reality, it’s time for your exit paving the way for others to take charge now!! Just relax and feel the pulse of my heart reverberating wishes on your well-deserved retirement. Some of you must be feeling more relaxed and secured having accomplished all your life goals in a phased manner. Intrusive thoughts and nervousness must be creeping in the minds of a few others at the prospects of their retirement.

This post is dedicated to you guys who could not plan their retirement during the early part of life for reasons beyond comprehension. Hope the subject will be absorbing for you to comprehend and follow to spruce up your re-tyred life.

Globally, all Financial Consultants recommend starting the planning of personal finances at the age of 25 to 30 years. Ideally, this is the age group when you should have started saving and planning for all your financial goals. However, in our country where an average Indian starts planning for retirement only after crossing the age of 50, you might be late but the game is not over yet. Maybe the retirement planning escaped your attention due to other priorities, social obligations or, living with your current lifestyle? You can’t retrieve those lost moments but certainly, you can spruce up your future with some purpose even now.

Hopefully, your perquisites like, PF/Gratuity/Leave Encashment and some other entitlements have already been processed by your employer. Your savings and receivable funds put together may heap up into a healthy corpus. Please see that all your debts are cleared before starting planning further. Don’t carry forward any such liability with you to avoid any untoward situation.

Further, the value of your money subject to inflation is likely to depreciate every year. The average inflation rate in India hovers around 6.5%, you need to earn interest or generate income on your money at least a net of 7% to neutralise the effect of this invisible enemy. You must ensure that this money is allocated to diverse securities/investments so that they continue producing passive income for you. Restrain yourself from spending lavishly on avoidable expenses.

By natural instinct, you are going to feel financially insecure after retirement. You may be tempted to keep maximum balances in your bank savings account as an emergency fund. Interest earning on such deposits is being 3% only, you may not be able to grow your funds as per your needs. There is every possibility of any friends/relative suddenly seeking financial help which you may not resist. In both cases, your risk and potential loss of money can’t be ruled out.

I will discuss the allocation of the money in the latter part of this post. Let’s find out the opportunities available for you to keep busy and earning portfolio income to supplement the limited resources.

The possibility of getting hired after retirement has always been remote but the prevailing pandemic conditions have made the task more difficult. Social distancing norms as prescribed by the administration worldwide are more inconvenient and painful for the senior citizens. The virus is more threatening for elderly people aged 60 years and above due to their weakening immunity. The chances of getting a good break look bleak under the given circumstances.

Working from Home has come as a blessing in disguise for many companies and individuals. Wherever feasible, the companies have allowed their workforce to work from Home making it a win-win situation for all. Why don’t you try the undernoted resources for keeping yourself busy and earning a bit while sitting safely at home?

Freelancer Jobs: Friends, some of you must have acquired expertise in Financial Markets, IT and Software, Computing, Data entry, Tuition work, Legal, content writing skills, or any other specialization working for more than 30 years. You can explore opportunities for getting freelance jobs sitting at your home.

There are hundreds of websites offering you freelance jobs. Some of these are, Upwork, Freelancer, Fiverr, Toptal, and Guru. You can register with these companies and start earning right away. No formal education is required as the only pre-requisite qualification is your talent and expertise.

The payments are secured and guaranteed as these websites take a cut out of your income. Earning may range from 5$ to 100$ per hour depending upon your proficiency, efficiency, and competence.

Stock Market: If you have prior experience of conducting the business of share trading in the stock market or you have enough patience and perseverance, you can also look for trading in the stock markets. This will not only keep you busy for a few hours daily but also help in generating a passive income. Intraday trading is beyond your scope and should not be undertaken. This product has been devised for proficient investors with more risk appetite and possessing professional skills.

However, you can identify a few stocks by using due diligence/normal prudence and go for positional trading. Positional trading allows leverage of a few days and you can decide your trade accordingly. This is a high yield lucrative business space if you can invest wisely after thorough research. Stock markets are not open on Saturdays and Sundays that allows you to trade for 20 days in a month.

Coming back to the management of your funds and life after retirement, you need to sit down and jot down the income and expenditure details accruing every month. There is no need to create an emergency fund as most of the Bank FDR’s or other investments can be encashed prematurely these days. You need only two months of living expenses and Rs.100,000/- for any incidental expenditure required to be incurred during the odd hours.

Since life expectancy has increased by more than 20 years, you need to know that health care is going to be the biggest issue now. Most employers have a group insurance scheme in force for their employees. You need to confirm whether this will continue after retirement or not. Health insurance is not only costly after 60 years of age but comes with lots of strings attached to it.

In case the existing insurance cover provided by the employer can’t be taken forward, you must identify a good health policy for you under family floater. Go for the plan which has positive reviews from the customers about the hassle-free settlement of claim cases backed up with the best customer service. No frivolous condition laid down by the issuing company be accepted in the Policy lest a genuine claim is declined in future.

