Tag: Investing

  • Understanding Treasury Bill Rates: A Safe Investment Option

    Understanding Treasury Bill Rates: A Safe Investment Option

    Learn about Treasury bill rates and how they are determined. Discover the benefits of investing in Treasury bills, including low risk, liquidity, and competitive returns. Find out how to invest in Treasury bills and diversify your portfolio. Whether you are a seasoned investor or just starting, Treasury bills can be a valuable addition to your investment strategy.

    Understanding Treasury Bill Rates

    When it comes to investing, there are a multitude of options available. One such option that often considered a safe and secure investment is Treasury bills (T-bills). T-bills are short-term debt instruments issued by the government to raise funds. They considered to be one of the most low-risk investments available in the market.

    What are Treasury Bills?

    Treasury bills issued by the government as a way to finance its operations and pay off its debts. They are typically issued for a duration of less than one year, with maturities ranging from a few days to 52 weeks. T-bills are sold at a discount to their face value, which means that investors can buy them for less than their eventual payout.

    Investing in Treasury bills is essentially lending money to the government. In return, investors receive the face value of the bill at maturity, effectively earning interest on their investment. The difference between the purchase price and the face value the interest earned.

    How are Treasury Bill Rates Determined?

    The interest rates on Treasury bills determined through an auction process. The U.S. Department of the Treasury conducts regular auctions to sell T-bills to investors. The interest rate, also known as the discount rate, determined by the market demand for T-bills.

    Investors bid on the T-bills, specifying the discount rate they are willing to accept. The Treasury then accepts the highest bids first until it has raised the desired amount of funds. The discount rate of the last accepted bid becomes the interest rate for all T-bills sold in that auction.

    The interest rate on Treasury bills influenced by various factors, including the current state of the economy, inflation rates, and the overall demand for government debt. When the economy is strong and inflation is low, Treasury bill rates tend to be lower. On the other hand, when the economy is weak or inflation is high, Treasury bill rates tend to be higher.

    Why Invest in Treasury Bills?

    Treasury bills considered a safe and secure investment for several reasons:

    1. Low Risk:

    As T-bills backed by the full faith and credit of the government, they considered to be virtually risk-free. This makes them an attractive option for conservative investors who prioritize the preservation of capital.

    2. Liquidity:

    Treasury bills are highly liquid investments, meaning they can easily bought and sold in the secondary market. This allows investors to access their funds quickly if needed.

    3. Competitive Returns:

    While Treasury bills may not offer the highest returns compared to riskier investments, they still provide competitive returns relative to other low-risk investments, such as savings accounts or certificates of deposit.

    4. Diversification:

    Investing in Treasury bills can help diversify a portfolio by adding a low-risk asset that is not directly correlated to the stock market. This can help reduce overall portfolio volatility.

    How to Invest in Treasury Bills

    Investing in Treasury bills is relatively straightforward. Here are the steps to get started:

    1. Open a TreasuryDirect Account:

    To invest in Treasury bills, you will need to open an account with TreasuryDirect, which is the U.S. Department of the Treasury’s online platform for buying and managing Treasury securities.

    2. Fund Your Account:

    Once you have opened a TreasuryDirect account, you will need to fund it by linking it to your bank account. This will allow you to transfer funds to purchase Treasury bills.

    3. Place an Order:

    Once your account funded, you can place an order for Treasury bills through the TreasuryDirect website. You can specify the amount you wish to invest and the duration of the T-bills you want to purchase.

    4. Monitor and Manage:

    After purchasing Treasury bills, you can monitor and manage them through your TreasuryDirect account. You can track their maturity dates, interest rates, and even reinvest the proceeds into new T-bills if desired.

    Conclusion

    Treasury bill rates play a crucial role in the investment landscape, providing investors with a safe and secure option for preserving capital and earning competitive returns. By understanding how Treasury bill rates determined and the benefits of investing in T-bills, investors can make informed decisions about their investment strategies.

    While Treasury bills may not offer the highest returns, their low-risk nature and liquidity make them an attractive option for conservative investors or those looking to diversify their portfolios. By investing in Treasury bills, investors can have peace of mind knowing that their funds backed by the full faith and credit of the government.

