Tag: University of Mumbai BMS Notes

Mutual funds are investment vehicles that pool money from many different investors to increase their buying power and diversify their holdings. This allows investors to add a substantial number of securities to their portfolio for a much lower price than purchasing each security individually.

Benefits of Mutual Funds

Risk reduction

As mutual funds are managed professionally it reduces the risk factor. Also, they are invested in a huge number of companies. Thus, the risk factor is reduced more.

Diversification

There are a large number of investors that has savings with them. Thus, these small savings are brought together and a mutual fund is created. So, this can be used to buy the share of many different companies. Also, because of this diversification, the investment ensures capital appreciation and regular return.

Tax advantage

There are many schemes in a mutual fund that provide a tax advantage under the new income tax act. So, the liability of paying the tax of an investor is also reduced. This can be possible only when he/she invests in mutual funds.

Investor protection

Mutual funds are monitored and regulated by the SEBI. Thus, it provides better protection to its investors. Also, this makes sure that there is no legal obligation for the investors.

Disadvantages of Mutual Funds

Although mutual funds can be beneficial in many ways, they are not for everyone.

1. No Control over Portfolio. If you invest in a fund, you give up all control of your portfolio to the mutual fund money managers who run it.
2. Capital Gains. Anytime you sell stock, you’re taxed on your gains. However, in a mutual fund, you’re taxed when the fund distributes gains it made from selling individual holdings even if you haven’t sold your shares. If the fund has high turnover, or sells holdings often, capital gains distributions could be an annual event.
3. Fees and Expenses. Some mutual funds may assess a sales charge on all purchases, also known as a “load” this is what it costs to get into the fund. Plus, all mutual funds charge annual expenses, which are conveniently expressed as an annual expense ratio this is basically the cost of doing business. The expense ratio is expressed as a percentage, and is what you pay annually as a portion of your account value. The average for managed funds is around 1.5%. Alternatively, index funds charge much lower expenses (0.25% on average) because they are not actively managed. Since the expense ratio will eat directly into gains on an annual basis, closely compare expense ratios for different funds you’re considering.
4. Over-diversification. Although there are many benefits of diversification, there are pitfalls of being over-diversified. Think of it like a sliding scale: The more securities you hold, the less likely you are to feel their individual returns on your overall portfolio. What this means is that though risk will be reduced, so too will the potential for gains. This may be an understood trade-off with diversification, but too much diversification can negate the reason you want market exposure in the first place.
5. Cash Drag. Mutual funds need to maintain assets in cash to satisfy investor redemptions and to maintain liquidity for purchases. However, investors still pay to have funds sitting in cash because annual expenses are assessed on all fund assets, regardless of whether they’re invested or not. According to a study by William O’Reilly, CFA and Michael Preisano, CFA, maintaining this liquidity costs investors 0.83% of their portfolio value on an annual basis.

The word “investment” can be defined in many ways according to different theories and principles. It is a term that can be used in a number of contexts. However, the different meanings of “investment” are more alike than dissimilar. Generally, investment is the application of money for earning more money. Investment also means savings or savings made through delayed consumption. According to economics, investment is the utilization of resources in order to increase income or production output in the future.

An amount deposited into a bank or machinery that is purchased in anticipation of earning income in the long run is both examples of investments. Although there is a general broad definition to the term investment, it carries slightly different meanings to different industrial sectors.

According to economists, investment refers to any physical or tangible asset, for example, a building or machinery and equipment. On the other hand, finance professionals define an investment as money utilized for buying financial assets, for example stocks, bonds, bullion, real properties, and precious items.

According to finance, the practice of investment refers to the buying of a financial product or any valued item with anticipation that positive returns will be received in the future. The most important feature of financial investments is that they carry high market liquidity. The method used for evaluating the value of a financial investment is known as valuation. According to business theories, investment is that activity in which a manufacturer buys a physical asset, for example, stock or production equipment, in expectation that this will help the business to prosper in the long run.

Types of Investment in Security Analysis and Portfolio Management

Types of investments

Investments may be classified as financial investments or economic investments.In Finance investment is putting money into something with the expectation of gain that upon thorough analysis has a high degree of security for the principal amount, as well as security of return, within an expected period of time. In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling. Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.

Economic investments are undertaken with an expectation of increasing the current economy’s capital stock that consists of goods and services. Capital stock is used in the production of other goods and services desired by the society. Investment in this sense implies the expectation of formation of new and productive capital in the form of new constructions, plant and machinery, inventories, and so on. Such investments generate physical assets and also industrial activity. These activities are undertaken by corporate entities that participate in the capital market.