Let me list a road map for you to manage your money with an eye on preserving your capital by generating enough passive income for the living expenses regularly:

1. SCSS(Senior Citizens Saving Scheme): With a sovereign guarantee, this scheme looks attractive for those retiring from active service. The Senior citizen’s savings scheme is open only to senior citizens aged 60 years and above. You need to open this account within one month of your retirement. The upper limit of deposit in this scheme per account is 15 lac but you can open more than one account also. Initially, any deposit made under this scheme matures after five years However, it can be renewed further for three years. The interest rate is decided every quarter but once invested, you get a fixed return for five years. The present rate of interest is 8.6% per annum. The interest amount is taxable under the Income Tax Act. However, You can get premature payment also.
2. Mutual Funds: Ordinarily Mutual Funds in India provide 10 to 13% returns on various MF schemes. You can consider this option by investing a portion of your funds in Mutuals Fund schemes where fund allocation is 100% in equity. This is risky but the most rewarding portfolio for investments on longer horizons. There is no lock-in period and you can exit as and when you need the funds. Just a few clicks on your computer and the proceeds get credited to your Bank account within a week’s time. There is no capital gain tax on MF’s investing in equity only. However, the maximum permissible amount of capital gain is Rs.100,000 only
3. Bank FDR: Though interest rates have come down considerably, the Bank FD still remains a choice for many as you get a special interest for senior citizens also. These instruments can be encashed online at any time. Gone are the days when you had to visit the Bank branch for canceling and encashment of your FD prematurely. The payment gets credited to your Bank account immediately. Except for Tax saving FDR which has a lock-in period, all other FD’s are easily payable before maturity.
4. POMIS(Post Office Monthly Income Scheme): Maximum of three joint account holders with 4.5 lac each for individuals is permissible in this scheme. The maximum limit for minor accounts is Rs. 3 Lakh. The minimum amount which can be invested is Rs. 1,500 for any individual. Interest is revised regularly on a quarterly basis. However, presently the post office is paying an interest rate of 7.8% to their customers. Interest is fully taxable but no TDS is deducted at source. Interest is credited to your post office savings account every month.
5. Tax-Free Bonds: Another safe and better yielding option for retired people is an investment in Tax-Free Bonds issued by the Govt. of India. These are long term securities offering interest rates as high as 8% and no tax is deductible at source as interest earnings are completely tax-free. Maturity ranges from 10 to 20 years as such it is advisable for those investors who can spare money for longer periods. You can buy these bonds through your Demat account or in physical form as per your convenience. These are risk-free investments due to sovereign guarantee,

Besides, all retiring people will appreciate that Income Tax liabilities are going to remain the same except for a small exemption for senior citizens in the country. Each and every penny is going to be accounted for payment of income tax. Although, there is no penalty for late payment of income tax by senior citizens in India you must ensure paying advance income tax out of your pension or other resources. Filing of ITR is mandatory for all senior citizens and must be taken care of for timely submission every year.

Happy reading friends! Stay Safe Stay Connected

Disclaimer: The material and information contained on this website/Blog is for general purposes only. You should not rely upon the material or information on the website as a basis for making any business, legal or any other decisions. Any reliance you place on such material is strictly at your own risk and responsibility

UK Scare: Sensex Crash

Amidst the ongoing vaccination drive in the USA and the UK, there comes a bad news about a new corona variant from the UK. Many countries have announced halting air traffic originating from the UK in the wake of a sudden spurt in corona cases and its new variant recently. The news has jolted the entire world once again. The EU was looking all set for starting vaccination after clearance of Pfizer corona vaccine today but the new development has forced them to stop ferry and air service connecting the UK immediately.

Indian govt has also decided that all flights originating from the UK to India shall be temporarily suspended till 31st December 2020. A large number of the Indian Companies derive their maximum revenue share from the UK . These companies may feel the pinch due to the latest developments in the UK. The prevailing events will certainly result in under-par performance during the remaining period of the current financial year for a few companies like TATA steels,Tata Motors, Motherson Sumi and a few others.

The increasing number of corona cases in the USA, a new variant in the UK, and talks going around about overvaluation of some companies made the Indian markets crash today? However, Sensex losing more than 1400 points and Nifty closing 400 points lower on Monday didn’t cause any jitters for the ongoing IPO of Antony waste Handling cell Ltd that was oversubscribed within a few hours of its opening on Monday. This IPO was not successful in its first attempt in March 2020 as investors showed little interest in the IPO due to prevailing pandemic conditions worldwide.

It looks like this year 2020 has more worries for us at the fag end of December. X-mass celebrations may see dampened spirits by keeping the already financially strained and exhausted families indoors. This year has already tested the endurance level of everyone around the globe. Any further escalation in the crisis will subject the already suffering people to another level of ferocity in the coming year.

