Financial Planning Process

Conventional Six Step process

1. Introduction Meeting- Gather your Financial Data
We meet to gain insight into each other. Gather data, establish goals and objectives. This initial meeting ask of projecting your goals or ask where you want to be in coming years.
2. Data Gathering- Identify your goals
Devise strategic solutions that enable you to use financial resources to achieve your lifestyle objectives. Collect comprehensive data on all aspect of your financial life. Here, emphasis is put on analyzing your situation, approach and accounts.
3. Gap Analysis- Identify financial gaps
At this stage, we identify financial issues and gaps created due to discrepancy of your existing and aspired goals. Outline clear course of action, set written recommendations and prepare solutions to match your goals. Large emphasis is put on identifying weaknesses, obstacles and conflicts.
4. Prepare a financial plan
Provide options that describe how to get there. Prepare a statement of advice, which sets out the strategies and recommendations that address your goals and information. It outline a valid pathway that would take you how you can get there where you have always proclaimed for. Evaluate alternatives, risks & opportunity costs.
5. Annual Review
Monitor and re-balance your portfolio periodically, review and revise your plan to ensure it stays up-to-date even in changing lifestyle. Review progress and update it accordingly.

6. Implementation & Financial |Action
   
• In this step of the financial planning process, you develop an action plan. This requires choosing ways to achieve your goals. As you achieve your immediate or short-term goals, the goals next in priority will come into focus.
  
• To implement your financial action plan, you may need assistance from others. For example, you may use the services of an insurance agent to purchase property insurance or the services of an investment broker to purchase stocks, bonds, or mutual funds.

Need For Financial Planning

- A well thought-out and prudently drawn financial plan: Allows you to reach your financial goals in a set time period. Once your goals are defined and the time period for achieving those goals is set, then it becomes easier to achieve it. Ensures better management of money. A financial plan will keep an account of every rupee spent or earned. This will help you spend wisely while optimizing your savings. Helps you understand your priorities and risk preferences and invest accordingly. Priorities in life change with time and along with it your risk taking ability. A financial plan enables you to take into account these changes and accordingly make changes in your investment portfolio. Helps you to fulfill various responsibilities in life. We all have various family responsibilities to fulfil in life. And, we need finances to perform them. A diligently drawn plan ensures that you have adequate money to discharge your responsibilities. Helps you manage your assets and liabilities better. Financial planning can help you to manage your liabilities better by keeping an eye on your income and expenses. When you plan well, there is less chance of borrowing irresponsibly. Similarly, you can build assets for yourself over a period of time with proper planning. Helps you take better and informed financial decisions in life. Financial planning helps you understand your financial position better. And, based on the knowledge of your existing financial situation, you will be better equipped to take decisions.

What is Financial Planning?

What is Financial Planning?

Financial Planning is the process of meeting your life goals through the proper management of your finances. Life goals can include buying a house, saving for your child's higher education or planning for retirement. The Financial Planning Process consists of six steps that help you take a 'big picture' look at where you are currently. Using these six steps, you can work out where you are now, what you may need in the future and what you must do to reach your goals. The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan for how you can meet your goals given your current situation and future plans.

The Benefits of Financial Planning

Financial Planning provides direction and meaning to your financial decisions. It allows you to understand how each financial decision you make affects other areas of your finances. For example, buying a particular investment product might help you pay off your mortgage faster or it might delay your retirement significantly. By viewing each financial decision as part of the whole, you can consider its short and long-term effects on your life goals. You can also adapt more easily to life changes and feel more secure that your goals are on track.

Who is a Financial Planner?

A Financial Planner is someone who uses the Financial Planning process to help you figure out how to meet your life goals. The Planner can take a 'big picture' view of your financial situation and make Financial Planning recommendations that are suitable for you. The Planner can look at all your needs including budgeting and saving, taxes, investments, insurance and retirement planning. Or, the Planner may work with you on a single financial issue but within the context of your overall situation. This big picture approach to your financial goals sets the Planner apart from other Financial Advisors, who may have been trained to focus on a particular area of your financial life.

Can you do your own Financial Planning?