Financial investments and economic investments are, however, related and dependent. The money invested in financial investments is ultimately converted into physical assets. Thus, all investments result in the acquisition of some asset, either financial or physical. In this sense, markets are also closely related to each other. Hence, the perfect financial market should reflect the progress pattern of the real market since, in reality, financial markets exist only as a support to the real market.

Nature and Objectives of Investment Management

Nature of investment

The features of economic and financial investments can be summarized as return, risk, safety, and liquidity.

1. Return

• All investments are characterized by the expectation of a return. In fact, investments are made with the primary objective of deriving a return.
• The return may be received in the form of yield plus capital appreciation.
• The difference between the sale price and the purchase price is capital appreciation.
• The dividend or interest received from the investment is theyield.
• The return from an investment depends upon the nature of the investment, the maturity period and a host of other factors.

Return = Capital Gain + Yield (interest, dividend etc.)

2. Risk

Risk refers to the loss of principal amount of an investment. It is one of the major characteristics of an investment.

The risk depends on the following factors:

• The investment maturity period is longer; in this case, investor will take larger risk.
• Government or Semi Government bodies are issuing securities which have less risk.
• In the case of the debt instrument or fixed deposit, the risk of above investment is less due to their secured and fixed interest payable on them. For instance, debentures.
• In the case of ownership instrument like equity or preference shares, the risk is more due to their unsecured nature and variability of their return and ownership character.
• The risk of degree of variability of returns is more in the case of ownership capital compare to debt capital.
• The tax provisions would influence the return of risk.

3. Safety:

Safety refers to the protection of investor principal amount and expected rate of return.

• Safety is also one of the essential and crucial elements of investment. Investor prefers safety about his capital. Capital is the certainty of return without loss of money or it will take time to retain it. If investor prefers less risk securities, he chooses Government bonds. In the case, investor prefers high rate of return investor will choose private Securities and Safety of these securities is low.

4. Liquidity:

Liquidity refers to an investment ready to convert into cash position. In other words, it is available immediately in cash form. Liquidity means that investment is easily realizable, saleable or marketable. When the liquidity is high, then the return may be low. For example, UTI units. An investor generally prefers liquidity for his investments, safety of funds through a minimum risk and maximization of return from an investment.

 Four main investment objectives cover how you accomplish most financial goals. These investment objectives are important because certain products and strategies work for one objective, but may produce poor results for another objective. It is quite likely you will use several of these investment objectives simultaneously to accomplish different objectives without any conflict. Let’s examine these objectives and see how they differ.

Capital Appreciation

Capital appreciation is concerned with long-term growth. This strategy is most familiar in retirement plans where investments work for many years inside a qualified plan. However, investing for capital appreciation is not limited to qualified retirement accounts. If this is your objective, you are planning to hold the stocks for many years. You are content to let them grow within your portfolio, reinvesting dividends to purchase more shares. A typical strategy employs making regular purchases. You are not very concerned with day-to-day fluctuations, but keep a close eye on the fundamentals of the company for changes that could affect long-term growth.

Current Income

If your objective is current income, you are most likely interested in stocks that pay a consistent and high dividend. You may also include some top-quality real estate investment trusts (REITs) and highly-rated bonds. All of these products produce current income on a regular basis. Many people who pursue a strategy of current income are retired and use the income for living expenses. Other people take advantage of a lump sum of capital to create an income stream that never touches the principal, yet provides cash for certain current needs (college, for example).

Capital Preservation

Capital preservation is a strategy you often associate with elderly people who want to make sure they don’t outlive their money. Retired on nearly retired people often use this strategy to hold on the detention has. For this investor, safety is extremely important – even to the extent of giving up return for security. The logic for this safety is clear. If they lose their money through foolish investment and are retired, it is unlike they will get a chance to replace it. Investors who use capital preservation tend to invest in bank CDs, U.S. Treasury issues and savings accounts.

Speculation

The speculator is not a true investor, but a trader who enjoys jumping into and out of stocks as if they were bad shoes. Speculators or traders are interested in quick profits and used advanced trading techniques like shorting stocks, trading on the margin, options and other special equipment. They have no love for the companies they trade and, in fact may not know much about them at all other than the stock is volatile and ripe for a quick profit. Speculators keep their eyes open for a quick profit situation and hope to trade in and out without much thought about the underlying companies. Many people try speculating in the stock market with the misguided goal of getting rich. It doesn’t work that way. If you want to try your hand, make sure you are using money you can afford to lose. It’s easy to get addicted, so make sure you understand the real possibilities of losing your investment.

The secondary objectives are tax minimization and Marketability or liquidity.