Thankfully, the DOW and other international markets have not shown any nervousness following the Indian debacle and we should hope that the moods of investors will be kept upbeat with the impending Financial Stimulus efforts going on in the USA.

** The House of Representatives, USA has passed the $900 billion corona virus bill that will bring some respite to those who were waiting for the financial stimulus eagerly. It will certainly improve liquidity position and consumer spending may increase before closing of the year. We may see improved foot fall of customers in the coming few days bringing scome cheers for the small businesses also.

Stay safe and keep invested

Investment Fundaas!!

Stock markets are a lucrative but riskier mode of investment option worldwide where average returns come to a cool 12 to 14% for long term investments. Investors look forward to accessing valuable data that may help them in taking an informed decision for investment in securities. Whether , it’s developing or the developed economies, the mindset of every investor remains more or less the same. There could be differences in the temperament or risk appetite between the investors coming from diverse backgrounds but they are all attuned to booking profits by curtailing their losses.

Despite turbulance and volatile nature of markets, the number of customers entering stock markets keeps surging every year. It will be premature to imagine that these customers enter this era after pursuing formal training or crash courses in stock trading or investments. My experience suggests that only a few customers come prepared with complete information on the salient features of stock markets. Ever-increasing number of customers need sophisticated tools as well as expert guidance to transact business for earning profits with an eye on protecting their capital.

We find hundreds of blogs and an equal number of Videos every day trying to impress upon the investors with their half-cooked stale stories. Business TV/ Youtube Channels have their own agendas to maximize profits by streaming programs that get maximum viewership. They end up serving the interests of the companies rather than the investors. However, there are still some superb websites and Channels which provide well-researched data for you to utilize analyzing important statistics. Morning star, Screener, investing.com, yahoo finance, Google finance etc. are some of the sites that provide authentic updated data for brainstorming by the investors.

Though it’s not an easy call to predict the movement of markets or offer foolproof advice on trading in the stock markets I will try to communicate in a simple and amenable language for you to comprehend and apply the knowledge while conducting business in the stock market. You are not going to become a complete professional with this brief piece of enlightenment but you will feel more comfortable and confident to conduct stock market business more prudenly in the future.

Let’s categorize the customers to understand the gamut of stock market business in a better way. There are generally two types of customers engaged in buying and selling shares/securities with the sole aim of earning profits:

1. Traders: Any customer who enters the market for buying and selling of shares for earning profits by putting his money for some minutes/hours/days is known as a TRADER. He has nothing to do with the fundamentals of the company and acts only on any hot news about the company/Latest Govt.Policy/Political disturbances or any information that impacts the market movement. This is the riskiest type of stock market business as you may earn huge money in a few trades but likely to incur losses on some other occasions. Income from this type of activity is taxable under short term capital gain tax as applicable in the respective countries.
2. Investors: A tribe of customers who try to understand the company by following its past performance, management and, future projections by committing his money for a longer period of time is called INVESTOR. These types of customers are likely to earn big profits by remaining invested for longer horizons. Historical data proves wealth creation for those investors who stay invested for a period of 10 years or more. A large number of millionaires or billionaires worldwide have found their way to stardom through this route only. Income generated by the investors is taxable under long term capital gain tax as applicable in the respective countries.

Remember!! Be patient!! Today is not the last day of the stock market. Take a well-researched decision before jumping into the market. Please don’t get tempted for buying or selling without reassuring yourself about the timing and value of a stock. Any hasty decision will land you in trouble and the hard- earned money may slip out of your hands. Trade in high volume scrips initially and lower priced stocks should be avoided.

In the following table, I have tried to incorporate a few ratios/terms along with their relevance for your reference and understanding in an easier way. You can save this table and utilize the data in case of need. Once you have shortlisted a few stocks for trading or investment, you need to collect and correlate data with the given table for taking a final call on buying the stock.