    Whether you are a seasoned investor or just starting, considering Treasury bills as part of your investment strategy can be a prudent decision. Their simplicity, low risk, and competitive returns make them a valuable addition to any investment portfolio.

  • Investing in Property Syndicates: A Comprehensive Guide

    Investing in Property Syndicates: A Comprehensive Guide

    A comprehensive guide on investing in property syndicates; Investing in real estate can be a lucrative way to build wealth. But not everyone has the financial means to purchase a property outright. This is where property syndicates come into play. They offer investors an opportunity to pool their resources and invest in a property together, sharing in the profits and risks of ownership.

    Here are the articles to explain, What is the comprehensive guide on investing in property syndicates?

    In this blog, we will provide a comprehensive guide on investing in property syndicates, including what they are, how they work, their benefits, risks, and things to consider before investing.

    What are Property Syndicates?

    They are a type of investment vehicle that allows multiple investors to pool their funds and invest in real estate. It usually manages by a professional property manager who is responsible for identifying suitable investment opportunities, managing the property, and distributing the returns to the investors. Investors contribute a set amount of money to the syndicate, and the total amount uses to purchase a property. The property manager then manages the property and collects rent from tenants, distributed among the investors based on their share of ownership.

    How do Property Syndicates Work?

    Investing in property syndicates involves several steps, including:

    • Finding a Syndicate: Investors must find a property syndicate that suits their investment goals and preferences. This may consist of research and due diligence to find a reputable property manager and syndicate that aligns with the investor’s investment strategy.
    • Contributing Funds: Once an investor has found a suitable one, they must contribute funds to the syndicate. The amount required may vary depending on the syndicate’s investment strategy and the property’s cost.
    • Property Acquisition: The property manager uses the funds contributed by investors to purchase a property. Once the property acquires, the property manager is responsible for managing the property, finding tenants, collecting rent, and handling any necessary maintenance and repairs.
    • Profits and Returns: The property generates rental income, distributed among the investors based on their share of ownership. The property manager may also sell the property at some point, and any profits from the sale distribute among the investors.

    Benefits of Investing in Property Syndicates:

    Reduced Risk: Investing in property syndicates provides investors with an opportunity to invest in a property without assuming all the risks associated with property ownership. Since the investment is spread across a group of investors, any losses incurred stand shared among the investors.

    Access to Quality Properties: They provide investors with access to high-quality properties that. They may not have been able to afford it on their own. This is because the cost of the property stands spread across a group of investors, making it more affordable.

    Professional Management: They manage by professional property managers who have the expertise and experience to manage the property effectively. This ensures that the property exists well-maintained and generates a steady income stream for the investors.

    Risks Associated with Investing in Property Syndicates:

    • Lack of Control: Since the property manages by a property manager, investors have little to no control over the management of the property. This means they may not have a say in decisions. Such as when to sell the property or how much to charge for rent.
    • Illiquidity: They are illiquid investments, meaning selling your share in the syndicate may be challenging. This is because there is no established market for selling shares in the property, and finding a buyer may be difficult.
    • Limited Returns: They typically offer lower returns than other real estate investment forms, such as owning a rental property. This is because the property manager’s fees and other expenses are deducted from the rental income before it distributes to the investors. There may be restrictions on when and how much income distribute to investors.

    Things to Consider Before Investing in Property Syndicates:

    • Investment Goals: Before investing in a property syndicate. It’s essential to identify your investment goals and ensure that they align with the syndicate’s investment strategy.
    • Property Manager: The property manager plays a crucial role in the success of the property syndicate. It’s important to research and evaluates the property manager’s experience, track record, and fees before investing.
    • Investment Structure: They may structure as either a trust or a company. Each structure has advantages and disadvantages, and it’s important to understand its implications before investing.
    • Investment Amount: They typically have a minimum investment amount, and investors should ensure that. They have sufficient funds to meet the minimum investment requirement.

    Investing in property syndicates can be a viable option for those who wish to invest in real estate. But do not have the financial means to purchase a property outright. They offer several benefits, including reduced risk, access to quality properties, and professional management. However, there are also risks associated with investing in property syndicates, such as lack of control, illiquidity, and limited returns. Before investing in a property syndicate, conducting thorough research, understanding the investment structure, and evaluating the property manager’s experience and track record are essential.

