Difference between Debt & Equity Investing

The basic difference between debt and equity would be the ownership level. Let's take an example where you invest in me.   If you give out some money to me and expect that I return the money along with interest that I pre promise, that would be a debt investment. I'm indebted to you but since I have promised you a return with interest, you don't actually own me.   In another case, you give me money at your own risk. But you trust me/hope that I'll be a billionaire in the future and I'll payback from my profits. The more profits I make, the more you do. If I am bankrupt, you don't get anything back.  And so you have invested in my equity. By trusting me, you own me in a way!   In other words, by investing in a debt instrument such as a bond, you are guaranteed the principal of the bond, plus any interest that is owing.   However, for equity investors, you become an owner. As such, you also take on the risk of the company not being a success. Just as a small business owner has no guarantee of success with each new venture, neither is a shareholder.  As a shareholder, if the company is successful, you stand to make a lot of money. On the flipside, you stand to lose a lot of money if the company is less than successful.   Now debt and equity is just a classification of financial products and not a product by itself. So let me share the products available within the two classifications:   Equity: You can own any stock on the Stock Exchanges and you have invested in an equity product. If you invest through Mutual Funds who have schemes for equity. Even ULIPs invest in equity and so part of your Insurance buy goes to equity. The NPS also invests in equity.    Shares come in different sizes and categories. There are large, mid and small caps and there are penny stocks. As a beginner, you can invest in large and mid cap companies and only after you gain experience, you can consider investing a small portion in small caps and hot penny stocks. These are the riskiest but if handled adroitly, give the largest returns. However, it needs expertise and nerves of steel.   Debt: Mutual Funds also have debt funds where you can invest. Some people may find investing in bonds simpler than investing in stocks. Your friendly neighbourhood financial advisor can provide you with government bonds like NSC/KVP. Your banker provides you with Fixed Deposits and PPF accounts. You can also pick up some highly rated corporate bonds.   Then there are hybrid funds where the Mutual Funds invest a part in equity and a part in debt.   To compare debt and equity, you need to consider the risk and the reward tradeoff. But that I guess would be another post.   Would you like to add your thoughts on this? Welcome and Thanks.

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Ranjan Varma
http://ranjanvarma.com
http://personalfinance201.com

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Build a Strong Super Portfolio

Good friend Manish Chauhan who writes a blog on creating awareness among Indian investors on the importance of personal finance has a thoughtful post on the Four Pillars of Success for a Strong Portfolio. Manish Chauhan is a Software Engineer by profession and investing freak by heart

Everyone wants a super cool portfolio. (Somehow I’m reminded of the proverb: If wishes were horses, beggars would ride) Thre is a thought process to achieve a good and strong portfolio or atleast to get you started on the journey.

Manish writes:

There are some good traits of portfolio which makes it better than others . A good and strong portfolio has some strong elements or parameters which it must meet . These are the Pillars for a strong Portfolio or Investments.
1. Capital Appreciation
2. Liquidity
3. Risk Management
4. Goal Oriented

See the full post at Manish's Blog

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India's first online weekly on Personal Finance

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Mutual Fund Industry (India) Update

CRISIL reports that fund flows into mutual funds in recent months, have shown a strong correlation to performance and size of fund houses. Large fund houses, with a large number of better performing funds in line with the CRISIL Composite Performance Ranking (CPR) of mutual funds are attracting higher inflows. The Indian mutual fund industry's average assets under management (AAUM) grew for the third month in succession and stood at Rs. 5.02 trillion in February 2009 as compared to Rs. 4.62 trillion in January 2009. The AAUM crossed the Rs. 5 trillion milestone in February 2009 for the first time after it dipped below this level in October 2008.

According to Krishnan Sitaraman, Head – CRISIL FundServices, "The top three fund houses, which recorded the highest increase in absolute AAUM over January and February 2009 have a large number of funds which fall in the CRISIL~CPR 1 (very good) and CRISIL~CPR 2 (good) ranking clusters and are large in size." These included Birla Sun Life Mutual Fund (11 funds of which were ranked CRISIL~CPR 1 or CRISIL~CPR 2), ICICI Prudential Mutual Fund (8 funds ranked CRISIL~CPR 1 or CRISIL~CPR 2) and Reliance Capital Mutual Fund (10 funds ranked CRISIL~CPR 1 or CRISIL~CPR 2).