Terminology/ Ratio	Formula	Benchmark	Relevance
Earnings per Share(EPS)	Net Income/Ordinary shares value	+ve	It should increase every year and any reverse trend must be analyzed properly. More the EPS(Earnings per Share) good for investors. In new companies like After pay, this may be negative also but you can see how this figure has been improving over the years.
Price to EPS (PE ratio)	Share Price/EPS	<15	In simple words, PE ratio is the value by which multiple of EPS, the share price of any company is trading in the market. For example, if the share price of any company is 120$ and EPS is 8$, then the PE ratio will be 120/8=15. Normally value less than 15 is considered good for investment. However, some good companies have high valuations and it will be prudent to compare the PE ratio with other companies of the same industry.
(Return on Equity) ROE	Net Income/Equity	>15	Value more than 15 is good for investment. Must compare this ratio for the past three quarters to have a clear picture of the company. The Increasing trend indicates the good health of the company even if the value is less than 15
(Return on capital employed) ROCE	Net Income/Total capital employed	>15	Value more than 15 is good for investment. Must compare this ratio for the past three quarters to have a clear picture of the company. The Increasing trend indicates good health of the company even if the value is less than 15
D/E Ratio	Debt/Equity	<1	D/E ratio is a calculation used to assess how much debt is being used to run a business compared to the equity of the business. valuation ranging from 1 to 2.5 is acceptable. For infrastructure companies, it could go beyond these figures
(Price to Book Value) P/B Ratio	Price/Book value	=1	Any value around 3 looks satisfactory for good companies. However, this ratio is much higher in well established companies. More value of this ratio indicates lesser amount of money available in case the company goes into liquidation
Dividend	Surplus Profits or reserves/total shares	As per the profit	A sum of money paid regularly by a company to its shareholders out of its profits is known as a dividend. Though all companies don’t pay dividends this adds to the value of shares.
Promoter’s Capital	Preferably more than 50%	50% and above	Refer shareholding pattern to see the %age of promoters capital and whether there is any pledging of shares by the promoters. Pledging of shares is not desireable. Have a look at the contribution in the share capital made by Mutual Funds and FIIs. Any such contribution is good for the investors.
Revenues or Sales	Must increase	Must increase	This is the figure which must increase every year for a robust healthy working of the company. Any decrease means there is a problem with the company management and study thoroughly before investing.

To illustrate further, the relevance of these data and terminology used in the above table, a live example of Colgate India Ltd one of the top consumer goods companies in the world is being shown hereinbelow. You will see by yourself, how a good company demonstrates strength in all the parameters and ratios. Please go through the data as shown below and try to connect with the table shown above. This will help you in arriving at the correct decisons while investing in the stock market.

COLGATE PALMOLIVE(INDIA) LTD:

• Market Cap₹ 43,523 Cr.
• Current Price₹ 1,600
• High / Low₹ 1,630 / 1,065
• Stock P/E : 49.7
• Book Value: ₹ 60.0
• Dividend Yield: 1.75 %
• ROCE:: 67.4 %
• ROE: 53.7 %

ROE(Return on Equity)

Return on Equity
10 Years:	65%
5 Years:	53%
3 Years:	51%
Last Year:	54%

Data: Courtesy Screener.in

Disclaimer: The material and information contained on this website/Blog is for general purposes only. You should not rely upon the material or information on the website as a basis for making any business, legal or any other decisions. Any reliance you place on such material is strictly at your own risk and responsibility

Primary Markets: Investing in New Stocks(IPO) How to Buy IPO

Friends, It may sound strange but the developed economies look averse to the more friendly environment for retail investors prevalent in the developing economies. There could be various reasons attributing to such apparent contrasting conditions. Maybe, the retail investors in developed countries have other priorities in place. There could be a lack of enthusiasm by the small investors or you can say there are virtually no small investors in the developed countries.

Though there can’t be any comparison with the USA, the most robust economy in the world but my effort is to showcase the procedures as visible from the layman’s perspective. Let’s discuss the situation prevalent in the two top democracies i.e India and the USA along with another developed economy Australia. All the three countries have a very effective regulatory system in place which takes care of stock markets functioning in their respective countries. we have regulatory bodies who take care of stock exchanges for safeguarding the interest of the investors.  Regulatory bodies protect the interests of investors and traders by providing a healthy environment in the equity market. These are::

1. SEBI ( Securities Exchange Board of India): India
2. ASIC ( Australian Security and Investment Commission): Australia
3. SEC ( Securities and Exchange Commission) : USA

IPO/Float. Primary Market

Australia: IPO also known as Float in Australia is opened by companies for subscription but investing in stocks through IPO by the Retail Investors is a challenging job. Companies planning to raise capital through IPO’s tend to sell their entire stock to Institutional Investors/Stock Brokers for ensuring successful launching of the IPO. Some brokerage houses get more share from the companies while others are not so lucky. That makes a tricky exercise for retail investors to access the IPO process.

The interested retail investors subscribe to the issue by opening a broking account with a broking house i.e stockbroker. It depends on the whims and fancies of the stockbroker as to which investor he wants to allot the IPO and how many shares will be allotted to the investors. You are fortunate enough if your broker considers you a potential applicant for the IPO.

Photo by Jose Francisco Fernandez Saura on Pexels.com

There is one more route for the allotment of IPO in Australia. If you are already a customer of the company, you are likely to get an invitation from the CEO to participate in the IPO.. Otherwise, most of the public is left out of the IPO process in Australia and whatever the retail investor gets is not more than 10% and that too on a selective basis only. The retail investor remains in dark throughout the process.

USA: Almost on the same lines, all companies hire the services of investment Banks/Brokers for selling their shares ignoring the Retail Investors. Generally, a retail investor has to open a broker account with the brokerage house, send money in his account and wait for the allotment. You are fortunate if the broker considers you as a potential applicant and processes your application for allotment of shares.