    What is the comprehensive guide on investing in property syndicates Image
    What is the comprehensive guide on investing in property syndicates? Image by Schluesseldienst from Pixabay.
  • Freelancer People Have Started Investing in Startups in 2020

    Freelancer People Have Started Investing in Startups in 2020

    Why People Have Started Investing in Startups in 2020? Freelancer People or Every investor has a unique reason to put their assets in a company. Angel investors can come from a variety of different backgrounds. They might be well aware startups and businesses, or they could be complete novices in the field. Some of them might be looking for a great payback, and others might want an adrenaline rush.

    Self-made or Home-made or Freelancer Why People Have Started Investing in Startups in 2020?

    Talking about startups, they are always about a brand new chance. Every startup owner might not have the same intentions. Perhaps, many of them are looking to create bug bucks, but many might want to have a different impact. Intentions play a huge role while building a startup because that shall determine the sustenance of the brand.

    Many may agree that more than half of the startups fail miserably. Even if some of them seem like shining initially, they eventually fade by the fifth year. Nonetheless, some of these startups do work out well and may return more assets than expectations. Now, from the perspective of an investor- there could be a lot of hits and trials. Here we shall describe a few of the reasons why people go for investing in certain startups.

    Why People Have Started Investing in Startups in 2020 Image
    Why People Have Started Investing in Startups in 2020?

    A unique opportunity window:

    Every investor is looking for an opportunity. It could be for fame, money, or leadership or just a chance at a business. When a prospective investor is looking at a startup, he or she is looking at a larger future. The communication between the investor and the founders of the startup plays a significant role in sealing the deal.

    Every startup should ideally something different to offer catering to a set target audience. For the investor, growth plays a crucial aspect, and they must be able to determine it. Sometimes, this discussion may miss the point. For example– Warren Buffet rejected the offer to invest in Amazon when he wasn’t able to determine the expansive growth rate of the global brand. It often takes a keen eye for an investor to spot that opportunity in a startup model.

    Solid management model and plan:

    The startup founders must dedicate their time to developing the larger model and plan of growth. They may have a great product that is desirable in the market, but if they don’t have a plan, investors may lose interest. The model developed should be as watertight as possible. Every loophole must be brought on the table so that they are cleared up.

    The founders must have relevant experience that will benefit the startup. They should know their product or services to the nitty-gritty. Being a watertight model is not enough, though. Flexibility is also essential so that the sustenance of the company is ensured. The founders must cover for the cost of business for the economic stability of the brand in times of crisis.

    The Demand for the Product:

    Most startups work around developing a new product or a new service. It could be something that has already been in supply or something that can have great demand. The initial idea should be alluring. Smart investors would not want to spend money on a faulty product or something that will fade away with time.

    There should be a clear graph of the target customers. One can also not miss out on preparing methodologies to gain that number of audiences.

    Timing and competition:

    No matter how good your service is, the market is always fluctuating. If your product is brand new and investors can identify the customers, any time can be a good time. However, if you are going into the territory of established brands working on similar services, you will face competition.

    Your business model must cover for this competition and how you would tackle it down. You should determine what will make the customers come in your direction. You should have an edge over your competitors and convince your investors for the same.

    Scalable assets:

    Most investors want to be secure about the startup they chose to invest in. You can have a good idea and intention, but the model shall if it is not scalable. Investors want to ensure a return out of business. Also, as a startup founder, you must think of how the investment shall benefit the providers.

    That is why it’s always better to provide numbers over vague statements. Do your homework well, and invest your time in avid research. The more accurate your numbers, the more watertight your business model becomes.

    Making a change:

    Not every investor invests solely for money. Several angel investors want to invest in a larger cause than personal profit. They may want to have a positive impact on the environment or society. On the other hand, some investors may refrain from something that harms society or biodiversity.

    In the wake of climate change and social injustice in several, challenging world problems, innovatively is a great demand. Some investors would like to see a wholesome consciousness in startups. A product that is in demand and also doesn’t cause harm to any community would be considered a win-win for everybody.

    An alluring team:

    Several investors want to have a long association with their startups. As such, communication should not be a hurdle for them. They would want to look at the credentials and personality of the team members. They would also like to know their cohesiveness. Therefore, the founders must ensure the role of the team and should pick dedicated members for the task.