Tax Minimization:

An investor may pursue certain investments in order to adopt tax minimization as part of his or her investment strategy. A highly-paid executive, for example, may want to seek investments with favorable tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other tax-sheltered retirement plan can be an effective tax minimization strategy.

Marketability/Liquidity:

Many of the investments we have discussed are reasonably illiquid, which means they cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires the sacrifice of a certain level of income or potential for capital gains.

Common stock is often considered the most liquid of investments, since it can usually be sold within a day or two of the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable bonds aren’t likely to be held in his or her portfolio.

Despite its popularity and presence in the news, the stock market is just one of many potential places to invest your money. Investing in stock is often risky, which draws attention to the huge gains and losses of some investors. If you manage the risks, you can take advantage of the stock market to secure your financial position and earn money.

Investment Gains

One of the primary benefits of investing in the stock market is the chance to grow your money. Over time, the stock market tends to rise in value, though the prices of individual stocks rise and fall daily. Investments in stable companies that are able to grow tend to make profits for investors. Likewise, investing in many different stocks will help build your wealth by leveraging growth in different sectors of the economy, resulting in a profit even if some of your individual stocks lose value.

Dividend Income

Some stocks provide income in the form of a dividend. While not all stocks offer dividends, those that do deliver annual payments to investors. These payments arrive even if the stock has lost value and represent income on top of any profits that come from eventually selling the stock. Dividend income can help fund a retirement or pay for even more investing as you grow your investment portfolio over time.

Diversification

For investors who put money into different types of investment products, a stock market investment has the benefit of providing diversification. Stock market investments change value independently of other types of investments, such as bonds and real estate. Holding stock can help you weather losses to other investment products. Stock also adds risk to a portfolio, as well as the potential for large, rapid gains, helping investors avoid risk-averse or overly conservative investment strategies.

Ownership

Buying shares of stock means taking on an ownership stake in the company you purchase stock in. This means that investing in the stock market also brings benefits that are part of being one of a business’s owners. Shareholders vote on corporate board members and certain business decisions. They also receive annual reports to learn more about the company. Owning stock in the company you work for can be a way to express loyalty and tie your personal finances to the success of the business as a whole.

Higher Liquidity:

In the Indian stock market, two exchanges, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) play important roles. Most companies trade their shares on either or both of these exchanges. This provides higher liquidity to investors because average daily volumes are high. Therefore, if an investor wants to buy or sell any product on the stock exchanges, this liquidity makes it easy.

Versatility:

The stock market offers different financial instruments, such as shares, bonds, mutual funds, and derivatives. This provides investors a wide choice of products in which to invest their monies. In addition to providing investment choices, this flexibility is beneficial in mitigating the risks inherent to stock investing by enabling diversification of investment portfolios.

Higher Returns in Shorter Periods of Time:

Compared to other investment products like bonds and fixed deposits, stock investing provide investors an excellent possibility of making greater returns in comparatively shorter time periods. Adhering to the stock market basics, such as planning the trade, using stop-loss and take-profit triggers, doing the research and due diligence, and being patient can significantly mitigate the risks inherent to stock investing and maximize the returns on share market investments.

Acquire Ownership and Right to Vote:

Even if an investor acquires a single share in a company, he acquires a portion of ownership in the company. This ownership, in turn, provides investors the right to vote and offer his contribution in the strategic movement of the business. Although this may seem like an exaggeration, it is true and there are several instances when shareholders have prevented company management from making unreasonable decisions that are detrimental to their interests.

Regulatory Environment and Framework:

The Indian stock market is regulated by the Stock Exchange Board of India (SEBI). The SEBI has the responsibility of regulating the stock exchanges, its development, and protecting the rights of the investors. This means when investors invest in financial products on the stock market, their interests are well-protected by a regulatory framework. This significantly helps in reducing risks due to fraudulent activities of companies.

Convenience:

Technical development has influenced every aspect of modern living. The stock exchanges are also using various technical advancements to provide greater convenience to the investors. The trades are all executed on an electronic platform to ensure the best investment opportunities to investors in an open environment. In addition, broking service providers offer online share trading facilities that make investing convenient, because investors can place their orders through a computer from the comfort of their homes or offices. The demat account makes it easier for investors to hold all the products within their investment portfolio electronically in a single location, which makes it easier to track and monitor the performance.

Although stock investing has several benefits, investors must also be cautious while making their decisions. Understanding the stock market basics and doing their research before investing is advisable to mitigate risks and maximize returns.

Stock Investment

Stock investment is one of the most preferred investment options due to the high return potential. As the stock investments carry a little higher risk and hence are also capable of generating high returns.