Some personal finance websites, magazines or self-help books can help you do your own Financial Planning. However, you may decide to seek help from a professional Financial Planner if:       you need expertise you don't possess in certain areas of your finances. For example, a Planner can help you evaluate the level of risk in your investment portfolio or adjust your retirement plan due to changing family circumstances. you want to get a professional opinion about the Financial Plan you developed yourself. you have an immediate need or unexpected life event such as a birth, inheritance or major illness. you feel that a professional Advisor could help you improve on how you are currently managing your finances. you know that you need to improve your current financial situation but don't know where to start.

Be sure you're getting Financial Planning advice

The government does not regulate Financial Planners as Financial Planners; instead, it regulates Planners by the services they provide. For example, a Planner who also provides insurance transactions is regulated as an insurance agent. As a result, the term 'Financial Planner' may be used inaccurately by some Financial Advisors. To add to confusion, many Financial Advisors like accountants and investment Advisors can also offer Financial Planning services. To be sure that you are getting Financial Planning advice, check if the Advisor follows the six step process.

How to make Financial Planning work for you?

You are the focus of the Financial Planning process. As such, the results you get from working with a Financial Planner are as much your responsibility as they are those of the Planner. To achieve the best results from your Financial Planning engagement, you will need to be prepared to avoid some of the common mistakes shown above by considering the following advice:   Set measurable goals Set specific targets of what you want to achieve and when you want to achieve results. For example, instead of saying you want to be 'comfortable' when you retire or that you want your children to attend 'good' schools, you need to quantify what 'comfortable' and 'good' mean so that you'll know when you've reached your goals.     Understand the effect of each financial decision Each financial decision you make can affect several other areas of your life. For example, an investment decision may have tax consequences that are harmful to your estate plans. Or a decision about your child's education may affect when and how you meet your retirement goals. Remember that all of your financial decisions are interrelated.     Re-evaluate your financial situation periodically Financial Planning is a dynamic process. Your financial goals may change over the years due to changes in your lifestyle or circumstances, such as an inheritance, marriage, birth, house purchase or change of job status. Revisit and revise your Financial Plan as time goes by to reflect these changes so that you stay on track with your long-term goals.     Start planning as soon as you can Don't delay your Financial Planning. People, who save or invest small amounts of money early, and often, tend to do better than those who wait until later in life. Similarly, by developing good Financial Planning habits such as saving, budgeting, investing and regularly reviewing your finances early in life, you will be better prepared to meet life changes and handle emergencies.     Be realistic in your expectations Financial Planning is a common sense disciplined approach to managing your finances to reach life goals. It cannot change your situation overnight; it is a life long process. Remember that events beyond your control such as inflation or changes in the stock market or interest rates will affect your Financial Planning results.     Realize that you are in charge If you're working with a Financial Planner, be sure you understand the Financial Planning process and what the Planner should be doing. Provide the Planner with all of the relevant information about financial status. Ask questions about the recommendations offered to you and play an active role in decision-making.

Common Mistakes in Financial Planning Approach

The following are some of the common mistakes made by consumers in their approach towards Financial Planning     Don't set measurable goals.     Make a financial decision without understanding its affect on other financial issues.     Confuse Financial Planning with investing.     Neglect to re-evaluate their Financial Plan periodically.     Think that Financial Planning is only for the wealthy.     Think that Financial Planning is for when they get older.     Think that Financial Planning is the same as retirement planning.     Wait until a money crisis to begin Financial Planning.     Expect unrealistic returns on investments.     Think that using a Financial Planner means losing control.     Believe that Financial Planning is primarily tax planning

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Goldman Sachs vs. Chinese housewife

Whose investing acumen are you likely to trust more, Goldman Sachs or an average Chinese housewife? Well, at first glance, this looks like no competition at all. The world's largest financial institution, with the best resources and brains at its disposal versus your average Chinese woman. However, there's one area out there where the so called David trumps the mighty Goliath. And it answers to the name of gold investments. As per metals analyst Jeff Clark, the Chinese have continued to gobble up gold in ever increasing quantities despite the warning sign flashed by Goldman Sachs recently. And it is not just China. India's gold appetite has not dimmed either even in the wake of some strong restrictions by the Government on gold imports. Our stance on this has been pretty clear from the word go. We believe that we are in an unprecedented era of central bank money printing where paper money is being devalued every minute. And gold looks like the ultimate safe haven against such a deluge. Therefore, it makes immense sense to have part of one's portfolio invested in the yellow metal.