    A tight-knit team not only works to impress the investors but also ensures a better growth rate for the startup.

    Freelancer People Have Started Investing in Startups in 2020 Image
    Freelancer People Have Started Investing in Startups in 2020; Image from Pixabay.

    Conclusion:

    Investing may seem to be tricky to many people considering the assets at stake. These are some fundamental traits that investors might look for in a startup. The investor, as well as the startup founder, should have an excellent ability to look forward in time. As mentioned above, every investor is looking for their opportunity as per their specific needs. Also, Good investors take their own time and research to come to a conclusion on how and where to invest, which always varies from case to case.

  • What do you think about Socially responsible investment (SRI)?

    What do you think about Socially responsible investment (SRI)?

    SRI or Socially responsible investment or Socially mindful venture; It characterizes as moral and green speculation, which means maintaining a strategic distance from businesses that contrarily influence the earth and its kin. SRI knows too to thinks about ecological, social, and corporate administration or corporate governance, otherwise called ESG standards.

    Here clarify the importance and meaning of Socially mindful venture (SRI or Socially responsible investment). You may best comprehend this moral inquiry.

    Which organizations under working with Socially capable speculation or Socially responsible investment (SRI)? Those organizations that underground without open information work. This incorporates organizations that create or put resources into liquor, tobacco, betting, and weapons. Rather, SRI includes putting resources into organizations occupied with moral and socially cognizant topics, as ecological supportability and social equity. A few financial specialists additionally consider SRI to represent practical, mindful, and sway contributing. Since this business fastly recoups their speculation. Despite this definition, socially mindful contributing moves in the direction of both positive change and monetary benefit.

    What do you think about Socially responsible investment (SRI) Image
    What do you think about Socially responsible investment (SRI)? Image from Pixabay.

    It characterizes comprehensively as a speculation procedure that thinks about the social and ecological outcomes of ventures, both positive and negative, inside the setting of thorough money related examination. SRI reserves intend to coordinate individual, social, and ecological worries with monetary contemplation’s; their goal is to expand speculator’s riches while guaranteeing that the chose organizations positively affect individuals and the Planet.

    Another Meaning of SRI:

    As a rule, socially responsible financial specialists empower corporate practices that they accept advance ecological stewardship, shopper assurance, human rights, and racial or sexual orientation assorted variety. Some SRIs maintain a strategic distance from organizations saw to have negative social impacts, for example; liquor, tobacco, cheap food, betting, erotic entertainment, weapons, contraception/abortifacients/fetus removal, petroleum product creation, or the military. The zones of concern perceived by the SRI professionals are now and again summed up under the heading of ESG issues: condition, social equity, and corporate administration.

    Socially responsible investing is one of a few related ideas and approaches that impact and, now and again, administer how resource directors contribute portfolios. The expression “socially responsible investing” now and then barely alludes to rehearses that look to maintain a strategic distance from hurt by screening organizations remembered for a venture portfolio. In any case, the term is additionally utilized all the more comprehensively to incorporate progressively proactive practices, for example; sway investing, investor backing, and network investing. As indicated by financial specialist Amy Domini, investor promotion and network investing are mainstays of socially responsible investing; while at the same time doing just negative screening is deficient.

  • Explain How to Investment in Mutual Funds?

    Learn and Study, Explain How to Investment in Mutual Funds?

    Mutual fund companies, also known as Asset Management Companies (AMCs) collect funds from the public (mainly from small investors) and invest such funds in the market and distribute returns/surpluses in the form of dividends. Surpluses can also be reflected in higher Net Asset Value (NAV) of the scheme. In simple words, a mutual fund company collects savings of small investors (pool their money); the fund managers of the concern invest such pool of funds to market (securities); when returns are generated from such investment, passed back to the investors. Also learned, Process of Investment, Explain How to Investment in Mutual Funds?

    This is how a mutual fund works. First, an offer document (containing details of the scheme, its investment horizon, and class (ES) of securities it intends to invest etc.) is issued to the public. Then the collected money is pooled together to constitute a fund. This fund is managed by fund managers of AMC who take major investment decisions. A trust takes care that the mutual fund investments are in accordance with the scheme of the fund and is being managed in the interest of the investors. The returns from such investment activities are distributed in accordance with the scheme of the fund.

