Some companies consider the situation of being unemployed and provide loans for the loans despite the situation. A few companies consider giving unemployed tenants a loan. As any type of loan, it is expected to be repaid back within a stipulated time.
Most unsecured loans have a monthly repayment obligation and are not stand by. As per the convenience of the borrower, secured or unsecured loans can be chosen. Unsecured loans are feasible with those who have a consistent job and can be regular for the repayments.
Secured loans have lower interest rates and have a stand by option without having to pay monthly checks. This is more practical for the self-employed people who are expected to have irregular returns. This kind of loan has a holiday period or an overdraft and ensures no harsh penalties in case repayments are made on a later date.
The loan obtained can be calculated by using various professional websites and check out for the ways to improve one’s finances. Debt consolidation and debt management are advised for tenants.
The secured property will be at risk if one doesn’t keep up with the repayments on a loan or mortgage. All unsecured or secured loans are subject to status.
Whether you are developing a personal investment portfolio, a comprehensive retirement plan, or you simply want to improve your personal financial state, having a qualified financial advisor assisting you every step of the way can be highly benefits. With finding the best financial advisor to hire being as easy and affordable as it is today, you will actually find enjoying these benefits a huge advantage nonetheless. That is why in this article we are going to discuss the benefits you can get from working with a financial professional. Let’s have a look, shall we?
The main benefit you get to enjoy when you are working with a qualified financial advisor is experience. Years of experiences in investing using different instruments and managing assets are something you can really benefit from, especially if you are relatively new to the investment market. You and the financial advisor can work together in formulating the best financial plan and investment portfolio according to your needs and preferences.
It is also important that you work with a local financial advisor based near where you live, because it will be much easier to spot local investment opportunities as well. If you live in Texas, for example, you need to find Texas’s best financial consultants to help you with developing your investment portfolio. Local businesses, investment market, and other opportunities can really help you earn more return for your investments in both the short run and the long run.
Let’s not forget that financial advisors usually have access to investment instruments already. Instead of having to set aside a huge sum of money just to be able to invest in stocks and mutual funds, you can rely on the financial advisor’s resources to help invest your money into the right investment instruments even when you only have a small amount to invest.
Advanced knowledge in retirement planning, long-term investments, and personal financial management are also among the things you will get when you have a good financial planner helping you improve your personal financial state. You will be amazed by just how much easier it can be to improve your overall personal financial state.
We hear the term “investment bank” on a daily basis. Investment banks are vilified for their role in the financial crisis and criticized for the profits they reap and the large compensation packages for their employees. But many people have no idea what an investment bank is or what it does. Let’s take a look at the role investment banks play in the financial services industry and the economy at large.
So what is an investment bank? First of all, investment banks are very different than the commercial banks we are all familiar with. They do not take deposits like the retail bank on the corner. Instead, investment banks primarily assist in the buying, selling and issuing of securities — that is stocks, bonds and similar financial instruments.
Investment banks assist companies and institutions on “buy side” and “sell side” activities. The buy side refers to the advising of institutions concerned with buying assets and securities. Entities that engage in buy side activities include private equity funds, mutual funds, hedge funds, pension funds and proprietary trading desks. The sell side refers to a broad range of activities, including broking and dealing securities, investment banking, advisory functions and investment research.
The core functions of an investment bank include investment banking — otherwise known as corporate finance — sales and trading and research. Some larger investment banks also perform other services like investment management or merchant banking, but let’s take a closer look at the core three.
Investment Banking (Corporate Finance)
Investment banking can be a confusing term because many people use it to refer to any activities performed by an investment bank. More specifically, though, investment banking refers to assisting companies with raising capital and giving advice on mergers and acquisitions.
The corporate finance or investment banking department of an investment bank is the group that works with a company to put together an initial public offering (IPO). Or, if a company already has public stock outstanding, they might put together a follow-on offering, which is simply an additional issuance of stock shares. The corporate finance department can also help companies raise capital through private placements, which often involve securing capital from private equity groups.
Should the ownership of a company seek to sell the entire enterprise, the corporate finance department can also advise on M&A transactions. They can help identify potential buyers and negotiate a sale of the entire company. Likewise, if a company is in the market for acquiring other enterprises, this group can advise on acquisitions.
Another service that the corporate finance department of an investment bank might offer is the delivery of fairness opinions. In a fairness opinion, an investment bank will perform an analysis of a potential acquisition and render an opinion as to whether a reasonable price is being offered for the target company.
Sales and Trading
Sales and trading is perhaps the primary service that an investment bank can offer. There are often two major divisions within sales and trading — institutional and retail. The institutional division buys and sells financial products for institutional clients such as mutual funds, pension funds, etc. The retail division buys and sells financial products for retail investors. Stock brokers fall into this area.
The sales and trading department of an investment bank engages in market making. Market making involves buying and selling financial instruments in order to make an incremental profit on each trade.
Sales and trading can also engage in proprietary trading. Proprietary trading involves a special group of traders who do not work with clients. These traders take on “principal risk”, which involves buying or selling a product and does not hedge his total exposure. By managing the amount of risk on its balance sheet, an investment bank can maximize its profitability.
An investment bank’s sales and trading department also interacts with the corporate finance department on the issuance of IPOs and follow-on offerings. It is the sales and trading department that builds a book for a particular stock by calling up institutional and retail investors to judge the interest for the offering. They then price the initial sales value on the day of the offering and begin selling the new shares to their clients.
Depending on the size of an offering or the desired mix of investors for the offering, several investment banks may be involved in issuing shares to the public. This group of banks constitute the syndicate and are responsible for selling the shares involved in the offering.
Research
The research department of an investment bank is staffed by research analysts. These are the people who often appear on business news programs and talk about the performance of a particular company or stock. The role of the research department is to analyze companies and writes research reports that discuss their performance potential. These reports often include a “buy” or “sell” recommendation.
The research department on its own does not generate a lot of income. What it does do is influence trading volume, which results in more fees for sales and trading. When a research analyst changes his or her recommendation on a stock, many investors will then act on that recommendation and the sales and trading team earns more in trading fees.
There exists, however, a conflict of interest between research and other parts on the investment bank. If an investment bank were about to issue new shares of stock for a company, for example, the research analyst could put out a strong recommendation for the stock just prior to the offering, and the bank could get a better price and potential earn more fees.
Likewise, if the proprietary trading division wanted to boost the return on their holdings, they could have research analysts recommend some of the stock they held as a buy. There are a number of areas where the research department could be used to mislead investors and earn more profit for the investment bank.
To circumvent these conflicts of interests, regulators have insisted that investment banks implement a “Chinese wall” in their firms. The Chinese wall keeps information about the investment bank’s corporate finance and sales and trading activities from passing through to the research department.
A Chinese wall also exists between the corporate finance and sales and trading divisions because many corporate finance activities involve non-public information that could be used to profitably execute trading strategies.
A World without Investment Banks
Without investment banks, companies would have a much more difficult time with raising capital. Likewise, the general public would have a hard time investing their money in anything other than a savings deposit.
Without investment banks, only very large institutions or very wealthy individuals would be able to structure the same financial transactions that occur every day with an investment bank.
In short, investment banks drastically speed up the flow of capital throughout the economy and allow businesses — and our savings — to grow more quickly. As complicated as all these activities may seem, they only scratch the surface of all the intricacies of an investment bank.
But the next time you hear that some investment bank advised on the sale of a company or generated several billing dollars in trading fees, at least you’ll have an idea of what they’re talking about.
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Enhancing Low-carbon Energy Investments in Europe
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“Diwali” (Deepavali) will be celebrated in India on the 5th November 2010 (Vikram Samvat 2067). The day of Diwali is auspicious for every Hindu but it is more important for business and business community. People take various investment decisions on this day. The attempt of this article is to help investors take informed investment decisions based on their Moon signs.
Aries:
Arians should avoid taking rash decisions concerning investment. Speculation should be avoided generally. Property investment may give positive results. Special care should be taken before entering into any contract and signing any document. Some Arians may gain from abroad. Investment in shares of good companies may also be considered.
Taurus:
Natives of Taurus should exercise extreme caution while investing in property. It may be advisable to go through the history of land or builder before taking any investment decision. There may be gains from stocks if investors go by fundamentals. Greed should be avoided and investment should be made on sound analysis. Ideal investment may be government bonds, IPO’s and mutual funds. Risk free investment is better option.
Gemini:
The Gemini people may invest in property for long-term for real gains. If the idea is to gain quickly, this may become a cause for loss. The natives are advised to remain careful while taking loans. They may fall into some kind of debt trap if prudence is not exercised in managing debts and investments. The focus of investment should be on the shares of good companies. Investment in gold may also payoff in the long run.
Cancer:
Speculative gain is possible from stock market if it is done with caution. Investment should be made on good companies. Care is necessary for investment in property. It is not wise to be overambitious with respect to future price rise of property. Shares or mutual funds may be good option. Gossip and hearsay should be avoided while taking investment decision. Investment in business may also prove to be a good option.
Leo:
Goddess of fortune seems to be kind this year to Leos. Possibility of gain exists in shares, stocks, property and the like. The stars of fortune are smiling and if such fortune is backed by intelligent plans and investment, good money can be made. However, it will be necessary to control nerves and be watchful. Some calculated risks can be taken for extra advantage.
Virgo:
If investment has been made in property, the projects may get delayed. Caution should be taken while making new investment in property. Read the agreements before signing them to find the finer points. Informed investment in stock market, fixed deposits, government bonds and interest bearing securities are better options. In short, it is important to minimize risks.
Libra:
Librans should be extra careful while investing in property. Gains can however be made in commodities market and share market. Planned investment will be better than speculation. Investment in gold may also be done for long-term gains. For investment of any kind, a proper survey of the situation will be beneficial. Possibility of gains from foreign source also exists.
Scorpio:
The time is very good for those who are planning to buy property for personal use. Gains from old property or ancestral property are indicated. Share investment may also give good returns. Stars are favorable with respect to investment right now. However, some calculated risks may be necessary to convert the advantage into material gains. Investment in gold and ornaments can be made for risk free investment.
Sagittarius:
Extreme caution should be exercised in taking investment decisions. It is better to make efforts for maximizing earnings. Invest the hard-earned money in safe instruments like Government bonds, securities, insurance and mutual funds. It is better to avoid speculative investment. Property investment should also be done with due prudence. It is better to seek expert opinion regarding projects in which investment is to be done.
Capricorn:
Time is good for several types of investment. Money can be made from almost every investment, but, investment should not be done with a blind eye. Caution should be exercised with respect to property investments. Delay in delivery of projects may become a matter of concern. There may be some issues with respect to financial liquidity as well. Unnecessary expenses need to be curbed.
Aquarius:
Money can be made from stock market. Speculation and short-term investment may also payoff well. However, informed investment is advisable. Investment in property may also give good returns. Gains from abroad are also indicated. Stars are favorable right now and prudent investments may become rewarding. Yet, caution is advisable while signing contracts and in finalizing deals for long-term.
Pisces:
There may be some career-related issues for natives. Such issues can be overcome with sustained and intelligent efforts. Risky decisions with respect to career and property investment should be avoided. It is better to avoid speculation. Investment in government bonds, securities and fixed deposits may be good investment instruments. Investment in gold can also be made.
High yield investing has taken on a fully novel dimension since the introduction of the internet and the basic own PC. Stylish the United States, a area of high pressure yield savings account is considered to be something on top of 5% monthly. Of curse as the old wise saying goes, the upper the yield the bigger the possibility. This is confirmed. You can not expect to earn more than an mode percentage rate with a lesser amount of possibility. It emphatically doesn’t meet substance.
When discussing area of high pressure yield gain accounts, are we chatting roughly speaking a savings savings account to produces a 5.4% twelve-monthly percentage return? Well, fair enough. And refusal. It depends on who you are and could you repeat that? You consider to be possibilities and realistic.
By instantly a good number of us suffer heard roughly speaking investment programs to privilege to be able to generate ridiculously area of high pressure returns. Traditional investors cringes while they hear vocabulary like 25% apiece month on behalf of solitary day plus the return of tenet, and they practically quiver while they hear claims of 300% in eight weeks. Certainly these area of high pressure yield investment programs have got to be scams. How can it be achievable to generate such returns in such a abruptly amount of measure? And why isn’t every person impossible present liability this if it can really go off? If these area of high pressure yield nest egg sustain in the least irrigate it follows that in emphatically five abruptly years we may perhaps wipe impossible poverty and homelessness and refusal teen would interminably move to bed hungry or sick again!
Are High Yield Investments Scams?
Believe it or not this question is not a undemanding fair enough or refusal response. It can’t be. The abruptly and safe answer would be fair enough, they are scams. However, it is of the essence to understand could you repeat that? They are and why they suffer not all been shut up shop down by the government if they are nothing more than a way to slink your money.
High yield investment programs are not a place to try to earn an salary. They are particularly unstable and unpredictable. People can and work out meet money from them, and at times it’s a considerable amount of money. But don’t acquire excited and start rushing impossible to re-mortgage your stock emphatically yet.
Read all single disclaimer on a area of high pressure yield investment code website and they will all say the exact same object. High yield investing comes with the possibility of trailing money. Never invest more than you can survive to lose. Why? Because all area of high pressure yield investment code will eventually powder and folks with money invested are disappearing to lose.