Historically, the ratio of Institutional Investors to Retail Investors for the issue of shares is 90 to 10. The Investment Bankers team up to form syndicates with each Bank getting a share of IPO. The Banks/brokers generally prefer big Institutional investors, Mutual Funds, Pension Funds, Hedge Funds through a process called Roadshow. A roadshow is a series of presentations made in various locations leading up to an initial public offering (IPO). Investment Bankers/Underwriters make a sales pitch to potential investors before going public. Suddenly one day the retail investors come to know about the listing of the IPO and is forced to buy from the secondary market price that is normally very high for the initial few days.

India: The most transparent system of IPO allotment appears to exist in India as there are predecided numbers of shares reserved for all categories including retail investors. Date of application/Date of allotment/Date of Listing/Face Value of the Share/Premium if any, all these factors are predecided and available on the application form.

A retail investor can apply for a multiple numbers of lots in one application up to Rs.2 lac only. Normally 35% of total shares are reserved for Retail Investors. One important feature of the Indian IPO system is the application through ASBA(Applications Supported by Blocked Account) meaning no amount of money will be taken out of your Bank account till allotment. Your money always remains in your Bank account till you get a firm allotment of the shares. The successful applicants are drawn through a computer random process at the pre-decided date and the lucky ones get the allotment of shares in their Demat account again on the fixed date.

The scheduled listing of shares takes place on the fixed date as mentioned in the application form. The investor is in a position to book profit by selling the allotted shares immediately in the stock market. Those who were not lucky in the computerized draw, they can buy from the open market at the prevailing prices. The whole process is transparent like a mirror and does not take more than 15 days.

Friends, I will be happy to find feedback about the procedures as explained by me. You can correct me if you feel like it.

Stay Safe Stay Invested

Financial Freedom Step wise Financial Planning, Savings,investments,wealth creation

Financial freedom!! A stage that culminates your long career into a happy relaxed retired life when you don’t have to work for your sustenance anymore. Your savings work for you to live your life happily as the wealth created by you over a span of 30 years starts generating a passive income. This could be, a regular flow of interest from Bank Deposits/ Dividends from the Stock market/Mutual Funds or Rent from the property you own. Looks interesting!! However, the fact remains that most people fall short of their targetted goals due to a lack of planning of their personal finances.

Financial freedom can easily be accomplished by managing your Personal Finances well. Sit down with a piece of paper and pen to scribble the details about your income and expenses at the end of every month. Find the difference between your income and expenses. Yes! This is your cash flow statement. You ought to know about your monthly income and expenses like your salary, Rent, Utilities, car expenses, Interest/Insurance, etc. A perusal of your monthly expenses will provide insight into the nature and relevance of each and every amount spent during the month. well!! You are already on your way to financial Freedom if your cash flow is positive. However, friends, if your expenses are more than your income then you need to sit down and find out where are you going wrong.

“Do not save what is left after spending, but spend what is left after saving.”- Warren Buffet

SOS:Income-Expenses= Negative. If you are spending more than your income, the cash flow is going to be negative indicating you are either using your credit cards or raising loans from your resources for making both ends meet regularly. You don’t appear to have control over the expenses and taking the liberty to spend more than what you are earning. Do you believe this is a happy situation in the long run? Certainly not!! You are destined to be doomed if you don’t check your Finances immediately. Let’s take a case of income expenses statement of Mr. A for Nov 2020:

November 2020: Income	Dr	Cr
salary		50000
Expenses Nov.2020
Utiilities	20000
Rent	15000
Car Loan	10000
Insurance/Petrol/Interest	12000
Cash Flow	57000	50000

Income-Expenses=Cash Flow::: 50000-57000=(-7000)

The above illustration reveals a negative cash flow of Rs.7000/- as the expenses happen to overshoot total income. Mr.A needs to check expenses or raise his income level to be more comfortable with his finances in the future. Now let’s have a look at the table, you will find that the chances of curtailing expenses are possible through Utilities/Rent only as other expenses are more or less of fixed nature. Mr. A will have to either shift to some alternate location where he could rent a house at lower rent or cut down his expenses on utilities to bring back his cash flow from negative to positive.

With a little bit harmonization in your expenses, you can see your life turning into bliss. This is how you need to manage your personal finances for achieving Financial Freedom. You must remember and need to pursue your goals with FIRE::

FIRE: Financially Independent Retire early:

Management and planning of Personal Finances warrant you to Become Financially Literate. There is nothing technical about it but continuous monitoring of your income and expenses will do the trick for you. Once your path is illuminated with the wisdom of Financial Literacy, you can be assured of attaining freedom sooner than expected. Incidentally such an important subject doesn’t find a place in the curriculum of school or college studies across the world. The sole purpose of education remains in producing Clerks/Engineers/Doctors only and no effort is made for equipping the students with tools for managing personal finances.