    NAV of a mutual fund (or in other words NAV per unit) refers to the total asset managed by the fund at its market value divided by the number of outstanding (issued and sold) units of the fund. For instance, a fund having net asset worth of Rs.100 crores and Rs.10 crore units are outstanding then the NAV per unit of the fund would be Rs.10. The NAV of a scheme depends on the market value of its investments and hence it fluctuates with the fluctuating share prices of its investment. An increase in NAV means capital appreciation for investors.

    Since mutual funds are managed by professionals who have requisite experiences and qualifications in the areas of the stock market, as far as a new entrant in the stock markets is concerned, these funds act as a safe vehicle for investment. Moreover, as mutual funds invest in a number of scrips, the impact of risks associated with individual securities is minimized. To put in financial language, the aim is to diversify the unsystematic risk in the portfolio. Also, since the pooled funds are invested in different sectors and stocks, there is a diversification effect reducing the overall risk of the portfolio.

    Since mutual funds generally trade in a large number of securities at the same time, there is the advantage of economies of scale. In other words, there are savings in transaction costs.

    According to the investment objective, mutual funds can be classified as (a) growth funds, (b) income funds and (c) balanced funds. Growth funds invest the majority of their pooled amount with the objective of achieving long-term capital appreciation. Income funds provide periodic returns to investors in the form of dividends. Balanced funds are a midway between growth funds and income funds. They balance their investment in such a way that investors not only get the periodical return, but their capital also tends to appreciate which is reflected in the higher NAV.

    If you are an investor who seeks for a suitable fund, then it depends on your risk-bearing capacity (your risk profile). If you are a high risk-averse investor who requires the periodic return, then you should always prefer investment in income funds. If you have a high risk taking capability and you have surplus funds to invest, then go for growth funds. If you want a small periodic return along with capital appreciation, then go for balanced funds.

    Investment in mutual funds should never be looked upon from the point of view of return. It is the risk-return paradigm which can help us to optimize our return over a period of time. Another point you should remember is that you should never attempt to compare two schemes of the mutual fund with different investment objectives on the basis of the returns provided by them, if you do so, it would be like comparing apples with mangoes.

    Sharpe ratio and Treynor Ratio are the tools to measure the performance of mutual funds over a period of time. Sharpe Ratio is obtained by dividing the difference between the return of the portfolio and risk-free rate of interest to the standard deviation of the portfolio return. This ratio takes into account surplus return earned by the fund over risk-free rate of interest and then divides it by standard deviation of the portfolio return (which is basically a representative of risk which measures the deviation of actual return of the portfolio with respect to mean return).

    Higher the return better is the fund. Treynor Ratio also takes into account surplus return earned over risk-free return but the measure of risk here is beta (a measure of systematic risk) rather than standard deviation. Thus, Treynor ratio is obtained by dividing the difference between the return of the portfolio and risk-free rate of interest to the beta (market risk/systematic risk) of the portfolio.

    There are some absolute performance measures such as Jenson’s Alpha, Fama’s Measure and Expense Ratio which provide an indication about the performance of a mutual fund as a whole. Jenson’s Alpha Measure helps us in identifying whether the fund has been able to outsmart its expected return.

    The expected return of a security is equal to:

    Re = Rf + β(Rm – Rf)

    Where Rf is the risk-free return, β is the systematic risk and Rm is the return on market index (return earned by the fund).

    Fama’s measure is obtained by the following formula:

    Fama’s Measure = Rp – [Rf + (σp/σm)(Rm – Rf)]

    Where, Rp = actual return of portfolio; Rf = risk free return, Rm = return on market index, σp = standard deviation of portfolio return, σm = standard deviation of market index return.

    Thus, instead of β, which takes into account only systematic risk, this measure takes into account standard deviation of stock return as well as standard deviation of market returns.

    Expense ratio refers to the total amount of expenses of the fund as a percentage of total assets of the fund. The expenses include all the charges in the form of administrative overheads, salary of staff etc. However, expenses do not include brokerage.