You can expect an annual return of 15% – 18%, if you know the art of investing in the right stocks at the right time. I would recommend you to start with a small investment in stock with an intent to learn before making big investments.

Best Investment Options for a Salaried Person

1. Public Provident Fund (PPF)

Apart from your regular pension contribution, an investment in PPF account can save lots of tax as all the deposits made are deductible under section 80C.

Further, all the accumulated principal and interest are exempted from tax at the time of withdrawal.

2. National Pension System (NPS)

NPS scheme is portable across jobs and locations. The added benefit is the returns from equity and debt investments.

All your contributions up to Rs. 1.5 Lac to Tier I capital are exempted under section 80C. Plus you can claim an additional up to Rs. 50,000 of tax benefits.

So here you can save Rs. 2 Lacs of tax.

3. Equity Linked Savings Scheme (ELSS)

You get a higher return of 15% to 18% while investing in ELSS. Investment in ELSS funds have a lesser lock-in period of 3 years and any earning over Rs. 1 Lac are taxable.

4. Tax Savings Fixed Deposit

If you want to have a safe investment option without investing in equities then pick tax saving fixed deposit of any bank or post office.

The interest rates vary from bank to bank and are in the range of 6% to 8.5%.

5. Unit Linked Insurance Plans (ULIPs)

Investments in ULIPs gives you wealth creation option along with life cover. Premium paid are eligible for deduction under section 80C. Plus the returns on maturity are exempt under section 10(10D).

The returns vary depending on the combination of equity, debt or hybrid funds.

Best Investment Plan with High Returns

6. Direct Equity Investment

All the equity investments carry higher risks and hence are also capable of generating very high returns. Opt for equity investment option if you are comfortable losing as much as 50% of the capital.

The last 1-year return of NSE is 12.40% and in the last 2 year generated a 26.5% returns. Likewise, shares of blue-chip companies have delivered huge returns in the near past.

7. Mutual Funds

Mutual funds are the safest and the most convenient way of investing in the markets when you do not have the time and expertise.

The equity mutual funds have generated consistently higher returns. With funds like L&T India Value, Mirae Asset India and ICICI Prudential Blue Chip delivering 3 years return in the range of 14% to 18%.

The investment in mutual funds can be a lump sum or monthly SIP for an amount as low as Rs. 500.

8. Commercial Real Estate

Commercial real estate provides rental income and capital appreciation. The higher appreciation is due to demand for office space and growth of corporate environment.

But the location, building quality, market space rent and the demand-supply plays a major factor in deciding returns.

A good investment in office and shop spaces not only fetches higher returns but also helps in the diversification of investment assets.

9. Initial Public Offer (IPO)

The best part of investing in IPO is that the money gets blocked only for 7 to 15 days. Prudent investment in a good company coming out with IPO can fetch returns as high as 20-25% over a period of time.

Best Investment Plan for 1 Year

10. Fixed Deposit

FDs are the safest and secure investment options provided by banks and post offices which earn higher interest rates than a savings account.

Any excess amount which you are not going to use for a certain period of time can be safely put into a fixed deposit.

11. Recurring Deposit

Like fixed deposit, RD to earns a higher interest rate than a savings account.

RD let you invest any amount which can be as small as Rs. 5 per month and is the best option for promoting the habit of savings.

12. Liquid Mutual Fund

The option carries the least amount of risk and is for persons who have idle money for short period of time.

The mutual fund invests your money in the highly liquid short term instruments like the bank’s CD, T-bills and commercial papers generally with a maturity period of less than 91 days.

13. Ultra Short Term Debt MF Plans

Unlike, liquid MF the money is invested in bonds and other instruments with maturity more than 91 days and less than 1 year.

Ultra ST debt MF does carry interest rate risk, are not so liquid and hence gives you higher returns.

Best Investment Plan for 3 Years

14. Savings Account with Sweep in Facility

The sweep in option lets you enjoy flexibility in managing your savings and also enjoy higher returns from a fixed deposit.

Here, any excess money lying in your savings account, above a particular threshold level gets automatically converted into a fixed deposit and vice versa.

15. Short Term Debt MF

Is a good option for generating stable returns with modest risk.

The funds are locked for up to 3 years and there is a 1% penalty for premature redemption. Still you can expect returns a bit higher than the fixed deposit in a range of 8-10%.

16. Equity Linked Savings Scheme (ELSS)

There are numerous benefits when you invest in ELSS like tax savings, higher returns (15% to 18%), option to invest monthly (SIP) and can be started with as low as investing Rs. 500.

17. Fixed Deposit

Returns on a 3-year FDs vary from bank to bank, usually in a range of 6.5% to 8%. Also there are no associated tax benefits in this investment option.