Power, engg stocks in favour today

	Despite witnessing strong buying activity during the last hour of trading, the Indian markets ended the day on a weak note. The BSE-Sensex closed the day with losses of about 64 points. The NSE-Nifty ended lower by about 18 points. Stocks from the power and capital goods sectors were amongst the top gainers, while those from the oil & gas andFMCG spaces were in amongst the top underperformers today. BSE Mid Cap and BSE Small Cap stocks ended the day on a flat note. As regards global markets, Asian indices ended on a weak note. European indices opened on a mixed note. The rupee was trading at Rs 62.42 to the dollar at the time of writing. Capital goods stocks ended the day on a firm note led by Bharat Heavy Electricals (BHEL), ABB and Alstom Projects leading the pack of gainers. The stock of Larsen and Toubro ended with marginal gains today. As per a leading business daily, the engineering behemoth is looking sell stake in a few assets to raise as much as RS 82 bn. This it aims to do by the end of the year. It is believed that the company is looking to sell its 26% stake in the Hyderabad Metro project as well as its 50% stake in Dhamra Port project. These are expected to help the company raise close to Rs 42 bn. Further, the company is believed to be looking at the option of listing L&T IDPL (at the Singapore stock exchange via the trust route) to raise about Rs 40 bn. Of this Rs 82 bn, nearly three-fourth of the amount will be put towards existing projects and the balance to fund new projects. The stake sale and divestment will help L&T maintain a comfortable debt service coverage ratio. Also, IDPL stake sale will ensure that there is no additional equity required from the parent company, which is struggling with working capital issues itself. Availability of funds will also help company target upcoming projects in roads and railways. Stocks in the oil and gas space ended the day on a subdued note with Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) leading the pack of losers. As per Economic Times, Petroleum Minister, Veerappa Moily, has decided to defer the hike in diesel prices. He has stated that as of now the proposed hike has been postponed. With regards to the under recoveries being faced by the oil marketing companies, he has stated that the government is working on alternatives to reduce the stress. Currently the oil marketing companies are seeing a loss of nearly Rs 14.5 per liter on diesel. The government had earlier planned to hike diesel prices by nearly Rs 3.5 per liter. Though the hike would not have eliminated the loss completely, however it would have provided some relief to the oil marketing companies.

FDI coming into the country

As India continues to worry about capital outflows, the regions that originate most of the FDI coming into the country hold importance. As per RBI, Mauritius continues to corner more than 44% of the FDI coming into the country. And despite the quandary over Mauritius' tax haven status, the government may not be able to take a firm decision on this. One may recall that India was earlier planning to review the double-taxation avoidance agreement (DTAA) with Mauritius. The reason behind the review is to prevent misuse of the treaty and track illicit money allegedly stashed in the African island nation. The country was losing more than US$ 600 m every year in revenue b ecause of the tax treaty, beside s incurring the risk of militant groups using it to route money into India. However, all such considerations seem to be in the backburner for the time being. More importantly, besides Mauritius even Netherland and Cyprus seem to be merging as the new tax havens.

Why Mauritius is important to India...

Source: RBI

Inflation highest in India amongst G-20 nations & BRICS - See more at: http://merabharosa.com/infographics-Inflation-highest-in-india-amongst-g-20-nations--brics-130#gallery

Weak Rupee, Black Money & Elections

Graph : Crude Oil prices from $28.81 to $115.19/bbl across 10 yrs

Crude Oil prices from $28.81 to $115.19/bbl across 10 yrs

Data since 15^th Aug, 2003 - to - 5^th Sep, 2013

Source: Bloomberg

Will the Syria crisis add fuel to our economic woes?