    The return on mutual funds is never equal to the return on securities which the investor can earn if he invests directly in those securities since there are front-end load, back-end load and annual expenses which will be deducted from the fund. Front-end fee is charged by the AMC at the time of initial investment in the fund. Exit load is the number of fees charged at the time of redemption (surrender) of the unit. Generally, funds which charge front-end fees do not charge back-end fees/exit load. Moreover, there are expenses which are deducted annually for meeting administrative and other expenses of the fund.

    Mutual fund schemes can be in the form of open-ended schemes or closed-ended schemes. In closed-ended schemes, a fixed number of units are issued by the fund and thereafter this number remains constant till the maturity of the scheme. The option available to the investors, in this case, is that they can buy and sell the units in the secondary market. The open-ended schemes are without any fixed number of outstanding units. Any investor can invest money in accordance with the NAV of the scheme any time. Similarly, investors get an opportunity to redeem their units any time. The logic here is that since there is no fixed total number of units, mutual fund not only accepts money for investment purpose later on after the scheme is launched but also redeems units of holders as and when required by them.

    Finally, there are index funds, ETFs and Fund of Funds, which should also be analyzed. Index funds are those funds which create a portfolio which replicates the composition of a particular index. For instance, an index fund on NIFTY will invest in all those securities which are a part of that index and the proportion is also similar to the weights which the individual securities have in that index. Thus these funds tend to replicate the performance of that index. If we put it in financial language, these funds create a portfolio with a β of 1 which exactly matches the performance of the market.

    For Example:

    When the market i.e. SENSEX moves up by 15% over a time period, the portfolio value also rises by 15% (or rather is expected to rise). This is because the securities which have been purchased by this fund are a part of that index and have been purchased in the same proportion as is the weight of those securities in the index. If an investor intends to have a complete elimination of unsystematic risk, i.e. he wants to earn a return which the index earns irrespective of the performance of individual stocks in the market he should invest in such funds.

    Exchange traded funds or popularly known as ETFs are mutual funds whose units are traded in stock exchanges. Unlike the traditional funds in which units are directly redeemed by the mutual fund itself, the units of these funds are bought and sold in the market just like shares. These funds may be open-ended or closed-ended. The investors of ETFs do need to have a Demat account.

    There are ETFs which are traded on stock exchanges with the underlying asset as gold, known as ‘Gold Exchanged traded Fund’. They provide a convenient and easy vehicle for retail investors to participate in the gold bullion market. Thus the fund issues a certificate for the specified amount of gold to its unitholders. The scheme is listed on a stock exchange and hence investors can buy and sell the units on the stock exchange. The advantage here is that there is no risk of holding physical gold stock and the investor can still have a notional claim over units of gold.

    There are also mutual funds which invest in other mutual funds and these mutual funds are known as the fund of funds. Thus, instead of directly investing in securities of corporates or bonds, these mutual funds invest I other mutual funds in order to get maximum diversification.

  • What is Dividend Investing? Meaning, Definition, and Example!

    Learn, What is Dividend Investing? Meaning, Definition, and Example!

    For those who are still considered greenhorns in the investment world, a dividend is a payment distributed by a company to all its shareholders. For the longest time, dividend investing has been a permanent fixture in wealth building and wealth management programs because of the kind of financial security it provides. An investor and expert financial planner earns in divided investments through dividend payments, which forms part of a company’s profit. Also learned, Mutual Funds, What is Dividend Investing? Meaning, Definition, and Example!

    Meaning:

    Each quarter, on the dividend declaration date, a firm’s board of directors declares the dividend amount that will be distributed to the firm’s shareholders. Only the shareholders who owned the stock on the dividend record date, i.e. the date that the firm reviews its lists to determine the shareholders of record, receive a dividend. Shareholders who do not own the stock on the dividend record date are not entitled to receive a dividend.

    Likewise, investors who buy the stock on or after the ex-dividend date do not receive the firm’s dividend. Usually, dividend investors are interested in a firm’s dividend payout ratio and dividend yield. A dividend payout ratio between 40% and 50% indicates that the firm distributes almost half of its retained earnings to its shareholders while the remaining is invested in the launch of a new product or to lower the short-term debt. The dividend yield may lead to a large cash income.