High yield investment programs are based on ethics alike to having a bet. While a good number of work out not, present are colonize in the the human race who meet their living roaming around to casinos and having a bet. Is it a scam? No. Stylish truth a good number of us next to slightest respect the truth to the character is competent as much as necessary next to live nightclub games to they can earn a living next to it no matter what of how we feel roughly speaking having a bet ourselves. The same applies to earning a living from area of high pressure yield investment programs. Most investors work out not even consider them real nest egg and poke fun at next to folks who attempt to earn a living through area of high pressure yield investing.
Most colonize who are able to sponsor their lifestyle and earn a living through area of high pressure yield investment programs happening in using solitary of two methods. They either jumped in with both feet next to the primary code to sounded profit to them and lost everything they invested or they researched area of high pressure yield investment programs until their fingers went dull earlier interminably investing a dime. Either way, both parties came to the conclusion to to roll up impossible early in area of high pressure yield nest egg programs they would suffer to work out ample inquiries and completely understand the procedure and ethics earlier they were disappearing to succeed.
Earning a living through area of high pressure yield investment programs takes a procedure to is undemanding to realize and monitor to prevent untimely last and robust losses. This procedure takes a portion of due diligence and of pour, certain very specialized education roughly speaking forex trading and even having a bet.
Reading the website’s method of investment can tell the mode area of high pressure yield investor a portion roughly speaking the security, or lack thereof, on behalf of in the least finicky code. Most will admit to trading in forex, which in the least mode investor can work out with a little education and inquiries. Some will tell you to they are trading in freight as well and certain admit to they are in addition having a bet with the investors’ money, accurately. Any website to says they are having a bet using fool corroboration methods of winning ought to no question be avoided next to all expenses. There is refusal fool corroboration method of having a bet.
High yield investing is probably something to be avoided altogether, although to is an character pick lone an character investor can meet. However, if you desire to acquire involved with a area of high pressure yield investment code and you unfastened your money, to was your pick as well. Just like it is achievable to unfastened money in the stockpile souk, you are likely to unfastened money in area of high pressure yield nest egg. An investor to looses money in the stockpile souk doesn’t typically store a court case adjacent to the insurance broker, so why are colonize so quick to store lawsuits and complaints while they unfastened money in area of high pressure yield investment programs?
The answer is objectionable but on behalf of the a good number part it is confirmed. Greed. We can assume to present are poor nest egg impossible present and ought to we unfastened three or four thousand dollars in a bad investment we assume it as part of the impending outcome of investing. Yet for the reason that we got excited and our minds happening expenses the money we were hopeful to date through a area of high pressure yield investment instantly suddenly the colonize who run these programs are thieves. High yield nest egg are nest egg even if they work out border on scams and you run the possibility of trailing your money. Remember the basic tenet of in the least investment? The upper the return the more likely you are to lose your money.
High yield nest egg are incredibly risky and certain of them are essentially scams. Scam artists are all over and if present are colonize in the the human race who are willing to fork on top of thousands of dollars in the unrealistic hope to they can spin it into ten of thousands of dollars in a relatively abruptly point of measure it follows that present will be colonize who are willing to slink to money from impending investors.
People are willing to donate their money to in the least valuable cause, so present are colonize who are willing to ready up pretender charities to slink donations from giving colonize. That certainly doesn’t meet all charity a scam and colonize aren’t disappearing to be over donating to charities of their pick. Just as present are folks who will take lead of people’s kindness and appeal to give away to charities, present are folks who are interested in scamming money from colonize who are annoying to get better their pecuniary portfolio through area of high pressure yield investment programs. That doesn’t mean all single area of high pressure yield investment code is a scam.
The solitary object all area of high pressure yield investment programs work out suffer in usual is to earlier or afterward they will all fold, even folks to start impossible being profitable. Just for the reason that a area of high pressure yield investment code starts sour producing the returns to it projected in the creation doesn’t mean to it will keep on to work out so on top of a long point of measure. This is how the area of high pressure yield investor gets dramatically burned. One or two programs to delivers on behalf of a point of measure doesn’t mean it’s measure to give up the job and allot all the vacant property to area of high pressure yield investing. It funds to solitary or two programs are liability well. They will not work out well forever and earlier or afterward they will powder. That is the nature of area of high pressure yield investing.
High Yield versus Conservative Investing
Which investment strategy is entirely on behalf of you? Only an character investor can answer to question on behalf of their own interests. Some colonize can tolerate the considerable possibility factors while others wish the stability of the more conservative and typical methods of investing. Some colonize are more willing to take a put money on than others, and by all funds area of high pressure yield investing is a form of having a bet.
There are dramatically fewer scams in typical investing. Some colonize will constantly believe to area of high pressure yield investing is a scam and present is nothing to will encourage them otherwise. Just for the reason that certain colonize are able to be triumphant doesn’t mean to a code is not a scam. And emphatically for the reason that something is a scam doesn’t mean to certain money can’t be made anyway. Does it meet it entirely or real or valuable? Again this is something to every one character investor needs to determine on behalf of themselves.
This article explicated the analysis of business decisions as economic cost & benefit. If you find the costs and benefits from the investment- You must be clearly defined criteria to be used for evaluation against the investment proposal. The criteria for making an investment analysis of dealing benefits and costs of an investment proposal, these benefits and costs in most cases do not take place directly, but these are variable so that can be generated for changeable periods.
On the basis of my experience, observed, & analysis, this article I have paid attention mainly on the economic benefits achieved from investing in and operating a business. In this article, I have struggled to expose in more specific terms with the economic costs associated by way of business decisions.
Throughout the article I have tried talk about in greater details-the cost of various types of capital employed in a business, examine how this cost is measured, and in what form and for which purposes this economic reality should affect business decision making.
Introduction:
Investment policies have given a new viewpoint to the part of financial administration, Generally, I found that a few people knows the good investment policy and when those people apply their knowledgeable strategy with the investment usually they gain,, it is highly unlikely that without the appropriate knowledge of investment policy a few people try to run a business with a huge amount, but unfortunately most of these investors turn around from this business with huge losses. all decisions involving to business investment from the analysis of investment in running capital such as cash, banks, accounts receivable, inventory and investment capital represented in fixed assets such as buildings, land, machinery, technology etc. to make the right decisions the financier has to take into account elements of evaluation and analysis as the criteria for analysis,
meaning the analysis of investment:
In most types of organizations or private companies, financial decisions are focused or have a clear objective, “the maximization of assets by the utilities, this fact in the present conditions, must refocus on a” maximizing wealth and the creation of “business value”. Against this background in investment resources are allocated and results obtained from them,
Meaning the analysis of Operating decision:
Operating decisions that involve routine responsibilities. Such as planning production and sales, scheduling personnel and equipment, adjusting production rates, and controlling the production Quality
Decisional framework:
The decisional framework I have discussed all along strained the interrelationship of investment, operations, and financing. In my experience observed that, over time, most management decisions cause cash movements in one form or another.
The dynamics of the business system require that funds be available at any time temporarily or permanently from a variety of sources, provided internally or externally. Key internal sources are cash flows from profitable operations or shifts in existing funds commitments.
Type of external sources are borrowing or raising new equity. Because the basic purpose of investing in, operating, and financing a business is to raise the economic value of the owners’ bet over time, management decisions should form economic value for the shareholders by generating after-tax results that are higher than the cost of all the supporting capital inputs.
Investment Decisions
One of the most vital long phrase decisions for any business relates to investment. Investment is the Obtain or making of assets with the purpose of make gains in the future. naturally investment engaged by financial wealth to buy a machine/ building or other asset, which will then give up returns to an organization over a period of time
I think the first thing is to identify what you want. You must know what the business prospect means for you and what you want to achieve out of your investment. It is generally a good plan to have a pre-planned profit level that acts as an object for your investment work. The good investor will also take time to recognize the market that they are trying to pierce. Do not just rely on information or suggestions from the people. You will need to go and see the accurate operation of the business so that you can review whether you are likely to be winning. The past of business investment is beset with stories of people who jumped against schemes they did not know and ended up paying a very heavy price
Following Solution of considerations in making investment decisions are:
1. What is the scale of the investment – can the company afford it?
2. How long will it be before the investment starts to yield returns?
3. How long will it take to pay back the investment?
4. What are the expected profits from the investment?
A good investor will always look for to administer and shelter their investment. If you just put an investment project and hope for the best, you are on a smooth slope to financial ruin. You will need to pay steady attention to what is happening to your business by requesting for management information and evidence of growth. That way smoothly if there are problems you will know about them and formulate a corrective strategy.
As well established that least standards for investments had to be set high sufficient to pay costs both for the projects exact risk and for the chance loss of forgoing the returns from any substitute uses of the funds invested. Such alternative investments in the company’s normal tricks or in new initiatives were equally assumed to sufficiently reimburse both shareholders and lenders for providing their capital.
Cash flows connected with investment:
When creation an investment the company expects a number of fixed cost and production costs for a positive number of future benefits, these invention costs and profit is called “Cash Flow”, this components are importance for investment decision
I recommended that the company’s generally cost of capital, when used as a minimum standard for the economic attractiveness of investments, totally in person all of these requirements, and value would be created if a project’s cash flow performance exceeded the company’s cost of Capital. The analytical methods directly include any financing costs; rather, the cash outflows and inflows as defined represented only investment outlays on the one hand,
Rate of return required for investment decision:
The required rate of return is the minimum rate of return that is necessary for an investment that will be established. In formative this rate must take into account all internal and external factors that influence the investment decision.
My statement in financial theory which states that “investors are risk-aversive” takes great implication in the logic that, as there is more risk involved in the decision to invest in a project will require a higher give up wealth invested. Thus, the expected return for an investment project depends on the exact project risk assessment, taking into account the risk free rate and to invest in this project. The aspects discussed effective tool in achieving the proper financial management in the decision to rent business investment, but all this must be verified and supplemented by technical studies, math and controls executed by the monitoring accountable for the financial area of the company.
The rules of a good investor are not rocket science. Everyone can achieve some level of success if they take the time to go over their investment opportunities and make the most logical business decisions best on the information available and their own knowledge. Common sense does help as well, especially if you are dealing with people.
Operating Decisions:
Role of Operating Level of Management: The top level management divides about finance production, marketing, rules and system for employees, process and working methods. The middle level management collects necessary wealth and services for their execution and bottom level management implements the rules process, methods and programme shaped by the top level management. This type of execution is associated with the industrial regulation, continuity of activities and most usage of resources. Middle level office supervisors and bottom level jobbers, foremen and workers are connected with this work.
Decisions are being implemented at bottom level and for its efficiency the management’s method has to be followed. It includes following of working method and working process. Due to the process and methods, the work of coordination between the activities becomes effective and an effective control which can be put on all types of works. In short for the decisions of efficiency, the administrative process becomes an important part.
The time prospect for operating decisions is generally shorter than that of the typical business investment. however, operational funds movements, such as increases or decreases in trade credit both used and extended and swings in cash balances and accruals as described in do involve costs, both in the form of out-of-pocket charges and opportunity costs. For case, a near-term decision to take pay for discounts might involve significant economic benefits when weighed against the cost of any incremental borrowing essential to take advantage of the discount. Cash management decisions to minimize bank balances can eliminate the opportunity costs inherent in idle funds. In fact, there are myriad circumstances in which near-term decisions can cause or eliminate the cost of employing funds, as these decisions are often directly linked to incremental sources that entail specific costs.
Effective decisions are being full by keeping the present activities in mind and their main aim is to accomplish the present objectives. These decisions are taken for the getting of positive results by fulfilling the departmental objectives. For this the departmental employees are given training according to their activities and an effecting level’s personnel is given essential powers for the same cases,
Above I have tried to expose the costs associated with obtaining financing and compensating providers of different sources of funds, both short-term and long-term, which must be considered by management in making any financing decision. Obviously, using any type of funds entails an economic cost to the company in one form or another. One of management’s obligations is to expand a pattern of funding that both matches the risk/reward profile of the business and is suitably modified to meeting the evolving needs of the company. At the same time, the use of long-term funds entails meeting the prospect of creditors, and meeting or if possible exceeding the potential of the providers of equity funds, the company’s shareholders.
Conclusion: The operative decisions are different in nature in comparison with to strategic decisions. Mostly they possess a special importance for achieving the short term motives in framework to the internal situation of a business component
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Building financial models is an art. The only way to improve your craft is to build a variety of financial models across a number of industries. Let’s try a model for an investment that is not beyond the reach of most individuals — an investment property.
You can follow along by downloading the investment property model.
Before we jump into building a financial model, we should ask ourselves what drives the business that we are exploring. The answer will have significant implications for how we construct the model.
For example, a financial institution such as a bank is driven by its assets (investments, loans, mortgages, etc.), therefore we would probably be better off forecasting the growth of the company’s balance sheet. A retail store, on the other hand, is driven by the sales of its products. Therefore, we should focus on forecasting revenues and the income statement.
Who Will Use It?
Other questions to ask are who will be using this model and what will they be using it for? A company may have a new product for which they need to calculate an optimal price. Or an investor may want to map out a project to see what kind of investment return he or she can expect.
Depending on these scenarios, the end result of what the model will calculate may be very different. Unless you know exactly what decision the user of your model needs to make, you may find yourself starting over several times until you find an approach that uses the right inputs to find the appropriate outputs.