These days along with dismaying market news, one country is making its way to the headlines. Syria - a country in the Middle East, along the eastern shore of the Mediterranean Sea. The world was shocked on August 21^st, 2013 when the news of a gas attack killing hundreds in Syria spread like wildfire all across the globe.
After the Syrian President Bashar al-Assad yet again denied carrying out this chemical attack, the US President Barack Obama won backing from key US political figures for a military strike on Syria. While the strike will be ‘limited’ in nature, according to the US President Obama it was needed to 'retaliate' President Bashar al-Assad’s act of flouting international warfare conventions through the chemical attack.
Syria's ally Russia plans to put Syria's chemical weapons under international control to avert US military action. But the plans are set off for another round of negotiations at the UN. However after intense diplomatic activity with Russia, President Obama for now has requested to 'postpone' a Congressional vote on authorizing military force against Syria. While the crisis seems to have abated for the moment, one wonders if this is the end of it or just a clam before another Desert Storm.
While we understand the urgent need to control the mayhem, in Syria but are not sure if a fresh round of killing will help them stop killing in anyway, what comes out as a bigger question is will this attack affect the already bruised Indian economy?
Just like a cherry on the cake, but in a negative way, this attack could have adverse effects on the Indian economy. Given the quagmire the Indian economy is in, US military action against Syria will only further dampen the vicious financial circle. The move has ignited global crude oil prices that touched $115-a-barrel in trade on Tuesday, 3rd September, 2013 which could further increase if the crisis escalates.

In addition to the "extremely volatile" exchange rate, the geopolitical situation in the Middle East is leading to pressure on international oil prices. The US military intervention in Syria is primarily a cause of concern for India because of its impact on global oil prices. Any western involvement in Syria may draw its neighbouring countries deeper into the fray, and the conflict may spill out beyond its borders. If the conflict spreads, it could threaten the supplies of out of both Iraq and Iran and the Strait of Hormuz. An outbreak of a full-scale attack on the nation could lead to a disruption in oil supplies via the Mediterranean Sea and send the oil prices soaring to astronomical levels. An estimated 17 million barrels pass through the Strait of Hormuz, making it the busiest passageway for oil tankers in the world. Around 250-300 oil tankers are crossing the Mediterranean Sea every day.

Source: Hindustan Times

India imports 78 per cent of its oil needs. Oil comprises 32 per cent of its import bill. It is the worst possible time for India for crude prices to rise, given that the rupee continues to plummet downwards, markets are crashing and there is already gloom all around. Although markets seem to have found some cheer in the last 2 days.
While some oil analysts fear that an attack on Syria might send oil prices shooting up to $150 a barrel on the Brent scale, like other emerging economies, India too is keeping its fingers crossed, perhaps a little more tightly than some others, hoping the predictions goes wrong. If the oil prices go up, at the domestic level the costs of petrol, diesel and LPG will go through the roof. This could lead to another spell of inflation in the country.
While the Syrian crisis can certainly affect India, there is a lot to be done at the domestic level for India to ensure that economy stabilizes. International events may not be in our control but we can take necessary steps at domestic level to improve the state of ecomony.

Data Source: BBC News, Washington Post and First Post

Let Picture speak about Financial Crisis

Let Picture speak about Financial Crisis

5 years after Lehman collapse, banks far from crisis!

A Kansas University study published by the Wall Street Journal has some interesting observation about market behavior in the month of September. It seems, if someone started investing in 1802 and kept his money in stocks only during September, he would have lost more than half of his money by 2006. Doing the same during any other month, the investor would have gained at least 79% during the period! Call it weird or baseless, the 'September effect' as it is called in the US, is not entirely ignored by even the largest fund managers. Explanations for the negative trend in September, are hard to come by. Needless to say, they are even harder to swallow. Striking September events, such as the 2008 collapse of Lehman Brothers and the 2001 terrorist attacks, are partly responsible. But since these are more recent events, one can hardly explain why stocks have fallen in more than 50% of Septembers since 1926.