    Definition:

    Dividend investing is an investment approach to purchasing stocks that issue dividends in an effort to generate a steady stream of passive income. Companies distribute cash dividends to their shareholders periodically during their fiscal year, but most issue them on a quarterly basis. “Dividend investing is an investment strategy of only buying stocks that issue dividends thus creating a reoccurring income stream.”

    The other profit portion not distributed to the investors will be pumped back into the capitalization used to fuel the operation of the company.
    • Most wealth management and wealth building programs include dividend investing. To place investments strategically, a professional financial planner would be necessary. One who deals with dividend investing would need the expertise provided by a financial planner when playing with the rise and fall of share prices.
    • With dividend investing as part of an individual’s wealth building and wealth management portfolio, a consistent flow of passive income is produced which the investor and financial planner can opt to spend or reinvest in the same venture to increase shares or place in other forms of investment. That is the reason why most retirees love investing in dividends – the supplemental income plus the excitement that market assumption brings.
    • Only when a company has reached a high level of marketing success will it only decide to pay dividends. This means that investing in a company that pays dividends is investing in a stable company. With bigger rewards and very little financial risks, dividend investing is really one of the best wealth building and wealth management strategy options. Dividend investing offers two ways of earning profits: getting dividend payments and increase in share prices which mean bigger return on investment when one decides to sell his shares.
    • With dividend investments, one gets a better deal with his money. It improves his wealth building and wealth management portfolio which raises his assets worth. Plus, he still retains part ownership of the company while collecting profits at the same time. An investor, as well as a financial planner, has the option of increasing his number of shares by reinvesting his dividends. He does not even have to shell out extra cash to buy new stocks and shares.
    • Investments in dividends can function as a barricade against inflation. Dividends can offset losses in other business as a result of the increase in the prices of products. High prices mean more earnings which also translate to bigger dividends.
    • Dividends are typically taxed lower compared to regular income. This means more savings on taxes paid to the government.

    Today, a lot of senior citizens rely on their investments on dividends in sustaining them with their daily needs. The dividends coming from stable companies are as consistent as night and day and it provides the opportunity of receiving cash right out the investments that they made without having to cash in on their shares. Or, they can beef up their shares by reinvesting the profits that they earn when they feel they do not need the extra cash at the moment (as a trusted financial planner would often say).

    For Example:

    A steel manufacturing firm has released its quarterly results and has a net income of $250 million. The board of directors decides to pay $120 million in cash dividend and reinvest $130 million in lowering its short-term debt. This means that the firm’s dividend payout ratio is dividend / net income = $120 million / $250 million = 48%.

    The board of directors declares a quarterly dividend of $0.95 per share, reaching an annualized dividend of $3.8 per share. The stock currently trades at $88; therefore, the dividend yield of the stock is dividend / stock price = $3.8 / $88 = 4.32%. A shareholder that holds 10,000 shares will be compensated with 10,000 x 4.32% = $432.

    On the ex-dividend date, the stock price declines to adjust to the dividend paid. Therefore, the firm’s stock that trades at $88, and pays a quarterly dividend of $0.95 per share, ceteris paribus, the stock will open at $88 – $0.97 = $87.03 on the ex-dividend date.

  • Explain How to Calculate NAV in Mutual Funds?

    Explain How to Calculate NAV in Mutual Funds?

    Learn, Explain How to Calculate NAV in Mutual Funds?

    The Net Asset Value (NAV) is the market value of the assets of the scheme deducting its liabilities. Simply put, the NAV is what investors are required to pay to buy or sell one share of the mutual fund. Keep in mind any additional fees are not included in this amount. In accounting terms, NAV is also known as the book value of the mutual fund. Also Learned, Mutual Funds, Explain How to Calculate NAV in Mutual Funds?

     

    The net asset value per mutual fund unit on any business day is computed as follows:

    NAV = (Market value of the fund’s investments + Receivables + Accrued income -Liabilities – Accrued expenses)/Number of units outstanding.