On to Real Estate
In our scenario, we want to find out what kind of financial return we can expect from an investment property given certain information about the investment. This information would include variables such as the purchase price, rate of appreciation, the price at which we can rent it out, the financing terms available fore the property, etc.
Our return on this investment will be driven by two primary factors: our rental income and the appreciation of the property value. Therefore, we should begin by forecasting rental income and the appreciation of the property in consideration.
Once we have built out that portion of the model, we can use the information we have calculated to figure out how we will finance the purchase of the property and what financial expenses we can expect to incur as a result.
The next section we can tackle is forecasting the property management expenses. We will need to use the property value that we forecasted in order to be able to calculate property taxes, so it is important that we build the model in a certain order.
Once we have these projections in place, we can begin to piece together the income statement and the balance sheet. As we put these in place, we may spot items that we haven’t yet calculated and we may have to go back and add them in the appropriate places.
Finally, we can use these financials to project the cash flow to the investor and calculate our return on investment.
Laying Out the Model
Since we are about to build a somewhat complicated model, we should think about how we want to lay it out so we keep our workspace clean. In Excel, one of the best ways to organize financial models is to separate certain sections of the model on different worksheets.
By putting calculations and projections that are closely related in the same worksheet and separating other calculations that are more relevant to other sections of the model on separate tabs (worksheets), we keep our model organized.
We can give each tab a name that describes the information contained in it. This way, other users of the model can better understand where data is calculated in the model and how it flows.
In our investment property model, let’s use four tabs: property, financing, expenses and financials. Property, financing and expenses will be the tabs on which we input assumption and make projections for our model. The financials tab will be our results page where we will display the output of our model in a way that’s easily understood (in the form of financial statements).
Forecasting Revenues
First Things first, let’s start with the property tab by renaming the tab “Property” and adding this title in cell A1 of the worksheet. By taking care of some of these formatting issuing on the front end, we’ll have an easier time keeping the model clean.
Next, let’s set up our assumptions box. A few rows below the title, type “Assumptions” and make a vertical list of the following inputs:
Purchase Price
Initial Monthly Rent
Occupancy Rate
Annual Appreciation
Annual Rent Increase
Broker Fee
Investment Period
In the cells to the right of each input label, we’ll set up an input field by adding a realistic placeholder for each value. We will format each of these values to be blue in color. This is a common modeling convention to indicate that these are input values. This formatting will make it easier for us and others to understand how the model flows. Here are some corresponding values to start with:
0,000.00
,550.00
95.00%
3.50%
1.00%
6.00%
4 years
The purchase price will be the price we expect to pay for a particular property. The initial monthly rent will be the price for which we expect to rent out the property. The occupancy rate will measure how well we keep the property rented out (95% occupancy will mean that there will only be about 18 days that the property will go un-rented between tenants each year).
Annual appreciation will determine the rate that the value of our property increases (or decreases) each year. Annual rent increase will determine how much we will increase the rent each year. The broker fee measures what percentage of the sale price of the property we will have to pay a broker when we sell the property.
The investment period is how long we will hold the property for before we sell it. Now that we have a good set of property assumptions down, we can begin to make calculations based on these assumptions.
A Note on Time Periods
There are many ways to begin forecasting out values across time. You could project financials monthly, quarterly, annually or some combination of the three. For most models, you should consider forecasting the financials monthly during the first couple years.
By doing so, you allow users of the model to see some of the cyclicality of the business (if there is any). It also allows you to spot certain problems with the business model that may not show up in annual projections (such as cash balance deficiencies). After the first couple of years, you can then forecast the financials on an annual basis.
For our purposes, annual projections will cut down on the complexity of the model. One side effect of this choice is that when we begin amortizing mortgages later, we will wind up incurring more interest expense than we would if we were making monthly principal payments (which is what happens in reality).
Another modeling choice you may want to consider is whether to use actual date headings for your projection columns (12/31/2010, 12/31/2011, …). Doing so can help with performing more complex function later, but again, for our purposes, we will simply use 1, 2, 3, etc. to measure out our years. In Excel, we can play with the formatting of these numbers a bit to read:
Year 1 Year 2 Year 3 Year 4 …
These numbers should be entered below our assumptions box with the first year starting in at least column B. We will carry these values out to year ten. Projections made beyond ten years do not have much credibility so most financial models do not exceed ten years.
On to the Projections
Now that we have set up our time labels on the “Property” worksheet, we are ready to begin our projections. Here are the initial values we want to project for the next ten years in our model:
Property Value
Annual Rent
Property Sale
Broker Fee
Mortgage Bal.
Equity Line Bal.
Net Proceeds
Owned Property Value
Add these line items in column A just below and to the left of where we added the year labels.
The property value line will simply project the value of the property over time. The value in year one will be equal to our purchase price assumption and the formula for it will simply reference that assumption. The formula for each year to the right of the first year will be as follows:
=B14*(1+$ B)
Where B14 is the cell directly to the left of the year in which we are currently calculating the property value and $ B is an absolute reference to our “Annual Appreciation” assumption. This formula can be dragged across the row to calculate the remaining years for the property value.
The annual rent line will calculate the annual rental income from the property each year. The formula for the first year appears as follows:
=IF(B12>=$ B,0,B5*12*$ B)
B12 should be the “1″ in the year labels we created. $ B should be an absolute reference to our investment period assumption (the data in our assumption cell should be an integer even if it is formatted to read “years,” otherwise the formula will not work). B5 should be a reference to our monthly rent assumption, and $ B should be an absolute reference to the occupancy rate.
What this function says is that if our investment period is less than the year in which this value is to be calculated, then the result must be zero (we will no longer own the property after it is sold, so we can’t collect rent). Otherwise, the formula will calculate the annual rent, which is the monthly rent multiplied by twelve and then multiplied by the occupancy rate.
For subsequent years, the formula will look similar to:
=IF(C12>=$ B,0,B16*(1+$ B))
Again, if the investment period is less than the year in which this value is to be calculated, then the result will be zero. Otherwise we simply take the value of last years rental income and increase it by our annual rent increase assumption in cell $ B.
Time to Exit
Now that we have forecasted property values and rental income, we can now forecast the proceeds from the eventual sale of the property. In order to calculate the net proceeds from the sale of our property, we will need to forecast the values mentioned above: property sale price, broker fee, mortgage balance and equity line balance.
The formula for forecasting the sale price is as follows:
=IF(B12=$ B,B14,0)
This formula states that if the current year (B12) is equal to our investment period ($ B) then our sale price will be equal to our projected property value in that particular year (B14). Otherwise, if the year is not the year we’re planning to sell the property, then there is no sale and the sale price is zero.
The formula to calculate broker fees takes a similar approach:
=IF(B18=0,0,B18*$ B)
This formula states that if the sale price for a particular year (B18) is equal to zero, then broker fees are zero. If there’s no sale, there’s no broker fees. If there is a sale then broker fees are equal to the sale price (B18) multiplied by our assumption for broker fees ($ B).
Our mortgage balance and our equity line balance we will calculate on the next worksheet, so for now we will leave two blank lines as placeholders for these values. Our net proceeds from the property sale will simply be the sale price less broker fees less the mortgage balance, less the home equity line balance.
Let’s add one more line called “Owned Property Value.” This line will show the value of the property we own, so it will reflect a value of zero once we have sold it. The formula will simply be:
=IF(B12>=$ B,0,B14)
B12 refers to the current year in our year label row. $ B refers to our investment period assumption, and B14 refers to the current years value in the property value line we calculated. All this line does is represent our property value line, but it will show zero for the property value after we sell the property.
On to the Financing
Now let’s model how we will finance the property acquisition. Let’s name a new tab “Financing” and add the title “Financing” at the top of the worksheet. The first thing we need to know is how much we need to finance.
To start, let’s type “Purchase Price” a few lines below the title. To the right of this cell make a reference to our purchase price assumption from the “Property” tab (=Property!B4). We will format the text of this cell to be green because we are linking to information on a different worksheet. Formatting text in green is a common financial modeling convention to help keep track of where information is flowing from.
Below this line, let’s type “Working Capital.” To the right of this cell, let’s enter an assumption of ,000.00 (formatted in blue text to indicate an input). Our working capital assumption represents additional capital we think we’ll need in order to cover the day-to-day management of the investment property. We may have certain expenses that aren’t fully covered by our rental income and our working capital will help make sure we don’t run into cash flow problems.
Below the working capital line, let’s type “Total Capital Needed” and to the right of this cell sum the values of our purchase price and working capital assumption. This sum will be the total amount of capital we will need to raise.
Capital Sources
A couple lines below our “Total Capital Needed,” let’s create a capital sources box. This box will have six columns with the headings: source, amount, % purchase price, rate, term and annual payment. Two typical sources of capital for acquiring a property are a mortgage and an equity line of credit (or loan). Our final source of capital (for this model anyway) will be our own cash or equity.
In the sources column, let’s add “First Mortgage,” “Equity Line of Credit,” and “Equity” in the three cells below our sources heading. For a typical mortgage, a bank will usually lend up to 80% of the value of the property on a first mortgage, so let’s enter 80% in the line for the first mortgage under the % purchase price heading (again, formatted in blue to indicate an input value).
We can now calculate the amount of our first mortgage in the amount column with the following formula:
=B5*C11
B5 is a reference to our purchase price and C11 is a reference to our % purchase price assumption.
In the current market, banks are reluctant to offer equity lines of credit if there is less than 25% equity invested in the property, but let’s pretend that they are willing to lend a bit. Let’s assume that they will lend us another 5% of the property value in the form of an equity line. Enter 5% (in blue) in the equity line of credit line under the % purchase price heading.
We can use a similar formula to calculate the equity line amount in the amount column:
=B5*C12
Now that we have the amount of bank financing available for our purchase, we can calculate how much equity we will need. Under the amount heading in the row for equity, enter the following formula:
=B7-B11-B12
B7 is our total financing needed. B11 is the financing available from the first mortgage and B12 is the financing available from the equity line of credit. Again, we’re assuming that we’ll have to cough up the cash for anything we cannot finance through the bank.
The Cost of Capital
Now let’s figure out what this financing is going to cost us. For interests rates, let’s assume 5% on the first mortgage and 7% on the equity line. Enter both of these values in blue in our rate column. For terms, a typical mortgage is 30 years and an equity line might be 10 years. Let’s enter those values in blue under the term heading.
The annual payment column will be a calculation of the annual payment we will have to make to fully pay off each loan by the end of its term inclusive of interest. We will use an Excel function to do this:
=-PMT(D11,E11,B11,0)
The PMT function will give us the value of the fixed payment we will make given a certain rate (D11), a certain number of periods (E11), a present value (B11) and a future value (which we want to be zero in order to fully repay the loan). We can then use the same formula in the cell below to calculate the payment for the equity line.
Now we’re ready to map out our projections. Let’s start by copying column headings from the property tab (Year 1, Year 2, etc.) and paste them on the finance tab below our capital sources box. Let’s also pull the owned property value line from the property tab (marking the values in green to show that they come from a different sheet).
Now let’s forecast some balances related to our first mortgage. Let’s label this section of the worksheet “First Mortgage” and below it add the following line items in the first column:
Beginning Balance
Interest PMT
Principal PMT
Ending Balance
Post Sale Balance
For year one of our beginning balance, we will just reference our first mortgage amount (=B11). For years two and later, we will simply reference the previous years ending balance (=B25).
To calculate the interest payment for each year, we simply multiply the beginning balance by our assumed interest rate (=B22*$ D). B22 would be the current year’s beginning balance and $ D would be our assumed interest rate.
To calculate each year’s principal payment, we simply subtract the current year’s interest payment from our annual payment (=$ F-B23). $ F is the annual payment we calculated before, and B23 is the current year’s interest payment.
Our ending balance is simply our beginning balance minus our principal payment (=B22-B24).
Finally, our post sale balance is simply our ending balance for each year or zero if we have already sold the property (=IF(B19=0,0,B25)). This line will make it easy for us to represent our debt when we go to construct our balance sheet later on.
We now repeat the same lines and calculations for projecting our equity line of credit balances. Once we are done with these two sources, we have completed our financing worksheet.
Taking a Step Back
We can now drop in our mortgage and equity line balances back on the property tab in order to calculate our net proceeds. For the mortgage balance we use the formula:
=IF(B18=0,0,Financing!B22)
B18 refers to the current year’s property sale value. If the value is zero, then we want the mortgage balance to be zero, because we are not selling the property in that particular year and don’t need to show a mortgage balance. If the value is not zero, then we want to show the mortgage balance for that particular year which can be found on the financing tab (Financing!B22).
We use the same formula for calculating the equity line balance.
On to Expenses
Let’s label our expenses tab “Expenses” and add the same title to the top of the worksheet. This worksheet will be simple and straightforward. First, let’s create an assumptions table with the following input labels:
Tax Rate
Annual Home Repairs
Annual Rental Broker Fees
Other Expenses
Inflation
Next to each of these cells, let’s enter the following assumption values in blue:
1.10%
0.00
0.00
.00
1.50%
Each of these assumptions represents some component of the ongoing costs of managing a property. Below our assumptions box, let’s again paste our year headings from one of our other worksheets (Year 1, Year 2, etc.).
Let’s drop in a line that shows our owned property value that we calculated earlier and format these values in green. We will need these values in order to calculate our tax expense, so it’ll be easier to have it on the same worksheet.