May the fault lies in our education system which never enlightens us on managing money matters. Normally every child looks up to his parents for all Financial decisions till he actually starts earning. The child never grows up to tackle financial matters independently. Moving from schooling to college degrees, he keeps improving his grades without ever being told about the intricacies of this very important subject of Personal Finance. Campus placement or getting a good job remains the only exciting factor in his mind

let us start with the expenses part which plays important role in budgeting your finances. Your instinct for spending more goes berserk on finding liquid easy access to money. You must understand that the credit cards and other avenues are designed to meet your emergent temporary requirements. The credit cards are meant for day to day bills only. No long term borrowings!! In no case payment of the credit card bill be made in part or with a minimum amount. Banks/Credit Card Companies play with your mindset always trying to tempt customers for making a minimum payment of bills. You feel temporarily relieved of the pressure by not making full payment of the credit card bill but this trap leads only to make you broke in the future as interest rates charged by the Credit cards companies on the unpaid balances are astronomical.

The balances keep accumulating and suddenly, you will find the credit card companies declining further usage as the limit has been exceeded due to the interest factor. I would recommend auto-debit of credit card bill linked with your Bank account

Let’s understand the two types of credit which you are using in your life. There is good credit and bad credit to name the two. Good credit provides you liquidity at a cheaper rate for the creation of appreciating assets, whereas bad credit will make you pay higher rates for the creation of assets decreasing in value. You need to buy/invest by using bank Loans/Finance Companies only when the asset created by such finance is of appreciating nature. Buy a house/Gold/Stocks or any other investment which is bound to increase in value, it’s a good borrowing.

However, if the asset is of diminishing nature like Car/TV/Costly Electronic gadgets/Furniture etc then you need to re-evaluate the project as rates on this credit are high and the value of items is bound to decrease in the future. This is certainly a bad credit. Since none of these articles are of emergent nature, you can plan and buy by saving from your monthly expenses

Which type of credit do you think will be better? The answer looks imminent when you find items purchased by good credit increasing in value every year and at the same time, the bad credit besides being costly helps only in adding articles getting depreciated in value over a period of time.

Now coming to Positive Cash Flow, You will find a certain amount in your Bank account after spending for expenses at the end of every month. These surpluses can be used for making extra payment for reducing your loan liabilities or investing in a phased manner to achieve life goals like child education/New House/Investments/Retirement Fund etc. . Why not start saving today with the howsoever small amount it may be. This beautiful proverb says it all: “Little drops of water make a mighty ocean”.

Nature teaches us a great lesson about the significance of small consistent efforts in our life but a steady stream of savings is required for achieving our life goals. Little by little, birds make beautiful nests and little by little small towns become big cities.

There is a need to evaluate your Balance Sheet at the end of each year. This will show whether you are on right track or not. The consistent increase in Net worth will pave way for making your life beautiful. There are only two ways to keep your net worth curve moving up: Firstly by increasing your Assets and secondly by decreasing your liabilities.

Liabilities		Assets
Car Loan	125000	Bank Balance	75000
Credit Card	50000	PF	60000
		Car	150000
		Mutual Funds	50000
Net Worth	160000
Total	335000	Total	335000

Assets-Liabilities= Net Worth:::(335000-175000=160000)-Mr B aged 30 years

You will see in the above illustration that Mr. B has a net worth of 160000/- and he is well on way to becoming financially independent. An increase in net worth every year indicates the wealth you are creating for yourself and the family for the future. Time to think about long term goals after allocating enough amount towards an emergency fund. Here is a live example of how the principle of compounding works for your consitent savings/investments to pave for a beautiful future.

Principal Value PV	Inflation Rate i	Time n	Future Value FV
50000	6%	30 years	FV=PV(1+6/100)n
			287175

Table(A)

Table (A) provides you the future value of Rs.50000/- after 30 years with 6% inflation.. You will agree that the value of money keeps decreasing every year. You can’t buy for Rs.100 the same stuff after one year which you are buying today. Similarly, the value of your salary/income will not be the same after 30 years. It will be decreased substantially. That means you need to earn more to keep pace with the rising prices after 30 years. Now please refer to the table below: You will find that your salary amount of 50000/- after 30 years at inflation rates of 6% will have to grow substantially and the calculation comes out to Rs. 287175. Does that mean you will have to earn Rs.287175/-pm after 30 years to live the same life which you are living today.> Agreed?

Principal Value PV	Interest rate i	Tenure n	Maturity Value MV
5000	10%	30 Years	MV=PV(1+10/100)n
			1.14 cr

Table (B)

For maintaining the same standard of living as you have been enjoying today, you need to earn Rs.287175 after 30 years but who will pay you this amount after your retirement. You will have to take care of yourself.