8. Recurring Deposit (RD)

The returns generated are almost the same as a fixed deposit for a 3 year period.

There are hundreds of people around who can share their property investment ideas with us. Almost everyone, at some stage in their life, has experienced a property dealing. 

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We’ve seen our parents, elder siblings etc buy a property. It has enriched our knowledge. Even listening about property dealing from friends also adds to our knowledge base. But nothing is more valuable than self indulgence.

Which are those deeper insights about property investment which experienced buyers use as their guide? How a beginner can invest in real estate in India as a pro?

This is what we are going to discuss in this article. But before that, lets’ refresh some basics about the property market in India.

Rich and wealthy invest in real estate directly. They own multiple residential or commercial properties. Steady and decent capital appreciation of their real estate property is common.

But the part which makes property investment so dear is its capability of generating stable short term income. The short term income is generated in form of “monthly rents“. 

The rate at which the rental income grows, generally beats inflation in long term. This is specially true for Metro, Tier1, and Tier 2 Cities. As the monthly yield of property grows, this also pushes the overall property price up. 

What is shown in the above infographic? Real estate investment generates assured returns. The returns are in form of rent and capital appreciation.

The rental yield (fixed income) grows with time. Generally this growth keeps pace with the inflation. Capital appreciation will happen due to demand growth. India being a growing and young population, demand for property keeps rising.

This dual effect (of assured rent and value growth) makes the real estate sector generate unparalleled returns, unlike any other asset.

Property investment is one of the best inflation hedge. This is the reason why big investors like Robert Kiyosaki and Donald Trump has special liking for it.

Tread With Caution

Why? Because, except for few Indian cities, real estate market has not really matured in India? Why I say so? Because we still see random development of properties in majority cities in India. 

A good real estate property must be developed, sold, and maintained as per a master plan incorporating all facilities.

Unless property has a master plan, its long term value appreciation is doubtful. In most cases, value of such properties depreciates with time.

The problem is, most of the properties are by either unplanned or are developed by below-par developers. This makes real estate investing in India slightly risky.

for a beginner, it is essential to know what to look at in a property. Investing in real estate cannot be done just on basis of aesthetics. Proportional weightage must be given to at least 14 parameters listed below:

Price

• Affordability: If one’s affordability is Rs.35 Lakhs, and the property on offer is costing Rs.40 Lakhs, it is clearly not affordable. This is one reason why affordability calculation in step #1 is essential before making a commitment.

Vicinity

• Location: Property investment must be done in a location which is known to the investor. Investing in an unknown city/town shall be avoided. Location of property within the city is also important. A property which has schools, markets, hospitals nearby is preferable.
• Transportation: Approach road is important. If there is a broad and paved road connecting the property, it’s a big thumbs up. Public transport connectivity like metro, bus depot, auto rickshaw stand, Ola/Uber connectivity also adds to the value.
• Negatives: Special attention must be given to the drawbacks of the property. Typical ones can be like busy roads, too close to railway station or airport, traffic noise, remote location, old society etc. These factors cause hardships & also lowers the quality of life of the residents.

Specification

• Type of House: If the preference is a row house, multi-storeyed apartment will not work and vice versa. Before venturing out for property search, type of house must be finalised.
• New or Used: Second hand homes can be great value for money. They have an advantage of ready possession and established locality. They may also have pre-built facilities like internet, heaters, wood work, modular kitchens etc. But a new property also comes with its own advantages.
• Number of bedroom: For a small family, even a studio apartment is enough. For others, requirement may range from 1/2BHK to higher size flats. I personally like evaluating property first on basis of their size (in SQFT), and then on the number of bedrooms it can offer.
• Open Floor: There are some properties which has slots & pockets for wardrobes, cabinets, fridge etc. Such homes offer better ‘open floor space management’ after the furnitures are put in place. Generally speaking, a house must be able to accommodate your special furnitures (like over , bicycle, pram etc).
• Parking: If you own a car, two wheeler etc the property must offer an adequate parking facility.

Other Features

• Communication: If the property has facilities already laid for services like cable TV and broadband etc, it can save few bucks. Generally speaking, look for mobile & internet connectivity in the area. There are some areas which has inherently poor mobile network connectivity.
• Extension: Over a period of time, owners like to extend their living space. Properties which has provisions for extension may prove handy in times to come.
• Gardening: For some, building a hanging garden in their balcony is a big plus. If you are looking for a row house, check if the open space provides the possibility of gardening. Property with such provisions becomes desirable.
• Present Condition: Check the ‘built condition’ of the property. If it is a new property, no problem. But in a second hand house, rework or repairs may be required. Being aware of this extra cost before taking the possession is advisable.
• Condition on Outside: Apartment may be good from inside, but the outside building is equally good? Make sure to check the property from outside. Scan the painting, cracks, seepage, loose wirings, encroachments, quality of parking etc.
• Security: These days the societies are plagued with random thefts and pilferages. Make sure to check if the property has a dedicated security protection.