Below this line, let’s add a few line items that we’ll be forecasting:
Home Repairs
Rental Broker Fees
Other Expenses
Taxes
Our first year of home repairs will simply be equal to our annual assumption (=B5). For subsequent years, though, we will need to check to see if we still own the property. If not, our cost will be zero. If so, we want to grow our home repairs expense by the inflation rate. Here’s what the function for subsequent years should look like:
=IF(C=0,0,B15*(1+$ B))
In this case, C is the current year’s property value, B15 is the previous year’s home repair expense, and $ B refers to the inflation rate. For rental broker fees and other expenses, we can use the same methodology to forecast these expenses.
For taxes, we will need to use a different calculation. Property taxes hinge on the value of the property, which is why we have used a percentage to represent the tax assumption. Our formula to calculate taxes will be as follows:
=B13*$ B
Since our taxes will be zero when our property value is zero, we can simply multiply our property value (B13) by our assumed tax rate ($ B). And now we have forecasted our expenses.
Putting It All Together
Now comes the fun part. We need to put all of our projections into presentable financial statements. Since this will be the part of the model that gets passed around, we’ll want to make it especially clean and well formatted.
Let’s label the tab “Financials” and enter the same title at the top of the worksheet. A couple lines below, we’ll start our balance sheet by adding a “Balance Sheet” label in the first column. Just below this line, we’ll drop in our standard year headings, only this time we want to include a Year 0 before the Year 1 column.
Along the left side of the worksheet just below the year headings, we’ll layout the balance sheet as follows:
Cash
Property
Total Assets
First Mortgage
Equity Line of Credit
Total Debt
Paid-In Capital
Retained Earnings
Total Equity
Total Liabilities & Equity
Check
Our cash value in year zero will be equal to the amount of equity we plan to invest, so we will reference our equity value from the finance worksheet (=Financing!B13) and format the value in green.
Property, first mortgage, equity line and retained earnings will all be zero in year zero because we haven’t invested anything yet. We can go ahead and add in the formulas for total assets (cash plus property), total debt (first mortgage plus equity line), total equity (paid-in capital plus retained earnings) and total liabilities and equity (total debt plus total equity). These formulas will remain the same for all years of the balance sheet.
For the year zero balance for paid-in capital, we’ll use the same formula as cash for year zero (=Financing!B13).
Returning to cash, we will use this line as our plug for the balance sheet since cash is the most liquid item on the balance sheet. To make cash a plug, we make cash equal to total liabilities and equity minus property. This should ensure that the balance sheet always balances. We still need to watch to see if our cash is ever negative, which could present a problem.
On a balance sheet, property is usually represented at its historical value (our purchase price), so we will use the following formula to show our property value and format it in green:
=IF(C5>=Property!$ B,0,Property!$ B)
C5 represents the current year. Property!$ B is a reference to our investment period assumption and $ B is a reference to the purchase price. The value of the property will be either zero (after we have sold it) or equal to our purchase price.
Our first mortgage and equity line balances we can simply pull from the post sale balance on the finance tab. We format each line in green to show that it is being pulled from another worksheet.
Paid-in capital, will be equal to either our original investment (since we won’t be making additional investments) or zero after we have sold the property. The formula is as follows:
=IF(C5>=Property!$ B,0,$ B)
C5 represents the current year. Property!$ B is a reference to our investment period assumption and $ B is a reference to the year zero value of our paid-in capital.
We will have to skip the retained earnings line until after we have projected our income statement as it hinges on net income.
The check line is a quick way of telling if your balance sheet is in balance. It is simply equal to total assets minus total liabilities and equity. If the value is not equal to zero, then you know there’s a problem. As an extra bell and whistle, You can use conditional formatting to highlight any problems.
Calculating the Bottom Line
Below the check line, let’s set up our income statement in the same way we set up our balance sheet — with an “Income Statement” label followed by our year column headings. We will layout our income statement as follows:
Rental Income
Proceeds from Sale
Total Revenue
Home Repairs
Rental Broker Fees
Other Expenses
Total Operating Expenses
Operating Income
Interest Expense
Taxes
Net Income
Rental income, proceeds from sale, home repairs, rental broker fees, other expenses and taxes can simply be pulled from the other worksheets where we have calculated them (and formatted in green of course). Interest expense is simply the sum of the interest payments for both the first mortgage and the equity line on the financing tab.
The other line items are simple calculations. Total revenue is the sum of rental income and proceeds from sale. Total operating expenses is the sum of home repairs, rental broker fees and other expenses. Operating income is total revenue minus total operating expenses. Net income is operating income minus interest expense and taxes.
Now that we have our net income figure, we can jump back up to our retained earnings line in our balance sheet to finish that up. The formula for retained earnings starting in the first year and going forward should be as follows:
=IF(C5>=Property!$ B,0,B17+C43)
Again, the IF function looks at the current year (C5) and compares it to our investment period (Property!$ B). If it is greater than or equal to the investment period, then we have closed our our investment and the value is zero. Otherwise, the formula for retained earnings is the previous year’s retained earnings balance (B17) plus the current year’s net income.
And Now for Cash Flow
To answer our original question of what our return on this particular investment is going to be, we need to project the cash flow to the investor. To do so, let’s create another section below the income statement called “Investment Cash Flow,” which also has our year column headings. We’ll also want to add the following lines:
Initial Investment
Net Income
Cash Flow
Our initial investment line will only have a value in the first year zero cell, and it will be equal to our paid in capital only negative (=-B16). Our initial cash flow is negative because we make the equity investment to finance the project.
The rest of our cash flow comes in the form of net income. Since we have the net proceeds from the sale of the property flowing through net income as well, we can simply set the net income line equal to net income from our income statement. To maximize our potential return, we will assume that net income is paid out each year rather than being retained (this could result in some negative cash balances, but for simplicity’s sake, we’ll make this assumption).
Cash flow is simply the sum of the initial investment and net income for each year. The result should be a negative cell followed by some negative or positive net income figures (depending on our model’s assumptions). Now we’re ready to calculate our return.
A couple lines below the cash flow line, we’ll label a line “IRR” or internal rate of return. The internal rate of return is basically the discount rate at which your future cash flow is equal to your initial cash outflow. In other words, it’s the discount rate that gives the project a present value of zero. The formula we will enter to the right of this label is as follows:
=IF(ISERROR(IRR(B51:L51)),”N/A”,IRR(B51:L51))
We’re adding some fancy formatting to the formula to make sure that if the IRR function can’t calculate the return, it shows up as “N/A.” The basic function for IRR will simply reference our cash flow cells (B51:L51).
We can now play around with our model inputs to see if our assumptions and our project make sense. If you have data from a similar project, you may want to input those values to see if your model closely follows the actual results of the project. This test will help you determine if your model is working properly.
Remember, a model is only as good as the assumptions you put into it, so even with a detailed working model of a project, you will still need to invest a lot of time researching appropriate assumptions.
Final Touches
Take some time to format your model as best as possible. Set up each page so that it can print properly. Make sure that other users of the model can clearly follow it to see what you have done.
This is just one example of a financial model. Other models may be more simple or much more detailed. In order to be a great modeler, you have to practice. Good luck!
For an example of an investment property model, visit Finance Ocean. Or got to Finance Ocean to get a business plan template.
An Investment Trust is essentially a company that invests in shares and bonds of other companies. Individual investors can purchase shares in the investment company (or investment trust) who use the income generated from selling their shares to invest in other companies. Depending on these investments the share value of the investment trust can either go up or down, but will usually go up in the long run.
There are a number of advantages of using investment trusts as opposed to other investment options. One of the key advantages is the expertise of the investment managers. Their job is to choose the best investments on behalf of their shareholders; in other words those who they are investing on behalf of. They will be experienced investors who understand the markets they are investing in. Therefore utilising investment trusts is a wise idea if you want to invest but are not confident in deciding where to invest yourself. They do charge a fee and take a cut but if this leads to a better investment then it is worth it.
Investment Trusts allow small investors to invest where they may not be able to otherwise. They may not have the funds available to buy shares alone, but in an investment trust the money of different investors is combined to result in larger investments. This is beneficial to those who are not investing enough to accrue significant returns if investing alone as the combined amount increases the total.
Investment trusts will spread investments around different assets. This has two benefits for investors; it spreads the risk and adds to the diversity of the investment portfolio. This means investors are investing in a range of assets. This might not be possible if investing alone, especially if they do not have a large amount that they are able to invest. The range of expertise amongst investment managers means that they are able to invest in this range of different investments.
There are many people who would like to invest but do not have the time to research the best investments. With investment managers using their knowledge and making the investments this is less of an issue with investment trusts.
For many investment trusts are a good alternative to investing in company shares as individuals. The combination of the expertise and experience of investment managers, and the fact that there are several people investing together means that many choose this option above others.
Contributors: John R. Cotter, Editor; Pearl Carruthers, Assistant Editor; William J. Sullivan, Business Manager; J.K. Jamison, Faculty Adviser
Date Digital: February 2011
Date Original: 1912
Source: Butte Digital Image Project at Montana Memory Project (read the book)
Library: Butte-Silver Bow Public Library in Butte, Montana, USA.
Rights Info: Public Domain. Not in Copyright. Please see Montana Memory project Copyright statement and Conditions of Use (for more information, click here). Some rights reserved.
Attribution-Noncommercial-No Derivative Works.
The reason for putting a portfolio together is to reflect on future needs for capital and income and to give peace of mind that the desired outcome will be achieved without undue risk.
The first decision is with regard to Asset Allocation, which is simply explained as the amount of money invested in each of the asset classes. There are many asset classes such as stocks and shares, government gilts, corporate bonds, property, commodities, cash etc.
Although there are many Asset Classes it is universally agreed that most will fall into four main categories mainly cash, fixed interest, equities and property. Most other asset classes that individuals will come across are really sub-classes of these four.
The main benefits of having a spread of investments within these four asset classes is the understanding that the classes do not mirror each other’s movements, up or down, i.e. there is a low correlation between activity in each class. It is accepted that cash has a very low correlation with shares and property, property has a huge correlation with shares, shares have a lower correlation with fixed interest. So if property yields or value is increasing this does not mean that cash rates will be affected either up or down.
The primary key to investment success is having an asset allocation with the right mix of asset classes and the right amount of money invested in each of the mix to give the desired return at the correct level of risk.
It is probably an obvious statement to make that investors will have less risk if they divide their investment between cash and shares than if they have it all in shares.
A brief on Cash
Cash is understood by all and the cornerstone of our economy. Although banks are in the midst of major changes in their structure due to recent internal turmoil, they are still perceived as one of the safest places to hold money. They will provide a guaranteed rate of return over a specific period with no risk of underlying capital.
The two drawbacks of investing heavily in cash are 1) the level of return is lower than other asset classes over a long period and 2) inflation.
Inflation effectively means that the buying power of your money is going down over time for individuals on a fixed income; therefore inflation is very hard on retired people unless they have sufficient assets to build in regular income increases.
For these two reasons it is advisable not to have all assets in cash, even in retirement. There are many safe investments now with higher returns than from cash which will protect the buying power if inflation is present.
Generally depending of course on an individual’s risk profile, if an individual is at the stage of growing their asset base they should only have a limited amount of cash as an excessive amount will create a drag on the investment performance.
A brief on property
When considering property, many of us immediately consider our residential property and of course for many that is the only exposure to property investment.
There are however many different types of property investment away from our residential such as, residential buy-to-let, commercial property, overseas property, property fund, specialist property syndicates etc.
In recent years the attitude towards property investment changed, perhaps for the worse, whereby people believed property could be a short term investment, where historically it was always accepted as having a long investment cycle. I believe it is fair to say that unless an individual wants a hands on investment they need to consider investing via the myriad of funds or syndicates on the market. These structures basically allow a lot of individuals to pool their money and have property professionals manage the assets for them. The downside is of course, that the management has a cost attached to it which will diminish the returns.
A brief on equities
Equities are a summation of the method of investing in stocks and share either directly or through structured funds such as Unit Trusts, insurance bonds etc.
A simple definition of what is a stock (or share) is simply ownership of a small proportion of a company. Holding a company’s stock means that you are one of the many owners (or shareholders) of a company, and as such, you have an entitlement to your share of the company’s earnings as well as voting rights attached to the stock.
Of course the challenge for investors is deciding what companies to buy stock in and many do not want to spend the amount of time required to research investment opportunities.
It was for the reason that ‘collective investments’ were developed which allows private investors to pool their funds with other investors and appoint professional managers to run the funds.
The performance of the fund is dependent on the investment philosophy and style of the fund manager. Some fund managers may choose stocks that are safe bets for steady appreciation; others will be more aggressive stock selectors whose funds will experience a lot more volatility and be considered to be in a higher risk category. It is amazing to think that the growth of the collective fund industry has resulted in more funds available than individual shares. So, as much care needs to be taken when researching a fund manager as goes into particular share purchase.
The Consideration Of Risk In Investment
Risk is a basic and underlying concept which is present in all aspects of investment. It is inherent in every financial product and there is no such thing as a financial institution that does not face risk in its business. So the main challenge for the investor is how to manage and instigate risk as it cannot be wholly eliminated.
Risk can really be categorised as downside risk i.e. that something will go wrong which cannot be planned for or speculative risk which is associated with taking a gamble “for better or for worse”.