Friends,You need to accumulate huge funds which could generate a passive income of Rs.287175 per month, when you are retired and want to live a comfortable happy life. Table (B) as shown above will lead your way to achieve goals by investing wisely with consistent small savings. Average returns in stock markets range anywhere between 10 to 14 % annually and you can earn 10% on bonds/other safe investments also. Let us start investing Rs.5000/-PM expecting average return@10% being the lowest for 30 years You will be astonished to find the huge amount accumulated at the end of 30 years.

Just hold your breath and see the astonishing figures on your screen!!

Is it not interesting? You get an unbelievable amount of Rs.1.14cr on your retirement after 30 years. Is it not sufficient to provide you passive income of Rs.287175/- PM. This is how the compounding of savings works but you need to be consistent and prudent in choosing the right investment avenues.

Friends, I hope you liked my way of expressing financial freedom. I have not touched upon Emergency Fund or Mid Term Goals as these have been covered in my earlier blogs. Your feedback with critical comments is welcomed for making this blog worth gaining knowledge about Personal Finances

Happy Reading

Investments, Bonds, Stocks, Mutual Funds, Create Wealth

Investments are an important part of Financial Planning exercise for invesors who look for handsome returns to achieve their life goals in a well defined time frame. Taking average span of 40 years during which an individual works, only salary income and savings do not propagate enough Funds to achieve the identified milestones. You need to ensure growth of savings at a reasonable rates for accompalishing the cherished goals of good education for your children, spacious house to live in, all worldly comforts for your family and finally settling for a relaxed and peaceful retired life

There are a large number of Investment instruments available in the market but a few are being discussed for the benefit of retail investors to earn good returns. More Risk- More Returns or longer investment– better returns are the age old quotes which are relevant even in the present day context for investors:

1. Fixed Deposits in Bank
2. Recurring Deposits
3. NCD’s with leading companies
4. Mutual Funds
5. Stock Market(IPO or Secondary)
6. Gold ETF
7. Money Market Instruments lie CD(Certificate of Deposits)

Bank Fixed Deposit/RD: Coming to the first two, the interest rates have gone down substatially over the past few years and average return on these FDR’s doesnt go beyond 6% p.a which in other words is a depreciation of your money as inflation rate hovers around 7%.

For an FDR of Rs.100,000/-, likely interest will be approximately 6000/- for one year and you will receive a cumulative amount of Rs.106000/- in your account . However on the flip side, the value of your money after discounting the inflation rate factor @7% will come down to 99000/- Virtually any interest rate below the inflation rate will eat into your original investment.

However liquidity is the best value attached to this investment option as you can get your FDR’s encashed or raise a loan any time during the curency of the tenure of FDR. Insurance cover provided by DICGC upto Rs.500,000/- is another feature which makes Bank deposits attractive. Any loss due to failure of a particular Bank is covered by DICGC upto Rs.500,000/- w.e.f Feb.2020. Its advisable to maintain a part of your portfolio under this segment.

Bonds/NCD’s: Coming back on NCD’s/Bonds where average return is anything around 10%, the option looks good as compared to Bank FDR but the amount remains locked for a few years. Unlike Banks where you can encash your deposit receipt prematurely, the money remains stuck for a few years in Bonds as secondary market is still not mature. You can consider investing under this option by identifying top rated companies with a clean record of payments on time.

Stock Market/MF’s: Now coming to company shares in the Stock market and Mutual Funds, the historical figures prove that returns in these instruments is far more than the above referred instruments. During the past 10 years, the NIFTY 50 Index has grown more than 130% with a few sectors showing negative trends.However. Shares of good companies have shown tremendous increase in their value over the past few years and helped in wealth creation for those customers who remained invested for long periods.

Whereas risk is comparatively more for direct investments in Shares/stock markets,you can spare a portion of funds for direct investmnets in shares through secondary market if you are confident about past and future performance of the company with a proven track record of the management. It is advisable to start small investments initially through SIP(Systematic Investment Plan) for mitigating the risk of volatability in the market. You need to be Market literate with a thorough knowledge of reading various parameters based on Financial results.

IPO(Initial Public Offer): Other route of entering stock market is through IPO where the shares are issued to retail investors on a base price fixed by the company. The subscription is generally multiple times and you are lucky if the computer picks your application number in a random draw. Its like a Jackpot for you as the listing price is normally much more than the issued price. You can exit on the day of listing by booking handsome profit or build a separate portfolio to reap future benefits of dividends and price rise

Otherwise better option for entering stock market is through Mutual Funds. The Fund Manager has an expert team of professionals to study the market and companies with prudence. They have rich experience in identifying the right stock at best price. You are only left with chosing a well managed Equity Mutual Fund with excellent track record of managing the fund. You can decide the nature of fund depending on your risk appetite and future goals. I have seen a few ELSS funds giving you a return of more than 40% over the past few years