Size appears to be a key factor determining choice, with large fund houses recording higher net inflows as compared to the relatively small ones, a number of which have seen lower inflows, if not net outflows.

Added Krishnan, "With equity markets still volatile, and the economic climate uncertain, the AAUM growth currently is driven mainly by debt and liquid funds. Corporate bond yields fell in February 2009 and in such an environment, debt funds held an edge with respect to returns."

In absolute terms, mutual funds received net inflows of Rs. 340 billion in February 2009 as against Rs. 668 billion in January 2009. Income funds continued to receive the largest share of net inflows (Rs. 199 billion) followed by liquid funds (Rs. 149 billion). Gilt funds witnessed net outflows (Rs. 5 billion) for the first time since November 2008 as G-Sec yields rose in February 2009 adversely impacting returns from these funds. Equity funds witnessed marginal net inflows of Rs. 4 billion, a majority of which were in Equity Linked Savings Schemes (ELSS) as they constitute a tax-planning instrument.

The share of debt funds (income, gilt and liquid) in the Indian mutual funds universe has risen from 62 per cent a year ago (February 2008) to 77 per cent in February 2009 indicating a shift in investor preference towards debt funds due to the change in market dynamics.

Ranjan Varma
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Personal Finance Website
Ph: +91 9867755615

Tracker Application

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Simple Personal Finance Software

Technology excites me with the way it helps us to do something in a better way. Technology fascinates me when it solves problems, big or small.

So, perhaps, this fascination has helped me build the following tracker application. I do not have any technical qualifications and it's difficult to teach an old dog new tricks. But as they say learning never stops and if you're keyed on to something, you figure out how to handle it.

Zoho Creator has featured the application on their marketplace and that has given me the courage to write it on my own blog. And also the 400+ downloads along with encouraging comments about the clean and simple interface.

To manage anything, it is recommended that you measure it first. So when we talk about personal finance, the "Do's" & "Don'ts" do not really register with most of us. The key is to "Get started" on managing your money.

So if you and I are serious about personal finance, there should be a way to track what is happening to this important resource.

Personal Finance Tracker is an easy and simple way to track your personal finance. You can measure and track your income and expenses, create your portfolio of your Investments, create alerts/reminders and go to your choicest financial calculators.

You can also see pictorial representations of your budget, investments and expenses. You can filter them for what you need to analyse.

You can further filter the chart on the basis of the category of expense, whom spent for, payment method, etc.

Similarly for the income chart, you can filter it out on the basis of various sources of income. You can see a pie chart for your budget categories as well as your expenses.

There's calendar view of your alerts and reminders too.

You can filter the calendar on the high, medium or low criticality of the alerts and the months of the alerts too.

And btw, if you think that only a techie/programmer can build all this, let me confirm that it's been done by me alone. But it wouldn't have been possible without the amazing Zoho Creator. It's really friendly and intuitive and you can build a complete web application even when you are not a techie. Even techies can use the interface to build more complex applications, I'm sure.

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My Other Blog

India's first online weekly on Personal Finance

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Why should employers care about employee financial literacy?

Excerpts from PFEEF

While it is nice to have a bigger income that alone is not the solution for better financial well-being. What does increase one's level of living is improving financial literacy and putting into practice the newly learned good financial behaviors.

Employers have a large stake in employee financial literacy. Why? Because increasing employee financial literacy improves employer profits. A collection of scholars conducted breakthrough research on the negative costs to employers for the poor financial well-being of employees. One study found that the Department of Defense loses $1 billion annually in direct costs and reduced productivity due to employee stress about money matters. Examples of direct costs are absenteeism, short-term disability, turnover, wage garnishments, and accidents.

A national award-winning research study by Dr. So-Hyun Joo concluded that employers increase profits by $450 annually for each employee who slightly improves his or her financial behaviors. The return comes from reduced absenteeism and less work time used dealing with personal financial matters.

It is also extremely important for employers to realize that a number of studies show that a large proportion of those who are financially distressed, 40% to 50%, report that their health is directly impacted-negatively-by their financial worries and problems. Health problems caused by financial distress cost employers big money.

So, we can conclude that employee financial illiteracy does impact employers. In short, financially illiterate employees do not make the best decisions for themselves or their employers.

These findings should motivate employers to offer employees access to resources, education, counseling, and advice to decrease their stress about money matters and improve their financial lives. It is vital to empower employees to be financially literate.
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Ranjan Varma
http://ranjanvarma.com
http://personalfinance201.com

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