For individuals considering investment options it is well accepted that they must be aware of four main risk categories namely; prudential risk (where the management of the company invested in is bad and the results affected by this), fraud by management or individuals within the company, performance risk whereby investment is not doing as ell as hoped for and complexity risk where individuals do not understand the intricacies of the investment taken on.
It is fundamental requirement for every investor to establish their level of risk and to only invest in sectors, types of investments and over timescales that fit into their risk profile.
How to establish your current risk profile
This is an important exercise, as by knowing this you can start the process of selecting appropriate investment strategy.
A method well proven and widely utilised is noted below and it would be well worth taking time out to establish where you would sit on the scale. …………blah blah
When you have completed this profile, you can move onto the next chapters showing how different asset groups, investment structures, and product work together to create your ideal profile.
Fixed Interest Brief
A ‘fixed interest’ investment is where an individual effectively lends money (typically to the government or an individual corporate entity) in return for a fixed amount of income (or interest) over a particular time period. If the investment is held to the end of the term the capital amount invested is usually returned in full.
Although prices on fixed interest investment go up and down at different points – the economic cycle, an investor does know that when purchased they will get ‘x’ amount of income per year for ‘y’ years.
This therefore means that fixed interest investment is usually considered to be less risky than equities.
One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. Indian stock market opened to Foreign Institutional Investors in 14th September 1992, initially with lot of restrictions. The regulation on them are liberalized and minimized now, since 1993 has received a considerable amount of portfolio investment from foreigners in the form if FIIs investment in equities. This has become a turning point of India stock market. The government of India announced the policy of the government to permit the FII investment in India capital market. According to the SEBI modified the regulation on 14-11-1995. In order to make investment in India equity market they wanted to register with Security Exchange Board of India as foreign institutional investors. It is possible for foreigners to trade in India securities without registering as Foreign Institutional investors, but such cases require approval from Reserve Bank of India or the Foreign Institutional Promotion Board. They are generally concentrated in secondary market.
Domestic market alone not able to meet the growing capital requirement of the country and financing from mutilated institution has lost primary in the emerging in the global order .Besides aimed primarily at ensuring non-debt creating capital inflows at a time of extreme balance of payment crisis. It was to tie over the balance of payment crisis in the early 1990s
Portfolio flows often referred to as ‘hot- money’ are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been plying a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences.
Clark and Berko (1997) emphasize the beneficial effects of allowing foreigners to trade in stock markets and outline the “base-broadening” hypothesis. The perceived advantages of base-broadening arise from an increase in the investor base and the consequent reduction in risk premium due to risk sharing. Other researchers and policy makers are more concerned about the attendant risks associated with the trading activities of foreign investors. They are particularly concerned about the herding behavior of foreign institutions and the potential destabilization of emerging stock markets.
This study addresses these issues in the context of foreign institutional investors’ (FII) trading activities in a big emerging market – India. India liberalized its financial markets and allowed FIIs to participate in their domestic markets in 1992. Ostensibly, this opening up resulted in a number of positive effects. First, the stock exchanges were forced to improve the quality of their trading and settlement procedures in accordance with the best practices of the world. Second, the information environment in India improved with the advent of major international financial institutional investors in India. On the negative side we need to consider potential destabilization as a result of the trading activity of foreign institutional investors. This is especially important in an emerging country that has embarked upon reforms to open up its market.
OBJECTIVES The objectives of this study were as follows;
(1) To study the role of FII investment in the Indian stock market, ( 2 ) To examine the causal relationship between net FII investment and BSE sensex using granger causality test (3) To examine the causal relationship between net FII investment and NSE sensex using granger causality test (4 )To examine whether FIIs were a channel of global disturbance into the Indian stock market.
TOOLS: Study was carried out with the help of unit root test, co integration test, causal regression and F statistics for FII investment and index from BSE and NSE
LETERATURE REVIEWS
Gayathri Devi .R in 2003, she conducted study on “Causal Relationship between FIIs and Stock Market: A critical study”. It revealed that there was long run relationship between net FII investment and sensex, FII investment did not respond the short-run changes or technical-position of the market and they were more driven by fundamentals, and FII investments did granger cause India stock market. “Selen Serisoy Guerin” in 2006, conducted study on “The Role of Geography in Financial and Economic Integration: A comparative Analysis of foreign direct investment, Trade and Portfolio Investment Flows”.. It found support for the argument that most FDI among Industrial countries were horizontal, whereas most FDI investment in developing countries was vertical and our results indicated that portfolio investment flows compared to FDI, were highly sensitive to change in GDP per capita, this implied that if there was a negative output stock, portfolio investment flows would be more volatile than FDI. A.Julia Priya, D. Lazar and Joseph Jeyapual in 2005, they conducted study on “Role of Foreign Institutional Investors on stock market development in India”, Results revealed that sensex, market capitalization of NSE, Turnover of BSE and NIFTY without market capitalizations were influenced by Foreign Institutional Investors“Suchismita Bose and Dipankor coondoo” in 2004, they conducted study on “The Impact of FII Regulation in India”,. These results strongly suggested The liberalization policies had the desired expansionary effect and had either increased the mean level of FII inflows and/or the sensitivity of these flows to a change in BSE returns and /or the Parthapratim pal in 2004 conducted study entitled as “Recent volatility in stock markets in India and foreign institutional investors. Findings of this study indicated that Foreign institutional investors had emerged as the most dominant investor group in the domestic stock market in India. Particularly, in the companies that constitute the Bombay stock market sensitivity index, their level of control was very highinertia of these flows.
“sandhya Ananthanaryanan, Chandrasekhar krishnamurthi and Nilajan Sen in 2003 conducted study as “Foreign institutional Investors and Security Returns: Evidence from Indian Stock Exchanges”, It found strong evidence consistent with the base-broadening hypothesis.It did not find compelling confirmation regarding momentum or contrarian strategies being employed by FIIs.It supported price pressure hypothesis.
It did not find any substantiation to the claim that foreigner’ destabilize the market. J.S. Pasricha and Umesh.C.Singh in 2001, tried to analyze the impact of FIIs investment on Indian capital market. Their study revealed that FII are here to stay and have become the integral part of Indian capital market. Their entry has led to greater institutionalization of the market. They have brought transparency in the market operations.S.S.S. Kumar in 2001, attempted in his study to find the effect of FIIs on the Indian stock market. The inference analysis of the paper suggests that FII investments are more driven by market fundamentals rather than by short term changers or technical position of the market. As per K. Seethapathi and V. Subbulakshmi study entitled “Foreign investment: Need for focus”, They concluded that, the flows have to pick up. The political will is to be demonstrated by the government. In addition, the regulators have to identify the reasons for failure in converting approvals into actual investments and those issues are to be addressed immediately. E. Han Kim and Vijay Singal in 1997, they conducted study entitled “Are open market Good for Foreign Investors and Emerging Nations?”, Conclusion revealed as. Integrating the emerging stock markets into world markets has had benefits, and will continue to have benefits for both global investor and host countries. The end result of integrated markets a better allocation of resources, improved productivity of capital, and a higher standard of living.
THEORETICAL REVIEW
Between late 1990 and the middle of 1991, the economy faced severe balance of payment difficulties, coming close to defaulting on its external payment obligations in January and June of 1991. In January 1991, the Government negotiated with the International Monetary Fund (IMF) for loans. What followed was the implementation of the conventional IMF-World Bank prescription of short-term ‘stabilization’, consisting of devaluation, temporary import compression, fiscal and monetary compression with a rise in interest rates, followed by more long-term ‘structural adjustment’ measures, seeking to restructure the domestic economy.
The New Economic Policy was an outcome of implementation of the ‘structural adjustment’ program. The ‘economic reforms’ or ‘economic liberalization’ program, which began to be implemented with the announcement of the New Economic Policy (NEP), included wide-ranging changes in industrial policy, trade policy and foreign investment policy, a redefinition of the role of the public sector in the economy and redesigning the architecture of the domestic financial system. By narrowing down the topic, first it concentrates on capital account liberalization.
CAPITAL ACCOUNT LIBERALIZATION
The process of capital account liberalization in India needs to be situated in its wider context, for it was shaped by the reality in the national context and the conjuncture in the international context. In response to the external debt crisis, which surfaced in 1991, the government set in motion a process of stabilization, adjustment and reform. Economic liberalization and structural reforms sought to increase the degree of openness of the economy through trade flows, investment flows, technology flows and capital flows. The process began the introduction of convertibility on trade as quantitative restrictions on imports, except for with consumer goods were dismantled and tariff levels were reduced. It was combined with a liberalization of the regimes for foreign investment and foreign technology. And restrictions on international economic transactions, including capital movements, were progressively reduced. This process was also influenced by the gathering momentum of globalization which was associated with increasing economic openness in trade flows, investment flows and financial flows.
The approach to capital account liberalization in India was much more cautious. What was liberalized was specified. Everything else remained restricted or prohibited. The contours of liberalization of the capital account were, in large part, shaped by the salutary lessons of the external debt crisis which surfaced in early 1991 and brought India close to default in meetings its international obligations. The balance of payments situation, then, was almost unmanageable.
The vulnerability was accentuated by two factors: it became exceedingly difficult to roll-over short-term debt in international capital markets and there was capital flight in the form of withdrawals from deposits held by non-resident Indians. This experience dictated the parameters of capital account liberalization8. It prompted strict regulation of external commercial borrowing especially short-term debt. It led to a systematic effort to discourage volatile capital flows associated with repatriable non-resident deposits. Most important, perhaps, it was responsible for the change in emphasis and the shift in preference from debt creating capital flows to non-debt creating capital flows. To some extent, the liberalization that was introduced was also influenced by the perceived needs of the economy: financing the current account deficit, mobilizing resources for investment and attracting international firms. But capital account convertibility remained, fortunately, in the realm of rhetoric. The Mexican crisis in late 1994 was, ironically enough, a blessing in disguise for India. It was not just an early warning signal. It dampened the enthusiasm of those who advocated capital account liberalization with a big bang. It lent support to those who questioned the wisdom of capital account convertibility that would have been premature in every sense. The contours of capital account liberalization in India were determined by these factors.
In sketching these contours, it is necessary to distinguish between different forms of private capital inflows and outflows, as there are important differences between these categories in the nature and the degree of liberalization. A complete description would mean too much of a digression. For our purpose, it would suffice to consider the contours of liberalization in the following categories of capital account transactions:
• Direct investment,
• Portfolio investment, and
• Non-resident deposits.
Foreign Direct Investment
It is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.
The liberalization of the policy regime for direct foreign investment began in July 1991 with two major decisions. First, direct foreign investment with up to 51 per cent equity was to receive automatic approval in selected high priority industries subject only to a registration procedure with the Reserve Bank of India. Second, a Foreign Investment Promotion Board was constituted to consider all other proposals for direct foreign investment where approval was not constrained by pre-determined parameters and procedures. In effect, this created a dual route for inflows of direct foreign investment. The approval was automatic, within the specific parameters, from the Reserve Bank of India, while all other inflows were subject to approval through the Foreign Investment Promotion Board. The access through the automatic route has been progressively enlarged over time. Needless to add, outflows associated with direct foreign investment are not subject to any restrictions, but this was so even in the era of capital controls.
Foreign Portfolio Investment (FPI)
Portfolio investment represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities’ issuer by the investor; where such control exists, it is known as foreign direct investment.
The liberalization of the policy regime was extended to portfolio investment in September1992. To begin with, foreign institutional investors such as pension funds or mutual funds were allowed to invest in the domestic capital market subject simply to registration with the Securities and Exchange Board of India. Guidelines issued by the Reserve Bank of India permitted such foreign institutional investors to invest in the secondary market for equity subject to a ceiling of 5per cent (subsequently raised to 10 per cent) for individual foreign institutional investors in a single Indian firm with an overall limit at 24 per cent of equity (later relaxed to 30 per cent of equity at the option of the firm) for total foreign institutional investment in a single Indian firm. Foreign portfolio investment further classified into
1. FIIs
2. ADR/GDR, and
3. Offshore funds.
Foreign institutional investors (FIIs)
One who propose to invest their proprietary funds or on behalf of “broad based” funds or of foreign corporates and individuals and belong to any of the under given categories can be registered for FII.
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Endowment Funds
• University Funds
• Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and
• Asset Management Companies
• Nominee Companies
• Institutional Portfolio Managers
• Trustees
• Power of Attorney Holders
• Bank
Access was provided to foreign institutional investors in the secondary market for debt. Soon thereafter, foreign institutional investors were also allowed investment or placement in the primary market, subject to approval from the Reserve Bank of India, with a maximum limit of 15per cent of the new issue. It was some time before foreign institutional investors were permitted investment in government securities in the primary and secondary markets. This came in 1996-97 and was subject to the ceiling for external commercial borrowing. Subsequently, in 1998-99, foreign institutional investors were also permitted to invest in treasury-bills. There is no reserve requirements stipulated for, or taxes imposed on, these capital inflows. It also needs to be said that foreign institutional investors are allowed to repatriate the principal, the capital gains, the dividends, the interest and any other receipt from the sale of such financial assets, without any restriction, at the market exchange rate. The income tax rate for dividends on such portfolio investment for foreign institutional investors is 20 per cent, which is much lower than the corporate income tax rate for domestic or foreign firms. But foreign institutional investors are subject to a higher short-term capital gains tax at 30 per cent compared with 20 per cent for domestic investors, while the long-term capital gains tax is the same at 10 per cent. Sales of such financial assets for the purpose of repatriation are absolutely unrestricted, provided the sales are through stock exchanges. However, disinvestment through any other route, or in any other form, requires approval from the Reserve Bank of India.