GOLD: Yellow metal has shown tremendous results over the last few decades and the investors have reaped a rich harvest by investing in Gold. Whenever there is doubt and volatality in the market due to conditons like COVID19, investors have rushed to invest in Gold. Looks the safest bet! Whereas investment in physical Gold except ornaments for personal use is inconvenient from the security and safety point of view, the ETF route looks attractive. Gold ETF’s are liquid and tradeable for value. Gold Prices in 2000 was Rs.4400 per 10 gam which increased to Rs.18500 in 2010 and today it is more than Rs.50000 per 10 gm

CD(Certificate of Deposits): Though started in the year 1989, one of the best investment options which remains ignored by the investors in India is CD(Certificate of Deposits). You can earn average return of 7% on Certificate of Deposits by investing for a period ranging from 7 days to 1 year in any authorised Bank/Financial Institution. Minimum investment starts from Rs.100,000/- and this instrument is easily transferable by endoresment and delivery. since the issuing Bank can not buy back its own CD, there is no Loan facility against this instrument.

We have seen in the past that wealth creation has been possible for those who showed confidence and remained invested for longer periods not less than 5 years. Switching of portfolios or discontinuing SIP investments during sluggish market conditions will only erase the gains expected from long term investments.

Retail Investors are small investors who dream of all worldly pleasures by accumulating every single penny. They must show more reselience and patience for creating wealth through high yielding safe investmnets gradually.

Keep saving and stay invested

50/30/20 Budget Rule: Time to Change?

Senator Elizabeth Warren in her book “All Your Money” published in the year 2006 logilcally brought out a Plan popularly known as “50/30/20 Budget Rule” which is internationally acknowledged and accepted formula for Financial Planning . It is almost 15 years when she analysed the threshhold limit of Expenses and Savings prescribed to achieve the financial goals in one’s life.

With a complete changed scenereo over the last 15 years, scope of future expenses like Child Education,Retirement Fund,Emergency Fund and buying a house has made a sea change. Various faculties of higher education viz. IT/Medicine/MBA etc has become very costly. Gone are the days when future education was planned by the parents and kids would pursue on the dotted lines. The kids are more enlightened about planning of their own lives these days. Who knows which degree will they decide to pursue after ten years.

With commercialisation of sports, a few kids are crazy to pursue their career in sports which is again a very costly affair as the trained coaches/sports gears/diets demand a great commitment and heavy expenditure.

Similarly emergency fund equaling three months salary as suggested in the existing thumb rule does’nt appear sufficient to ward off the problems likely to happen in view of tough times like COVID-19

Recently, we have witnessed how the prevailing Pandemic conditions have subjected the whole world to unforeseen, unprecedented and unpleasant circumstances making the life uncomfortable not only for general public but also for the high paid individuals and businesses alike.

Accordingly with more emphasis on savings, a simple plan ie 30(Savings) /50(Living Expenses)/20(Wants and Desires) has been contemplated to provide more viable solution in such a way that you achieve all your life goals comfortably. Let’s discuss this new formula minutely as under:

It is very difficult to save after spending on household chores as suggested on various platforms including the book under reference. Before starting to spend anything out of your net income, you must reserve 30% upfront as Savings and use the balance i.e 70% for Living Expenses and Wants/Luxuries subsequently as under:

• Savings 30%: We need to allocate this fund under three categories: i) Emergency Fund 10%: life throws unexpected challenges sometimes when we lose our job/ business or face a medical emergency and there are not enough savings to confront these unforeseen circumstances. Create an emergency fund equivalent to at least 8 Months of Salary. Likelihood of getting any alternate employment in three months is remote and the family may find itself under great distress. This fund can be used during the uncertain times without resorting to easy high cost credit from Banks. ii) Child Education: As discussed herein above, increasing costs of education warrants to save 10% to afford higher education for your kids. You can utilise the corpus for upfront payment or as a margin for raising education loans for higher technical education overseas. This Fund will certainly help in fulfilling the dreams of kids who aspire to make their career in sports
• iii) Retirement and Home: With more health conscious society and quality of life, there is every possibility of living longer after retirement which require continued cash flows, You need to save at least 10% for accumulating corpus for retirement which could generate enough cash for living expenses.

• Living Expenses: 50%: These expenses pertain to day to day livelihood of the family. Groceries, Health Insurance, Insurance, Car EMI,Utilities,Rent/Mortgage are the major expenses required for your survival. As per the existing thumb rule this amount looks sufficient to enjoy a comfortable life.
• Wants/Luxuries 20%: We need to provide for Shopping/Dining out/Costly Electronic gadgets/Sports/Holidaying etc. Regular savings in this portfolio will help you to enjoy all worldly pleasures with ease without falling back on emergency fund. This Fund will also vindicate the saying”Dont compromise with your present for the sake of Good Future”

Contemplated Budget Rule

I would feel honoured to hear from my illustrious friends about viability of the proposed/contemplated Budget Rule and its applicability in normal as well as extraordinary times in one’s life. Your valuable suggestions will make this exercise worth consideration by the people who matter in studying the art of Financial Planning.