Main factors that affect the housing market

• Economic growth. Demand for housing is dependent upon income. With higher economic growth and rising incomes, people will be able to spend more on houses; this will increase demand and push up prices. In fact, demand for housing is often noted to be income elastic (luxury good); rising incomes leading to a bigger % of income being spent on houses. Similarly, in a recession, falling incomes will mean people can’t afford to buy and those who lose their job may fall behind on their mortgage payments and end up with their home repossessed.
• Unemployment. Related to economic growth is unemployment. When unemployment is rising, fewer people will be able to afford a house. But, even the fear of unemployment may discourage people from entering the property market.

• Interest rates. Interest rates affect the cost of monthly mortgage payments. A period of high-interest rates will increase cost of mortgage payments and will cause lower demand for buying a house. High-interest rates make renting relatively more attractive compared to buying. Interest rates have a bigger effect if homeowners have large variable mortgages. For example, in 1990-92, the sharp rise in interest rates caused a very steep fall in INDIA house prices because many homeowners couldn’t afford the rise in interest rates.
• Consumer confidence. Confidence is important for determining whether people want to take the risk of taking out a mortgage. In particular expectations towards the housing market is important; if people fear house prices could fall, people will defer buying.
• Mortgage availability. In the boom years of 1996-2006, many banks were very keen to lend mortgages. They allowed people to borrow large income multiples (e.g. five times income). Also, banks required very low deposits (e.g. 100% mortgages). This ease of getting a mortgage meant that demand for housing increased as more people were now able to buy. However, since the credit crunch of 2007, banks and building societies struggled to raise funds for lending on the money markets. Therefore, they have tightened their lending criteria requiring a bigger deposit to buy a house. This has reduced the availability of mortgages and demand fell.
• Supply. A shortage of supply pushes up prices. Excess supply will cause prices to fall. For example, in the Irish property boom of 1996-2006, an estimated 700,000 new houses were built. When the property market collapsed, the market was left with a fundamental oversupply. Vacancy rates reached 15%, and with supply greater than demand, prices fell.

• Affordability/house prices to earnings. The ratio of house prices to earnings influences the demand. As house prices rise relative to income, you would expect fewer people to be able to afford. For example, in the 2007 boom, the ratio of house prices to income rose to 5. At this level, house prices were relatively expensive, and we saw a correction with house prices falling.
• Geographical factors. Many housing markets are highly geographical. For example, national house prices may be falling, but some areas (e.g. London, Oxford) may still see rising prices. Desirable areas can buck market trends as demand is high, and supply limited. For example, houses near good schools or a good rail link may have a significant premium to other areas.

Need for Career Planning:

Career Planning is necessary due to the following reasons:

1. To attract competent persons and to retain them in the organization.
2. To provide suitable promotional opportunities.
3. To enable the employees to develop and take them ready to meet the future challenges.
4. To increase the utilization of managerial reserves within an organization.
5. To correct employee placement.
6. To reduce employee dissatisfaction and turnover.
7. To improve motivation and morale.

Process of Career Planning:

The following are the steps in Career Planning:

1. Analysis of individual skills, knowledge, abilities, aptitudes etc.
2. Analysis of career opportunities both within and outside the organization.
3. Analysis of career demands on the incumbent in terms of skills, knowledge, abilities, aptitude etc., and in terms of qualifications, experience and training received etc.
4. Relating specific jobs to different career opportunities.
5. Establishing realistic goals both short-term and long-term.
6. Formulating career strategy covering areas of change and adjustment.
7. Preparing and implementing action plan including acquiring resources for achieving goals.

Pre-requisites for the success of career planning.

1. Strong commitment of the top management in career planning, succession planning and development.
2. Organization should develop, expand and diversify its activities at a phased manner.
3. Organization should frame clear corporate goals.
4. Organization should have self-motivated, committed and hard working employees.
5. Organization’s goal in selection should be selecting the most suitable man and place him in the right job.
6. Organization should take care of the proper age composition in manpower planning and in selection.
7. Organization should take steps to minimize career stress.
8. Organization should have fair promotion policy.
9. Organization should publicize widely the career planning and development programmes.