On many occasions the impact of the September decline was seen in the month of October. As Mark Twain wrote, "October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February." Rest assured, like most other short term trends, the negativity about investing in the months of September or October, have no fundamental logic. However, it would certainly be worthwhile for investors to be wary of speculative trends.

 

Growth of the Indian auto industry

The Indian economy has been witnessing one of the most severe slowdowns in several years. During the April-June 2013 quarter, India's GDP increased merely by 4.4%. This is the slowest growth rate since 2009. The slowdown in the economy coupled with high fuel prices and interest rates have had an adverse impact on the growth of the Indian auto industry.

In a bid to beat the slowdown blues, auto makers have been focussing on the overseas markets to boost exports. In addition, the foreign currency earnings would also help hedge higher cost of imports due to the depreciating rupee. The chart of the day shows the top 5 auto makers with the highest exports in terms of unit sales. These auto makers have reported robust year-on-year growth in their export sales.

Data source: Mint

Are Indian stock markets 'scary'?

Indian stock markets have been on a roller coaster ride lately. After plunging to sub-18,000 levels during the latter half of August 2013, the benchmark BSE-Sensex is back close to 20,000 levels. From the very bottom to the very top, it's a neat 12% rise in a short span!

Many have attributed the bounce back to the new RBI Governor, Raghuram Rajan. The rupee has also gained about 8% from the recent all-time lows.

How should you read this recent spurt in stock markets? In fact, that's a wrong question. The question should rather be- should you read too much into the recent optimism?

Our answer is no. For one, the 'Raghuram Rajan' effect has been overhyped. We respect him for his talent and the initiatives that he has announced. But to believe that India's long term problems have been addressed would be nothing short of wishful thinking.

Secondly, there has been some seemingly short term relief on certain external fronts. And the markets have found enough reason to cheer.

But does that mean India is out of trouble? If Jeffery Gundlach, a widely respected bond guru is to be believed, the outlook for Indian stock markets is negative. He thinks Indian markets are "very scary" in the medium term. Why so?

The answer is the risk of capital outflows. As you know, Indian stock markets are heavily driven by foreign capital flows. So anything that may cause foreign institutional investors (FIIs) to exit Indian stocks could bring Indian stocks tumbling. One big factor is any change in the monetary policy of major central banks. The US Fed had hinted about a likely tapering in its QE program starting September. If that happens, it could trigger a mass exodus of capital from emerging markets. And India would be among the worst affected.

A point to be noted here is that India has been a big beneficiary of the ultra-easy monetary policies of developed economies, especially the US. And hence the risk of capital flight in the case of change in monetary policy.

The point we want to drive across is that India is very vulnerable to external shocks. Any negative trigger could put the recent stock rally in reverse gear.

But this does not mean you keep away from Indian stocks. In fact, a market meltdown triggered by capital flight would be a great time to lay your hands on fundamentally sound stocks. For disciplined value investors, market meltdowns are always very exciting times. Because that's when there's too much fear and people are dumping stocks out of panic.     

What is Technical Analysis?

The Technical analysis is a methodology to assist you in deciding the timing of investments, which is very vital to make wise investment decisions. The technical analysis is based on the assumption that history tends to repeat itself in the stock exchange. If a certain pattern of activity has in the past produced certain results nine out of ten, one can assume a strong likelihood of the same outcome whenever this pattern appears in the future. However technical analysis lacks a strictly logical explanation. Technical Analysis is the study of the internal stock exchange information and not of those external factors which are reflected in the stock market. All the relevant factors, whatever they may be can be reduced to the volume of the stock exchange transactions and the level of share price or more generally, the sum of the statistical information produced by the market. Few of the most commonly used technical analysis methods for share market Trading are Japanese Candlestick (most powerful stock charting method), Price Curves, Trend Lines, High Low Charts and Moving averages. Even you can become technical analyst on your own.

Indian markets Graphs Getting Grounded part -4

Rupee flat on its back 
With this combination of a demand for oil, a demand for gold (due to lack of faith in India's capital markets), and a policy log jam that adds to the import bill, the recent sell-off in the Indian Rupee is not surprising. But its velocity - and ferocity - is. The forward rates would indicate that the INR will weaken further (Graph 4). But the forward rates are more a function of traders running in where they see weakness as opposed to a fundamental argument for the weakness. 