Global Depositary Receipt:
Global Depositary Receipt A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. American Depositary Receipts make it easier for individuals to invest in foreign companies, due to the widespread availability of price information, lower transaction costs, and timely dividend distributions. Also called European Depositary Receipt.
The option of portfolio investment was also made available to domestic corporate entities from September 1992. Indian firms were allowed access to international capital markets through global depository receipts or Euro convertible bonds which converted debt into equity after stipulated period. This access, however, was not automatic. Individual applications, drawn up inconformity with the general guidelines of the government, were subject to approval. This process remains unchanged.
Offshore Funds:
An offshore fund is a collective investment scheme domiciled in an Offshore Financial Centre, for example British Virgin Islands, Luxembourg, Cayman Islands or Dublin.
Similar facilities for portfolio investment were subsequently extended to Offshore funds, non-resident Indians (as individuals) and overseas corporate bodies, only for investment in shares or debentures through stock exchanges, on the same terms as foreign institutional investors, but subject to a ceiling of 5 per cent for individual non-resident Indians or overseas corporate bodies in a single Indian firm.
Among the various components of portfolio investment, FII comprises the bulk of portfolio inflows. The main objective of foreign institutional investors is to minimize risk and maximize returns by diversifying their portfolios internationally. Major determinants of investment decisions of FII are country and region specific.
Portfolio flows often referred to as ‘hot- money’ are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been plying a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some while others are concerned about possible adverse consequences.
Among the most active FIIs are Morgan Stanely Asset Management, jardine Fleming, Capital International, J. Henery schorder, templeton, Warburg Pinkers, Internatioanl Alliance and Quantum fund.
Foreign Institutional Investors in India
India opened her doors to foreign institutional investors in September, 1992. This event represents a landmark event since it resulted in effectively globalizing its financial services industry. Initially, pension funds, mutual finds, investment trusts, Asset Management Companies, nominee companies and incorporated/institutional portfolio managers were permitted to invest directly in the Indian stock markets. Beginning 1996-97, the group was expanded to include registered university funds, endowment, foundations, charitable trusts and charitable. Since then, FII flows which form a part of foreign portfolio investments have been steadily growing in importance in India. Other than in the year 1998, the net flows have been positive. The nuclear tests and East Asian crisis did slow down the flows but as stated by Gordan and Gupta (2003), their effects were short lived. That the percentage of total net turnover of BSE, the share of average of FII sales and purchases increased from 2.6 percent in 1998 to 5.5 percent in 2002. The cumulative net FII investment in India as on August 2003 is approximately 400 million. As of August 2003 net FII investment was 9 percent of the BSE market capitalization which is small compared to the size of the market. However, in the words of Banaji (2002), it is not the market capitalization that matters but what is important is the level of the free float, that is, the shares that are actually publicly available for trading. With floating stock in the Indian market being less than 25 percent, about 35 percent of the free float available has been bagged by FIIs – despite the fact that they invest in just a few highly liquid stocks.
Though India receives hardly 1 percent of the FII investments in emerging markets, the portfolio flows to India have been less volatile when compared with that of many other emerging markets (Gordan and Gupta, 2003). FIIs by adopting a bottom-up approach seem to invest in top-quality, high growth, large cap stocks (Gordan and Gupta, 2003). Sytse et al. (2003) provide empirical evidence that foreign institutional investors in India, invest in large, liquid companies which enable them to exit their positions quickly at relatively lower cost and also that the foreign institutional owners have a larger impact than foreign corporate owners when performance is measured using stock market valuation criterion.
India is one of the fastest growing economies in South Asia, promising a growth of over 9 percent, second only to China, it would not be a surprise to see increased FII flows to India in the future. FIIs are now looking at the economy as a whole, with the macro-economic factors also playing their role in attracting foreign investors. Factors like a strong currency, key reforms in the banking, power and telecommunications sector, increased consumer spending and stable policies are expected to play a major role in attracting FIIs to India. The Securities Exchange Board of India (SEBI) along with the Institute of Chartered Accountants of India (ICAI) jointly monitor the markets and announces the regulatory measures thus making the Indian companies more transparent and more disciplined.
According to the April 2005 report on corporate governance by CLSA Emerging Markets, India ranks fourth with a score of 55.6 percent. Banaji (2000) emphasizes that the capital market reforms like improved market transparency, automation, dematerialization and regulations on reporting and disclosure standards were initiated because of the presence of the FIIs. But FII flows can be considered both as the cause and the effect of capital market reforms. The market reforms were initiated because of the presence of FIIs and this in turn has lead to increased flows.
The Government of India gave preferential treatment to FIIs till 1999-2000 by subjecting their long term capital gains to lower tax rate of 10 percent while the domestic investors had to pay higher long-term capital gains tax. The Indo-Mauritius Double Taxation Avoidance Convention 2000 (DTAC), exempts Mauritius-based entities from paying capital gains tax in India – including tax on income arising from the sale of shares. This gives an incentive for foreign investors to invest in Indian markets taking the Mauritius route. Consequently, we now see investments coming from Mauritius while there were none before 2000.
The country wise distribution of the FIIs registered in India, with majority of them coming from USA and UK. Chakrabarti (2002) and Rao et al. (1999) point out the fact that due to existing inter-linkages, the source of the FII investment might not be the country from where the institution operates. Nevertheless, the figure gives us an idea of the country wise distribution of the FIIs in India. So as to encourage long term investments in the Indian market, Budget 2003 proposed that investors who buy stocks of listed companies from March 1, 2003 be exempt from paying tax on the gains they make on their investments, provided they hold them for more than one year. With so much to benefit from, the FII investment in India is likely to increase in the future.
Regulation on FII
Investment by FII was jointly regulated by Securities and Exchange Board of India (SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the Reserve Bank of India through Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999. The promulgation of legislation pertaining to foreign investment by SEBI in 1995 market a watershed for FII flows to India; this led to a significant increase in the level of FII equity inflows in the pre-Asian crisis period. The SEBI FII Regulations and RBI policies are amended and modified from time to time in response to the gradual maturing of the Indian financial market and changes taking place in the global economic scenario.
In order to trade in India equity market, foreign corporation need to register with SEBI as Foreign Institutional Investors. Without registration they can invest, but cases require the approval from RBI. They are generally concentrated in secondary market. FII are allowed to invest in
a) Securities in primary and secondary market including shares, debentures and warrant of companies, unlisted, listed or to be the listed in India.
b) Units of mutual funds
c) Dated government securities
d) Derivative traded in a recognized stock market and
e) Commercial papers
FII can invest their own funds as well as invest on behalf of their over seas clients registered as such with SEBI. These client accounts that the FII manages are known as ‘sub accounts’. FII sub accounts include those foreign corporate, foreign individual, institution funds or portfolio established or incorporated out side India.
FII may issue deal in or hold off share derivative instrument such as participatory notes (PN). The entities that can subscribe to the PN are : a) Any entity incorporated in a jurisdiction that requires filing of constitutional or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction; b) Any entity that is regulated, authorized or supervised by a central bank, such as the Bank of England, or any other similar body provided that the entity must not only be authorized but also be regulated by the aforesaid regulatory bodies; c) Any entity that is regulated, authorized or supervised by a securities or futures commission, such as the Financial Services Authority or other securities or futures authority or commission in any country , state or territory ; d) Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange or other self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self- regulatory organizations are ultimately accountable to the respective securities financial market regulators.
Investment limit
As per the September 1992 policy permitted foreign institutional investment registered FII could individually invest in a maximum of 5% of a company’s issued capital and all FIIs together up to a maximum of 24%. From November 1996 are allowed to make 10 percentage investment in debt securities subject to the specific approval from SEBI as a separate category of FIIs or sub accounts as 100% debt fund investment such investment were of occurs subjected to the fund specific ceiling prescribed by SEBI and had to be within overall ceiling US 1.5 $ . The investment was however, restricted to the debt instrument of companies listed or to be listed on the stock exchanges. In 1997, the aggregate limit on investment by FIIs was allowed to be raised from 24% to 30% by then board of directors of individual companies by passing a resolution in their meeting and by special resolution to that effect in the company’s Board meeting. In June 1998 the 5% individual limit was raised to 10%.In March 2000, the ceiling on aggregate FII portfolio investment increased to 49%.This was subsequently raised to 49%, on March 8 2001, Finance minister announced February 28 2002 that foreign institutional investors can invest in accompany under the portfolio investment rout beyond 24% of the paid up capital of the company with the approval of the general body of the share holders by a special resolution.
Benefits and costs of FII investments
The terms of reference asking the Expert Group to consider how FII inflows can be
encouraged and examine the adequacy of the existing regulatory framework to adequately address the concern for reducing vulnerability to the flow of speculative capital do not include an examination of the desirability of encouraging FII inflows. Yet, for motivating the consideration of the policy options, it is useful to briefly summarize the benefits and costs for India of having FII investment. Given the Group’s mandate of encouraging FII flows, the available arguments that mitigate the costs have also been included under the relevant points.
Benefits
Reduced cost of equity capital
FII inflows augment the sources of funds in the Indian capital markets. In a commonsense way, the impact of FIIs upon the cost of equity capital may be visualized by asking what stock prices would be if there were no FIIs operating in India. FII investment reduces the required rate of return for equity, enhances stock prices, and fosters investment by Indian firms in the country.
Imparting stability to India’s Balance of Payments
For promoting growth in a developing country such as India, there is need to augment domestic investment, over and beyond domestic saving, through capital flows. The excess of domestic investment over domestic savings result in a current account deficit and this deficit is financed by capital flows in the balance of payments. Prior to 1991, debt flows and official development assistance dominated these capital flows. This mechanism of funding the current account deficit is widely believed to have played a role in the emergence of balance of payments difficulties in 1981 and 1991. Portfolio flows in the equity markets, and FDI, as opposed to debt-creating flows, are important as safer and more sustainable mechanisms for funding the current account deficit.
Knowledge flows
The activities of international institutional investors help strengthen Indian finance. FIIs advocate modern ideas in market design, promote innovation, development of sophisticated products such as financial derivatives, enhance competition in financial intermediation, and lead to spillovers of human capital by exposing Indian participants to modern financial techniques, and international best practices and systems.
Strengthening corporate governance
Domestic institutional and individual investors, used as they are to the ongoing practices of Indian corporates, often accept such practices, even when these do not measure up to the international benchmarks of best practices. FIIs, with their vast experience with modern corporate governance practices, are less tolerant of malpractice by corporate managers and owners (dominant shareholder). FII participation in domestic capital markets often lead to vigorous advocacy of sound corporate governance practices, improved efficiency and better shareholder value.
Improvements to market efficiency
A significant presence of FIIs in India can improve market efficiency through two channels. First, when adverse macroeconomic news, such as a bad monsoon, unsettles many domestic investors, it may be easier for a globally diversified portfolio manager to be more dispassionate about India’s prospects, and engage in stabilsing trades. Second, at the level of individual stocks and industries, FIIs may act as a channel through which knowledge and ideas about valuation of a firm or an industry can more rapidly propagate into India. For example, foreign investors were rapidly able to assess the potential of firms like Infosys, which are primarily export-oriented, applying valuation principles that prevailed outside India for software services companies.
Costs
Herding and positive feedback trading
There are concerns that foreign investors are chronically ill-informed about India, and this lack of sound information may generate herding (a large number of FIIs buying or selling together) and positive feedback trading (buying after positive returns, selling after negative returns). These kinds of behavior can exacerbate volatility, and push prices away from fair values. FIIs’ behavior in India, however, so far does not exhibit these patterns. Generally, contrary to ‘herding’, FIIs are seen to be involved in very large buying and selling at the same time. Gordon and Gupta (2003) find evidence against positive-feedback trading with FIIs buying after negative returns and vice versa.
BoP vulnerability
There are concerns that in an extreme event, there can be a massive flight of foreign capital out of India, triggering difficulties in the balance of payments front. India’s experience with FIIs so far, however, suggests that across episodes like the Pokhran blasts, or the 2001stock market scandal, no capital flight has taken place. A billion or more of US dollars of portfolio capital has never left India within the period of one month. When juxtaposed with India’s enormous current account and capital account flows, this suggests that there is little evidence of vulnerability so far.
Possibility of taking over companies
While FIIs are normally seen as pure portfolio investors, without interest in control, portfolio investors can occasionally behave like FDI investors, and seek control of companies that they have a substantial shareholding in. Such outcomes, however, may not be inconsistent with India’s quest for greater FDI. Furthermore, SEBI’s takeover code is in place, and has functioned fairly well, ensuring that all investors benefit equally in the event of a takeover.
Complexities of monetary management
A policymaker trying to design the ideal financial system has three objectives. The policy maker wants continuing national sovereignty in the pursuit of interest rate, inflation and exchange rate objectives; financial markets that are regulated, supervised and cushioned; and the benefits of global capital markets. Unfortunately, these three goals are incompatible. They form the “impossible trinity.” India’s openness to portfolio flows and FDI has effectively made the country’s capital account convertible for foreign institutions and investors. The problems of monetary management in general, and maintaining a tight exchange rate regime, reasonable interest rates and moderate inflation at the same time in particular, have come to the fore in recent times. The problem showed up in terms of very large foreign exchange reserve inflows requiring considerable sterilization operations by the RBI to maintain stable macroeconomic conditions. The Government had to introduce a Market Stabilization Scheme (MSS) from April1, 2004.