    Rules Governing the Mutual Fund NAV Calculation:

    1. Accrued Income and Expenses: The correct accrual of all incomes and expenses is a requirement for computing NAV. In practical terms, these are just estimates. For example, the investment manager’s fees have to be accrued every day for computing NAV but the fee is based on the weekly average of net assets. Changes in NAV due to the assumptions about accruals should not impact NAV by more than 1 %.
    2. Sale and Purchase of Securities and Units: The purchase and sale of securities have to be recorded in the books of the fund, and this impacts the net assets of the fund. Sale and repurchase of units alter the number of unitholders outstanding in the fund and impacts the denominator of the NAV equation.
    3. Initial Expenses: When a mutual fund scheme is launched, certain expenses are incurred. These relate to printing and mailing, advertisements, commission to agents, brokerage, stamp duty, marketing, and administration known as initial or pre-operational expenses, they are linked to the corpus of the scheme. The fund has to give a break up of these expenses in the prospectus.
    4. Recurring Expenses: Apart from the initial expenses, mutual funds incur recurring expenses every year. These expenses include items like the asset management fees, registrar’s fees, and custodial fees and are charged to the profit and loss account of the scheme.
    5. Sales and Repurchase Load: Sales or front-end load is a charge collected by a scheme when it undertakes fresh issue of units or shares. Suppose a mutual fund issues Rs.1,00,000 worth units having a face value of Rs.10 each. The company incurs some initial issue expenses, which may be around 1% of the face value, or in other words, the company may levy an entry load. Schemes that do not charge a load are called ‘No Load’ schemes. Repurchase or ‘Back-end’ load is a charge collected by a scheme when it buys back the units from the unit holders. It is because of the front-end and back-end loads the mutual fund schemes are at a premium and repurchased at a discount to NAV. The repurchase price is usually less than the reissue price.

    Learn how to calculate Net Asset Value with the following examples:

    • Example 1: If the net assets of a fund are $10 million, and the fund holds 2 million shares. Then, the NAV per share = $5 ($10 million / 2 million).
    • Example 2: YTC Corporation has total assets of $3,500,000 (including intangible asset $500,000) and total liabilities of $1,000,000. The calculation for net asset value of ABC corporation is as follows: NAV = total assets – intangible assets – total liabilities = 3,500,000 – $500,000 – $1,000,000 = $2,000,000
    • Example 3: A mutual fund has total assets of $2,800,000, liabilities of $800,000, and 200,000 outstanding shares. Then, the NAV per share = (2,800,000 – 800,000) / 200,000 = $10.
    NAV in Brief:

    The Net Asset Value (NAV) of a mutual fund is the price at which units of a mutual fund are bought or sold. It is the market value of the fund after deducting its liabilities. The value of all units of a mutual fund portfolio is calculated on a daily basis, from this all expenses are then subtracted. The result is then divided by the total number of units the resultant value is the NAV. NAV is also sometimes referred to as Net Book Value or book Value. Let’s discuss its calculation in a bit more detail.

    NAV indicates the market value of the units in a fund. So, it helps an investor keep track of the performance of the mutual fund. An investor can calculate the actual increase in the value of their investment by determining the percentage increase in the mutual fund NAV. NAV, therefore, gives accurate information about the performance of the mutual fund.

    Calculation of NAV:

    Mutual fund assets usually fall into two categories – securities & cash. Securities, here, include both bonds and stocks. Therefore, the total asset value of a fund will include its stocks, cash, and bonds at market value. Dividends and interest accrued and liquid assets are also included in total assets.

    Explain How to Calculate NAV in Mutual Funds - ilearnlot

    Also, liabilities like money owed to creditors, and other expenses accrued are also included.

    Now the formula is:

    Net Asset Value (NAV) = (Assets – Debts) / (Number of Outstanding units).

    Here:

    Assets = Market value of mutual fund investments + Receivables + Accrued Income

    Debts = Liabilities + Expenses (accrued)

    The market value of the stocks & debentures is usually the closing price on the stock exchange where these are listed.

    Some points to note:

    The mutual fund itself and/or certain accounting firms calculate the NAV of a mutual fund.

    Since mutual funds depend on stock markets, they are usually declared after the closing hours of the exchange.

    All Mutual Funds are required to publish their NAV at every business day as per SEBI guidelines.

    Also, NAV is obtained by subtracting the expense ratio of a fund. This expense ratio is the total of all expenses made by the mutual fund annually, including the operating expenses and the management fees, distribution and marketing fees, transfer agent fees, custodian fees and audit fees.