Graph 4: INR Forward premia

Source: Bloomberg

The Real Effective Exchange Rate of the Indian Rupee may be closer to USD 1 = 55 (Graph 5). The blue line of the actual fx rate tends to sway around the red line of the theoretical REER. 

Graph 5: INR is undervalued in REER terms,
which suggests an INR rate of Rs 55 per USD

Source: RBI, Bloomberg; data used is RBI 36 country REER

But markets don't always care about the underlying theory. 
The markets know best - at least for a while. 

As long term value investors, we can feel the moment to buy a truckload of Indian equity is approaching. 
The recent weakness in the Indian Rupee and the sharp sell-off in many stocks have seen an emergence of value. 
We are not yet "upping" the weight allocation to India for international clients but, with a little bit of patience, the stocks of companies we like run by managements we can depend on may come our way in the next few weeks. 
No, we're not there yet...but...stay tuned...its possible we may turn bullish on stocks pretty soon.

Indian markets Graphs Getting Grounded part -3

Another source of demand for US Dollars has been the elaborate and inconclusive battle between the environmentalists and the cheerleaders for go-go-growth. Iron ore mining has been banned. Coal mines are not connected to railway tracks so, though India is rich in coal, it imports coal (Graph 3). This mismatch of approximately USD 12 billion per year has added 1% to the current account deficit, as a percentage of GDP. 

Graph 3: Export of iron ore no longer pays for import of coal

Source: CMIE/Monthly data

Indian markets Graphs Getting Grounded part -2

India imports gold and oil
The current account deficit is due pretty much to India's thirst for oil and gold: fuelled by the distrust that most Indians have of the so-called Indian "industrialists". For many, the Indian elite represent robber barons who have successfully stolen their savings - ably supported by the financial firms with well-established credentials in global markets. Indians yearn for gold since IPOs and corporate bonds have been unreliable.

Graph 2: Current Account Deficit - excluding imports of oil and gold -
is steady at a surplus of 3% to GDP

Source: RBI, Bloomberg

Yet another fuel price hike

Continuing our discussion on the oil bill, the rising crude oil prices have resulted in yet another hike in petrol prices in the country. The increase this time the hike is for Rs 2.35 per litre. This is the sixth hike in the past 3 months. As shown in the chart, petrol prices in the key metro cities now range between Rs 74.17 per litre to Rs 81.57 per litre. The oil companies also plan to increase the price of diesel by Rs 0.5 per litre (excluding local taxes and VAT). Post the revision, diesel prices would range between Rs 51.97 to Rs 58.86 per litre. While the move would certainly help the that have been battling fuel under recoveries thanks to increasing crude prices and falling rupee. But it would certainly add to the woes of the common man as it would drive up consumer inflation in the country. Source: Economic Times

What is the gold silver ratio saying?

Above Rs 34,000 per 10 grams, the price of gold has gone up nearly 25% in couple of months! Given the possibility of global economic crisis and war with Syria, the possibility of investors rushing to the safe haven asset seems more real. Even the so-called gold bears, who were sounding its doom few months back, have now changed opinion.

But should one only focus on gold? Would other precious metals, for instance silver, have some upside? Well, the gold silver ratio could answer that to an extent. As per Investopedia, the ratio shows how many ounces of silver it takes to purchase one ounce of gold. The ratio between gold and silver over the past 50 years has averaged around 50. That is, on an average at least 50 ounces of silver is required to buy an ounce of gold. Hence, one can conclude that if the ratio is above 50, silver is a good buy. As per goldprice.org, the ratio currently stands at 58. So, probably investors should be looking at precious metals beyond gold.

Having said that, like any other investment, the exposure to precious metals should be limited. Also instead of looking for short term gains, they should be held in the portfolio as a hedge against inflation and currency risks.

Source: Goldprice.org

Does 8% tax-free return sound appealing?