With the foreign exchange invested in highly liquid and safe foreign assets with low rates of return, and payment of a higher rate of interest on the treasury bills issued under MSS,
sterilization involves a cost. With a rapid rise in foreign exchange reserves and the need for having an MSS-based sterilization involving costs, questions have been raised about the desirability of encouraging more foreign exchange inflows in general and FII inflows in particular. While there is indeed the issue of timing the policy of encouragement appropriately to avoid the pitfalls of throwing the baby with the bath water, there can not be a turnaround from the avowed policy of gradual liberalization, including the cap ital account. All modern market economies have evolved policies to reconcile prudent monetary management with the benefits of a liberal capital account. There is no scope for any diffidence in India also moving in the same direction.
CONCLUSION
The liberalization policies had the desired expansionary effect and had either increased the mean level of FII inflows and/or the sensitivity of these flows to a change in BSE returns and /or the inertia of these flows. On the other hand, the restrictive measures aimed at achieving greater control over FII flows also did not show any significant negative impact on the net inflows, it had found that these policies mostly render FII investment sensitive to the domestic market returns and raise the inertia of the FII flows.
Foreign institutional investors had emerged as the most dominant investor group in the domestic stock market in India. Particularly, in the companies that constitute the Bombay stock market sensitivity index, their level of control was very high. Data on shareholding pattern showed that the FIIs were currently the most dominant non-promoter shareholder in most of the sensex companies and they also controlled more tradable shares of sensex companies than any other investor groups .The sensex, market capitalization of NSE, Turnover of BSE and NIFTY without market capitalizations were influenced by Foreign Institutional Investors. FIIs investment was not across the shares listed in the stock exchange but instead it was very concentrated on the top few company’s shares. Though there was a role by FII on Indian stock market. It was to be taken very cautiously because their influences were on the very few shares in the stock market, which influenced the indicator included in the study but which might not help the Indian economy to grow
The influence of FIIs on the movement of sensex became apparent after general election in India, during this period sensex experienced its worst single-day decline in its history and in the three month period between April to June 2004, it declined by about 17 percent. Moreover, this study also showed that even sharp changes in sensex did not necessarily indicted a significant alteration of actual shareholding pattern of different investor groups even in sensex companies. The activities of foreign institutional investors in emerging economies following the opening-up of the capital account were not simply positive for these countries but could also exert adverse effects. The reasons were derived from asymmetric distributions of information between local and foreign investors and between fund holders and mangers. Foreign institutional investors could be assumed to have relatively little information on specific developments in emerging markets so that ‘diluted information’ and ‘illusive competition’ could result. Their influence on these markets was likely to worsen the relative position of local investors which leads to ‘unbalanced diversification’. Moreover, due to their incentives they were likely to amplify occurring imbalances or even trigger financial shocks leading to what they call ‘obscure risks’ and ‘booming contagion’. The was long run relationship between net FII investment and sensex, FII investment did not respond the short-run changes or technical-position of the market and they were more driven by fundamentals, and FII investments did granger cause India stock market. The FIIs investments are highly concentrate in terms of their market value in very small number of companies. There seemed to be a clear distinction in the FIIs shareholding in nifty and non-nifty companies. There was a wide gap between the actual investments by FIIs and the investments allowed as per the cap.The gap in their investments existed both in nifty and non-nifty companies
REFERENCES
1 “Parthapratim pal” in 2006, he conducted study on “Foreign Portfolio Investment, Stock market and Economic Development: A case study of India”,
2 “Selen Serisoy Guerin” in 2006, conducted study on “The Role of Geography in Financial and Economic Integration: A comparative Analysis of foreign direct investment, Trade and Portfolio Investment Flows”
3 Keneeth A. Froot and Tarun Ramadorai in 2005, they conducted study on “The information content of international portfolio flows”,
4 A.Julia Priya, D. Lazar and Joseph Jeyapual in 2005, they conducted study on “Role of Foreign Institutional Investors on stock market development in India”,
5 Keneeth A. Froot and Tarun Ramadorai in 2005, they conducted study on “Currency Returns, Intrinsic value, and Institutional-Investor flows”,
6 Megumi Suto and Masashi Toshino in 2005, they conducted a study entitled as “Behavioral Biases of Japanese Institutional Investors: fund management and corporate governance”
7 “Suchismita Bose and Dipankor coondoo” in 2004, they conducted study on “The Impact of FII Regulation in India”,
8 Lakshmi sharma in 2004, he studied, “A Gap Analysis of FIIs Investment-An estimation of FIIs investment Avenues in Indian Equity Market.
9 Parthapratim pal in 2004 conducted study entitled as “Recent volatility in stock markets in India and foreign institutional investors.
10 “Michael Frenkel and Lukas Menkhoff” in 2004, they conducted study on “Are Foreign Institutional Investor Good for Emerging Markets?”,
11 “Brian Bushee” in 2004, he conducted study on “Identifying and attracting the “right” investors: evidence on the behavior of Institutional investors”,
12 “Christophe faugere and Hany A. Shaby in 2003, they analyzed study on “Volatility and Institutional Investor holdings in a declining market: A study of NASDAQ during the year 2000”.
13 Gayathri Devi .R in 2003, she conducted study on “Causal Relationship between FIIs and Stock Market: A critical study”
14 “sandhya Ananthanaryanan, Chandrasekhar krishnamurthi and Nilajan Sen in 2003 conducted study as “Foreign institutional Investors and Security Returns: Evidence from Indian Stock Exchanges”,
15 Stuart L. Gillan and Laura T. Starks in 2003, they conducted study as “corporate Governance, corporate ownership, and the Role of Institutional Investors: A Global perspective”,
16 “Vihang Errunza” in 2001, he conducted study entitled as “foreign portfolio equity investments, financial liberalization and economic development
17 J.S. Pasricha and Umesh.C.Singh in 2001, tried to analyze the impact of FIIs investment on Indian capital market.
18 S.S.S. Kumar in 2001, attempted in his study to find the effect of FIIs on the Indian stock market.
19 “Rajesh chakrabarti” in 2000 conducted study on “FII Flows to India: Nature and Causes”
20 C.H. Rajeswar in 2000, he conducted study entitled “Foreign Institutional Investors – A new force of support and discipline”
21 As per K. Seethapathi and V. Subbulakshmi study entitled “Foreign investment: Need for focus”,
22 Ila Patnik and Deepa Vasudevan in 1998, their study entitled “foreign portfolio investment to India
23 “Rene M. Stulz” in 1999, he analyzed study on “international portfolio flows and security markets”.
24 Yung Chul Park and Chi-Young Song, they conducted study on “Institutional Investors, Trade linkage, Macroeconomic similarities and contagious Thai crisis
In order to invest wisely, you need to have a suitable investment plan that will ensure the appropriate amount of growth for you. Your investments will also need to be safe and easy to manage.
Developing an Investment Plan:
The first step in developing an investment plan is to identify what type of an investor you are. Investor types are often determined by their stages in life. Here is a guide:
- Single person under 40 years old. Focus: Long-term investments, medium to high risk. Emphasis: capital gain, compound growth.
- Two-income married couple, no children, aged 20 to 40 years. Focus: Long-term investments, medium to high risk. Emphasis: capital gain, compound growth.
- One-income family, young children, aged 20 to 40 years. Focus: Long-term investments, low to medium risk. Emphasis: compound growth.
- Single person, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
- Married couple with adolescent or independent children, aged 40 to 60 years. Focus: Medium-term investments, medium risk. Emphasis: capital gain, compound growth.
- All investors, aged 60 and over. Focus: Short to medium-term investments, low risk. Emphasis: Income.
The following are examples of investment portfolio mixes for the various types of investors.
Low Risk Investments:
Low risk investments are predominately cash, fixed interest and superannuation. This has the lowest risk of all investments but has also the lowest return – in today’s market, approximately 3% to 6% per annum. Fixed interest includes cash, cash management trusts and bonds. They return approximately 5% to 10% per annum, sometimes as high as 15% if you invest in global bonds in good markets.
Superannuation returns and risk profiles vary from institution to institution, however the best and safest usually return on average 10% per annum.
Medium Risk Investments:
Medium risk investments include property and non-speculative shares. Diversified funds, which invest in a range of asset groups, are also considered to have medium risk profiles. Average returns from these types of investments will range from 8% to 15% per annum.
I also like to include the broad spectrum of mutual funds, to be discussed later, in the range of medium risk investments. Some can return up to 25% and more depending on the fund type and managers.
High Risk Investments:
High risk investments include all speculative shares, futures and any other type of investment that is purely speculative by nature. Because with these types of investments we are betting on whether the price will go up, or sometimes down, I often classify this as a form of gambling. Accordingly, the returns are unlimited but so is the ability to lose the total money invested.
The basic rule for investing in highly speculative stock is to build in ‘sell-out’ thresholds, three up and three down. For example, if you buy a stock at .00 per share, your sell-out thresholds might be:
Sell out threshold 3 .00
Sell out threshold 2 .00
Sell out threshold 1 .50
Buy .00
Sell out threshold 1 .50
Sell-out threshold 2 .00
Sell-out threshold 3 .00
Each time your stock reaches one of the threshold levels, you sell a third of your stock.
If the stock starts to rise, you sell a third at .50 and then another third at .00 and so forth. If the stock starts to fall, you also sell a third at .50, then another third at .00 and the final third at .00. In this way, you will never lose all your money, however you have also put a cap on the total profit you will make on the investment. This I have found to be the best and safest method for investing in speculative shares. In 1987, my husband and I were saved from the severe losses of the Wall Street crash because we were well and truly out of the market by taking our profits beforehand. Like all systems, this strategy will only work as long as you obey the rules and do not get too greedy.
Mutual Funds:
Mutual Funds are a selection of investments that are professionally managed by a financial institution or organization. These institutions have a wide range of specialists, researchers and advisor’s who devote their time to ensuring that the fund invests in the best companies and assets.
As well as the advantage of having experts manage your investments, managed funds also give you the ability to invest in a wide range of shares, property or fixed interest markets, either locally or internationally, for as small an outlay as ,000. In the latter case, they also require a savings plan where you agree to deposit additional capital of a minimum 0.00 per month.
Because managed funds cover the whole spectrum of investment risk profiles, you can easily cover your preferred investment portfolio, as described above, by investing in several different funds.
Putting Together Your Investment Program:
After you have identified your investment type, you need to either seek a good financial advisor or devote your own time in researching investment options.
Shares have traditionally outperformed other asset groups over time. However, share markets can widely fluctuate in the short term, so any entry into the market should always be done with a long-term view of up to 10 years. Even the best managed share funds can fall if the stock market crashes or enters a severe downward cycle. As long as you ensure that you are with a reputable fund with good managers and are willing to ride the waves, your investment will do well in the long-term. If you are in the short-term, low risk category then your investments should be in the safer, more stable areas with lower returns.
Rules for Investing:
Investing may seem daunting for a lot of people. Maybe you have tried it once and failed, or maybe you are simply frightened of losing your money.
To avoid losing any capital, you simply need to be aware of the main pitfalls and always avoid them. The simple, reliable rules for investing are:
1. Have a plan. Always ensure that you or your financial advisor draws up an appropriate investment strategy for you that incorporates your risk profile, timeframes and financial goals. As foolish as it seems, many people plunge headfirst into investing without thoroughly working through these fundamental issues.
2. Don’t put all your eggs in one basket. Obvious advice, but many people fail to follow it. Many people think that they are on the right financial track by paying off the mortgage on their family home and then buying another property for investment purposes. Think about it! You have put all of your financial eggs in one asset basket – property. What happens if the property market collapses? Despite common thinking that this is a safe way to invest, the outcome is very risky. You have invested all of your well-earned money into only one area.
3. Build in appropriate timeframes. There is an old saying, “When the tea lady starts to invest in the stock market, it’s time to get out.” What this means is, when the share market is so high that everyone starts to clamber on board, it has probably reached its peak. There are two ways of successful investment timing. The first is to always pick the low-end of the market to buy and the high-end of the market to sell. This is extremely hard to do. Even the best-informed experts have trouble. The second way is to choose good investments and stay with them over the long-term (say 10 years or more) and ride the waves of the market. For safe, easy investing, choose the second method. Do not buy into the top-end of the market and sell once it starts to fall. You will definitely lose money this way.
4. Avoid high-risk investments. These include risky business ventures, highly speculative stock, tax avoidance schemes or too-good-to-be-true propositions that promise unusually high returns.
5. Avoid borrowing for your investments. Although some financial advisors advocate ‘gearing your investments’, this can be fraught with danger. Gearing means to borrow. If borrowing for investments takes you over your 40% fixed costs margin, you will be cutting it too fine, particularly if you lose your current income level.
6. Stay with the traditional and known. The best and surest investments are fixed interest, property and shares. Although all asset classes will fluctuate over time.
Work out the optimum mix for your investment profile, have a safe plan to work with and you can’t go wrong.
Addressing to the Indian Economic Summit’s session, on Tuesday, the 18th of Nov. 2008, the State Minister of Industry, Mr. Ashwini Kumar declared that Rs 500 billion would be invested by the Central Government with public-private partnership in infrastructure pertaining projects. According to him this investment would lure demand to boost economic growth. In the prevailing time when Indian economy is under threat of the entrance of world depression 2008, such type of a big dose of investment in infrastructure is desirable to barricade against the entering depression. But, the private partnership may hamper the way of receiving the desired results.