Advantages of Career Planning:

For Individuals:

1. The process of career planning helps the individual to have the knowledge of various career opportunities, his priorities etc.
2. This knowledge helps him select the career that is suitable to his life styles, preferences, family environment, scope for self-development etc.
3. It helps the organization identify internal employees who can be promoted.
4. Internal promotions, upgradation and transfers motivate the employees, boost up their morale and also result in increased job satisfaction.
5. Increased job satisfaction enhances employee commitment and creates a sense of belongingness and loyalty to the organization.

1. Successful Money Management

A. Money management: The day-to-day financial activities necessary to manage current personal economic resources while working toward long-term financial security.

B. Opportunity Cost and Money Management

1. 1. 1. Spending money on current living expenses reduces the amount you can use for saving and investing for long-term financial security.
      2. Saving and investing for the future reduce the amount you can spend now.
      3. Buying on credit results in payments later and reduces the amount of future income available for spending.
      4. Using savings for purchases results in lost interest earnings and an inability to use savings for other purposes.
      5. Comparison shopping can save you money and improve the quality of your purchases but uses up something of value you cannot replace: your time.

C. Components of Money Management

1. 1. 1. Personal Financial Records and Documents
      2. Personal Financial Statements
      3. A Budget or Spending Plan

   2. A System for Personal Financial Records

            3. Personal Financial Statements

A. The Personal Balance Sheet: Where are You Now?

Items of Value – Amounts Owed = Net Worth

B. Evaluating Your Financial Positiion

If you are a traditional college student, don’t be surprised if your net worth is negative.

C. The Cash Flow Statement: Where Did Your Money Go?

Total Cash Received during the time period – Cash Outflow during the time period = Cash Surplus or Deficit

Personal finance is the process of planning and managing personal financial activities such as income generation, spending, saving, investing, and protection. The process of managing one’s personal finances can be summarized in a budget or financial plan. This guide will analyze the most common and important aspects of individual financial management.

Areas of Personal Finance

In this guide, we are going to focus on breaking down the most important areas of personal finance and explore each of them in more detail so you have a comprehensive understanding of the topic.

As shown below, the main areas of personal finance are income, spending, saving, investing, and protection. Each of these areas will be examined in more detail below. 

1. Income

Income refers to a source of cash inflow that an individual receives and then uses to support themselves and their family. It is the starting point for our financial planning process.

Common sources of income are:

• Salaries
• Bonuses
• Hourly wages
• Pensions
• Dividends

These sources of income all generate cash that an individual can use to either spend, save, or invest. In this sense, income can be thought of as the first step in our personal finance roadmap.

2. Spending

Spending includes all types of expenses an individual incurs related to buying goods and services or anything that is consumable (i.e., not an investment). All spending falls into two categories: cash (paid for with cash on hand) and credit (paid for by borrowing money). The majority of most people’s income is allocated to spending.

Common sources of spending are:

• Rent
• Mortgage payments
• Taxes
• Food
• Entertainment
• Travel
• Credit card payments

The expenses listed above all reduce the amount of cash an individual has available for saving and investing. If expenses are greater than income, the individual has a deficit. Managing expenses is just as important as generating income, and typically people have more control over their discretionary expenses than their income. Good spending habits are critical for good personal finance management.

3. Saving

Saving refers to excess cash that is retained for future investing or spending. If there is a surplus between what a person earns as income and what they spend, the difference can be directed towards savings or investments. Managing savings is a critical area of personal finance.

Common forms of savings include:

• Physical cash
• Savings bank account
• Checking bank account
• Money market securities

 Most people keep at least some savings to manage their cash flow and the short-term difference between their income and expenses. Having too much savings, however, can actually be viewed as a bad thing since it earns little to no return compared to investments.

4. Investing

Investing relates to the purchase of assets that are expected to generate a rate of return, with the hope that over time the individual will receive back more money than they originally invested. Investing carries risk, and not all assets actually end up producing a positive rate of return. This is where we see the relationship between risk and return.

Common forms of investing include:

• Stocks
• Bonds
• Mutual funds
• Real estate
• Private companies
• Commodities
• Art

Investing is the most complicated area of personal finance and is one of the areas where people get the most professional advice. There are vast differences in risk and reward between different investments, and most people seek help with this area of their financial plan.

5. Protection

Personal protection refers to a wide range of products that can be used to guard against an unforeseen and adverse event.

Common protection products include:

• Life insurance
• Health insurance
• Estate planning

This is another area of personal finance where people typically seek professional advice and which can become quite complicated. There is a whole series of analysis that needs to be done to properly assess an individual’s insurance and estate planning needs.

The Personal Finance Planning Process

Good financial management comes down to having a solid plan and sticking to it. All of the above areas of personal finance can be wrapped into a budget or a formal financial plan.