We are living in times when return of capital is a bigger worry than return on capital. Needless to say, investors are willing to compromise on returns, to any extent, for safety of their capital. The poor economic and earnings outlook have got investors averse to the idea of investing in stocks. Bonds and fixed income instruments, which were mis-sold on the premise of safety, have also eroded investor wealth in recent months. Thus, there is hardly anything beyond bank fixed deposits that investors wish to park their hard earned money in. 

Every now and then, we get investor queries asking why they should remain invested in equities. That most stocks will return less than FD interest rates over the next one year is a no brainer! Well then, should anything beyond fixed deposits even feature in the asset allocation for retail investors? Our answer to this would be absolutely yes! While fixed deposits can offer assured returns for short term, they can hardly cover for inflation over the long term. And gold, although a necessary hedge against inflation and currency risks, cannot be a major portion of one's portfolio. It is therefore important to remain invested in equities. More so, in such times when the dividend yields are making up for the lack of capital gains. 

Take the case of PSU banks for instance. Most of them have been battered over the concerns of treasury losses and non performing assets. The fundamentals of these entities have certainly deteriorated over the past one year. Some have the worst behind them. Others are yet to see some pain. Markets therefore have discounted the valuations of these entities to such an extent that they are now more valuable dead than alive. That is, most of them are trading at 50% of their networth. Important to remember that the PSU banks together corner 60% of India's banking sector. And their future, although bumpy, is secured by government holding. Thus the dividend payouts of these entities too are guaranteed to a great extent. And at current prices, the generous payouts can fetch investors yields that are very close to FD interest rates. What is more, unlike FD interest rates, the yields can only go up as the payouts increase year after year. Also, that dividends unlike FD returns is tax free in the hands of the investor makes the case stronger for the former. 

Now, this is not to say that investors should grab every PSU bank or other stocks offering mouth watering dividend yields. The risks that some of them carry can indeed wipe out portfolio returns. Also one must avoid getting carried away by the lure of dividends. The exposure to such stocks, if at all, should be keeping in mind their balance sheet and management quality. 

Source: Equitymaster

Is your fixed deposit earning you any return?

As an investor you invest to earn a certain rate of return. In the volatile world that we live in today, these returns are getting more and more hard pressed. Stocks are getting battered. Gold has been falling too. This has led many to park their funds in fixed deposits. With interest rates hovering at high levels, most individuals who took this option were happy with their choice. Even though the Reserve Bank of India has brought interest rates down, the returns being offered by the fixed deposits continue to be attractive. At least this is what most people think. However the truth is far from this.

The reason for this is the concept of real interest rates. In simple words, real interest rate is the interest rate being offered by the bank less the prevailing inflation rate. As individuals, the inflation that affects us is the consumer price inflation. Therefore, this is the one we ought to look at when we are looking at the real interest rates on our investments.

The chart below shows that the rate of interest being offered on fixed deposits has not even covered consumer inflation. And this is considering the higher end of interest rates being paid on fixed deposits by the banks.

Source: Reserve Bank of India * Interest rates on fixed deposits with more than 1 year of maturity

This makes you wonder whether keeping all your money in fixed deposits is really worth it. After all, the returns generated here hardly even cover the increased cost of living that you suffer on account of higher inflation.

So should you completely avoid fixed deposits?

Though fixed deposits do not offer returns that cover inflation, but they are still a relatively safer form of investment. Therefore, giving them a complete miss would not be a prudent idea. The thing is we believe keeping aside some safe cash as absolutely necessary. Not only will this cash take care of your liquidity needs, but it will also come handy during market declines. Particularly when there will be opportunities to pick up fundamentally strong stocks at cheap valuations. And fixed deposits as such present a good avenue for parking this safe cash. After all, these deposits still offer better rates when compared to a simple savings bank account.

In today's scenario, you may be tempted to put your safe cash in the higher interest rate fixed deposit schemes being offered by some corporate houses. That in our opinion would be a disastrous mistake. You see despite the fact that bank FDs may offer returns that may not cover consumer inflation; they are still a relatively safer place to keep your cash in. For the chances of banks defaulting in returning your deposit are almost negligible as compared to the corporate.