These plans are commonly prepared by personal bankers and investment advisors who work with their clients to understand their needs and goals and develop an appropriate course of action.

Generally speaking, the main components of the financial planning process are:

• Assessment
• Goals
• Plan development
• Execution
• Monitoring and reassessment

The first thing an Indian taxpayer must know about is Section 80C. Among the various exemptions that the Income Tax Act offers to Indian taxpayers, Section 80C is one of the most popularly known exemption. This particular section alone exempts tax up to an outer limit of Rs1.50 lakh per financial year on a series of contributions.

Broadly, there are two types of contributions that are eligible for exemption under Section 80C. First, there are specific investments such as Public Provident Fund (PPF), long-term deposits, National Savings Certificate (NSC), and equity-linked savings scheme (ELSS), where you can invest for long-term growth and get tax benefits.

Second, there are also select payments such as premium on life insurance, tuition fees for your children, and principal repayment of home loan that are eligible for exemption under Section 80C. This exemption is applicable to each financial year and the total eligible contribution is directly deducted from the taxable income.

Let us look at some key investments and payments that are eligible for Section 80C exemption and some of their unique features.

EPF and PPF contributions

Employee contributions to the Employee Provident Fund (EPF) are mandated to be at 12% of the basic salary plus dearness allowance (DA) and the employer matches this contribution. However, only the employee’s contribution is eligible for Section 80C benefits. On the other hand, Public Provident Fund (PPF) rates are fixed by the Finance Ministry and they are instruments of high safety. PPF has a minimum lock-in period of 5 years and loans can be taken against PPF after this lock-in period is completed. Withdrawals are permitted from the seventh year onwards and the interest on PPF and the final redemption is entirely exempt from tax.

ELSS contribution

These specific tax-saving equity funds (with a 3-year lock-in period) have become quite popular over the last few years. Unlike PPF and bank FDs, where the returns are regulated, ELSS funds are a market-linked product. Dividends on ELSS are tax-free in the hands of the investor but are subject to Dividend Distribution Tax (DDT) at 10%. Effective April 2018, any LTCG earned on ELSS funds above Rs1 lakh is subject to tax at 10% without the benefit of indexation. ELSS remains a good instrument for combining tax-saving and wealth creation.

Long-term bank fixed deposits

These are like normal bank FDs but are subject to a mandatory lock-in of 5 years. The rates of interest are also at par with the bank FD rates. Only the contribution to these long-term FDs qualify for exemption under Section 80C. It needs to be noted that any interest that is received on such FDs will be treated as taxable income and taxed at your peak rate.

National Savings Certificates (NSC)

The NSC requires very minimal documentation and can be purchased at your neighbourhood post office. The interest rates on NSC are also announced by the government from time to time. NSC contributions are subject to a minimum lock-in period of 5 years. The interest is not paid out each year but is accrued and paid out on redemption. However, even though you do not receive the interest, you need to show the accrued interest each year in your tax returns and pay tax on the same.

Life insurance and ULIP premiums

Life insurance contributions are eligible irrespective of whether it is a term policy, an endowment policy, a money-back policy, or a ULIP. Any death benefit received or proceeds received on maturity, including bonuses, are fully exempt from tax in the hands of the recipient. In the case of ULIPs, the tax exemption is calculated differently. Section 80C exemption on ULIPs is available on the lower of the two (10% of the sum assured or actual premium paid). Even if ULIP has an equity component, there is no LTCG tax on redemption.

Tuition fees and home loan principal

With the rising costs of education, the Income Tax Act has extended the benefits of Section 80C to tuition fees paid for two children. This exemption is only available to annual tuition fees and not to any donation, capitation fees, or building fund.
On the other hand, while home loan interest is exempt under Section 24 of the Income Tax Act, the principal component is exempt under Section 80C. Interestingly, in the year of completion of your property, the stamp duty and registration charges can also be claimed as part of home loan principal under Section 80C.

National Pension Scheme (NPS)

Contributions made by an employee towards the National Pension Scheme (NPS) is allowed as a deduction under Section 80CCD, an adjunct of Section 80C. The advantage of the NPS contribution is that even if you have exhausted your limit of Rs1.50 lakh under Section 80C, the NPS contribution entitles you to an additional exemption of Rs50,000, thus taking your total exemption limit to Rs2 lakh. This extra benefit is not only for NPS but also for contributions made to APY schemes.

When selecting your Section 80C investments and contributions, you need to focus on the returns, risk, wealth creation potential, levels of tax benefits, and liquidity so that you make the best of both tax-saving and wealth creation.