INDUCED INVESTMENT
When talking about investment, it is categorized as the induced investment and the autonomous investment. Induced investment is that investment which is induced by profit motive in a free enterprise capitalist economy. It produces commodities and thereby it can be termed as ‘directly productive investment’. Establishment of a productive unit which produces consumption or capital goods comes under the category of the directly productive investment. It changes with a change in (national) income that is why it is also called income elastic investment. Induced investment is incurred especially to produce larger output.
AUTONOMOUS INVESTMENT
On the other hand, the autonomous investment is the investment which is not induced by profit motive. It is not sensitive to changes in income. It is also known as public investment and is incurred in direct response to inventions and much of the long range investment which is only expected to pay for itself over a long period. Autonomous investment is generally associated with such factors as introduction of new production techniques, new products, development of new resources or growth of population. Autonomous investment generates favorable environment for production. An autonomous investment is never profit motivated and that is why it is always suggested to be undertaken by government instead of private investors. Autonomous investment does not directly produce goods. It creates external economies whereby the cost of production sustained by the producing firms is lowered. Thus, their profit is increased whereby the firms are induced to produce more. In this way the autonomous investment indirectly helps to increase production. Moreover, autonomous investment generates general utility services to the general public which they can’t afford to purchase.
DUAL INVESTMENT
Autonomous investment is autonomous only to the extent it is free of profit. If this investment is made by private investors they can’t help earning profit. Therefore, the producers will have to pay for the external economies and the general public will have either to go without the generated general utility services or will be exploited for they will have to pay high to avail the services. Thus, in a developing economy where cost of production is high, general mass is poor and markets are undeveloped the autonomous investment will lose its importance if given in private hands. In this way, autonomous investment is made of two different portions. One is that which can never be given in private hands irrespective of the fact whether the economy is developed or developing. Therefore, this portion of autonomous investment is a true autonomous investment. The investment incurred in the projects pertaining to national security, law and order maintenance, international relations, world peace, general governance, epidemics eradication, general health, poverty alleviation, public welfare etc. comes under this type of autonomous investment. The remaining portion of autonomous investment is that which can be (and is generally) given in private hands in a developed economy. In a developed economy sufficiently a high level of income is achieved, the distribution of income is almost equal, market is extended and developed, general poverty stands alleviated and cost of production is quite low on account of capital based modern technology. Hence, the producers can easily pay for external economies and people can pay for many of the general utility services. Therefore, in a developed economy, the portion of autonomous investment to be incurred in the projects like road transport, construction of highways, construction of bridges, power and electricity, civil aviation, sea transport, education etc. can be (and generally is) given in private hands. This portion of autonomous investment, being however similar to the previous one (above said true autonomous investment) in a developing economy, but thus becomes profit motivated and is converted into induced investment in a developed economy. In other words, this portion behaves as autonomous investment in a developing economy but is converted to and starts behaving as induced investment in a developed economy. Therefore, this portion of autonomous investment can be regarded as the convertible investment or the dual investment.
CONCLUSI ON
The above concludes that investment can be categorized as the autonomous investment, the dual investment and the induced investment. The autonomous investment should be exclusively incurred by the government in both the developed and the developing economies and, similarly, the induced investment should be incurred by private investors in both the economies. As regards to the dual investment, it should be incurred by government in a developing economy and by private investors in a developed economy. However, a partnership of government and private investors may be desirable in case of the dual investment if the economy has entered into the stage nearest to the full development. It is similar to the case of the partnership of government and private investors in induced investment in early stages of development in a developing economy. The Indian economy seems to have travelled though a long on the development path but it has not so far achieved such a high stage of development which may allow private hands to participate in the dual investment. General poverty still persists there, income distribution is highly unequal, technology is not fully capital based, cost of production is high, and much more. Therefore, the dual investment in Indian economy still needs to be incurred exclusively by the government. Therefore, the partnership of government and private investors in case of the declared investment worth Rs 500 billion, referred to in the beginning hereof, is not desirable. The loss to the producers and the poor general mass on account of so far brought about privatization of the past is not a latent fact. All the same, if the government somehow feels itself helpless to desist from accepting the partnership, it must not at all allow it beyond the dual investment. In more clear words, the Government of India must keep the (true) autonomous investment fully intact from the private partnership and may allow the partnership in the dual investment but only to a limited extent if the partnership can not be fully abandoned.
In practice, it is essential to take an integrated approach to clients’ wealth management and investment supervision activities. The integration is based upon expressly recognizing the three major components of this process: wealth planning, investment supervision, and portfolio accounting and reporting. Each component is now examined in turn.
I The Investment Process: Wealth Planning
Although often a convenient starting point for any investment relationship, the planning phase is really a continuous and dynamic process that requires ongoing review and refinement as client needs and objectives change. It is during this phase that investment supervisors assist their clients in a determination of client goals, objectives, and constraints. The importance of this process should not be underestimated. Proper planning develops the inputs upon which all other portfolio management decisions will rely.
Specifically, investment supervisors must be interested in learning about their client’s views and preferences regarding the risk to be taken. These include determining the degree of tolerance for portfolio drawdown (peak-to-trough intervals of loss) and conditional value-at-risk (point-estimate maximal loss).
Other metrics of interest often include the degree of aversion to skew (exposure to directional market bias) and kurtosis (exposure to extreme events). The purpose of these inquiries is to closely discern the degree of client risk tolerance (where risk manifests itself in multiple dimensions).
This concentrated focus on the specific articulation of risk tolerance differentiates “best practice” approaches and is a critical input to the portfolio management and supervision process outlined below.
Effective investment supervisors also assess the organization of their client’s investment-level entities in order to determine how such goals and objectives are shared across different constituents. Other planning activities, including tax optimization (and related entity allocations), income and expense modeling, and asset and liability matching must also be conducted in order to more fully appreciate the requirements of the investment portfolio.
The initial goal of this process is to help clients formulate a comprehensive investment policy statement, including the articulation of risk tolerance, which will ultimately guide the asset allocation and portfolio selection decisions.
II The Investment Process: Portfolio Management and Supervision
Once an investment policy statement has been articulated, it must be translated into a consistent and actionable portfolio management process. Ultimately, a diversified portfolio of investments in the “traditional” (e.g., cash, fixed income, equities), and “alternative” (e.g., hedge funds, private equity, real estate) asset classes is built through a deep and intensive due diligence process.
Numerous academic and empirical studies confirm the philosophy that the asset allocation decision is one of the primary determinants of portfolio return variance—both across time and across investment managers (For example, Brinson, et. al., 1991 and Ibbotson and Kaplan, 2000). Security selection and market timing, though also influential, are generally secondary considerations that have marginal contributions relative to the overall asset allocation.
Effective asset allocation optimizes the power of diversification and ensures that an investment portfolio maximizes the return generated for a given level of risk. As a result, getting the “top-down” decision correct is of critical importance.
Unfortunately, applications of the technique by many consultants, investment managers, and brokers often fail to account for varying degrees of market efficiency, skew (bias or event risk), and kurtosis (extreme events) often present among different asset classes. Relying solely upon returns and standard deviations can lead to sub-optimal conclusions, especially since neither vector is particularly robust with respect to time. In addition, the popularly used linear mean-variance optimization models tend to produce results that produce inherently unstable and grossly imbalanced portfolios that are highly sensitive to estimation error (Michaud, 1989).
Such narrow reliance among investment consultants and money managers is not uncommon; however, it often leads to an overestimation of expected return or an underestimation of risk and is the root cause of many forms of investor disappointment. It is also a causal factor in many of the very notable fund “blow ups” that have been witnessed in recent times.
An “Efficient Portfolio Management (EPM)” Methodology
The EPM methodology explicitly addresses such shortcomings by taking on the issue of risk directly. The goals of the EPM are to:
Explicitly determine how much risk to take and what forms of such risk are acceptable; and
Ensure that the portfolio is maximally compensated for taking on those risks.
Under the EPM framework, investment exposure (the sources of risks and, correspondingly, returns) comes in two forms, namely: systematic and nonsystematic. The EPM process is a synthesis of strategic asset allocation (for the purposes of determining systematic allocations) and active risk budgeting (for the purposes of determining nonsystematic allocations).
A brief discussion of each follows below.
Allocations to Systematic Investment Assets
Systematic investment assets typically relate to broad, well-diversified market exposures (also generically referred to as “beta”). In order to determine the optimal systematic exposure to various asset classes, EPM relies upon the process of strategic asset allocation.
The process begins by identifying the investment universe of candidate assets. These may include, for instance, the following classes (and their related subsets): cash, fixed income, equities, commodities, and real estate. In order to establish the initial (neutral) portfolio weights, EPM draws upon the general findings of the Capital Asset Pricing Model (CAPM), as described by Sharpe (1964) and Lintner (1965).
According to the CAPM equilibrium, the optimal asset class weights are directly related to the relative aggregate market capitalizations of each such asset class. That is, in equilibrium, the portfolio weights for the “market portfolio” in aggregate also become the optimal weights for individual portfolios. EPM refers to these weights as the “Equilibrium Portfolio,” and it serves as the initial “center of gravity” for the strategic asset allocation process.
As prescribed by Black and Litterman (1992), EPM next “reverse-optimizes” the Equilibrium Portfolio to ascertain its implied views of asset class risk premiums. Stated differently, if one believes that the Equilibrium Portfolio is in fact the optimal portfolio (as suggested by CAPM), what must the views on relative asset class risk premiums be in order to satisfy mean-variance optimality conditions?
The analysis of such implied views is analogous to the more popular application of using implied volatility to evaluate options pricing. In that approach, it is assumed that the market price represents both known and estimated variables that affect valuation. However, given the difficulty of objectively estimating expected volatility, many investors consequently take the market price as a given and instead determine what it must imply about expected volatility. Then, investors can make individual judgments about whether this implied volatility is in fact reasonable.
Similarly, investment supervisors can compare the implied views of the Equilibrium Portfolio with their own views of relative asset class premiums. Importantly, under this approach, it is not necessary for investment supervisors to make forecasts of the absolute returns of every asset class; they need only make relative risk premium assessments.
Where differences emerge between investment supervisor (or client) views and the market-implied views, EPM combines them through a conditional, Bayesian-weighted adjustment in order to capture the corresponding degree-of-confidence in each view. The adjustment may also affect other asset classes, as the process attempts to maintain the consistency of the covariance relationships among such classes. The resulting portfolio weights form a “passive risk portfolio.” This approach tends to minimize the forecast errors and unrealistic portfolio tilts that often plague standard mean-variance optimization.
Since the passive risk portfolio primarily addresses broad market, systematic (beta) exposure, its implementation is best conducted through low-cost, tax-efficient passive investment instruments. Such composition for broad market systematic exposure is consistent not only with CAPM, but also with the general findings of Fama (1970) and Brinson, et. al. (1991).
Allocations to Nonsystematic Investment Assets
Nonsystematic investment assets generally relate to idiosyncratic exposures (also referred to as “alpha”) that are not correlated to the systematic universe. In equilibrium, and relying upon the principles of diversification, such idiosyncratic exposure should not be expected to produce excess return. Therefore, expected alpha return in equilibrium is equal to zero.
In reality, however, the markets are often not in a state of CAPM equilibrium, especially in the short to medium term. As a result, it is not unusual to find tactical sources of alpha that do in fact exhibit positive expected excess returns.
Active investment management is the process of identifying and capturing this positive alpha. In order to determine the optimal exposure to these activities from a portfolio management perspective, EPM relies upon a disciplined methodology of budgeting for such “active risks.” This risk budgeting process operates on the principle that active risks should be assumed only where the marginal contributions to portfolio return from such activities exceed the marginal contributions to portfolio risk.
Once again, the process begins by identifying the investment universe (in this case, of nonsystematic assets). This universe typically includes certain hedge funds, private equity, and real estate investments. However, it should not be construed that the nonsystematic universe consists solely of such “alternative investments.” It can also include actively managed assets in the more traditional classes (equities, fixed income, and others).
In those cases where an asset has elements of both systematic and nonsystematic exposure (as is sometimes the case for assets in the traditional classes), the alpha and beta components must be separated. This decomposition can be accomplished by evaluating the distribution of the investment’s variance from its systematic benchmark. In this context, the investment’s alpha is found by computing the mean of the distribution, while the “tracking error” is found by computing the standard deviation.
The active risk budgeting process now determines the most appropriate portfolio of active risks that, when combined with the passive risk portfolio, meets the client’s overall macro goals and objectives—as expressly defined in the earlier wealth planning activity.
The methodology begins with a series of simulation and optimization studies to determine categories of active allocations (conditional upon an allocation to the passive risk portfolio) that can most efficiently meet the client’s objectives. The optimization program explicitly recognizes each client’s individualized level of risk aversion by first satisfying client constraints related to portfolio variance, acceptable drawdown, and event risk and then determining which remaining combinations of assets maximize return.
This approach is unique in that it contains an explicit focus on the various degrees of each component of risk that can affect the total portfolio, including the higher order moments of the expected distribution. Careful consideration of such risks can provide far greater clarity into the investment process, help optimize the returns achieved in exchange for the risks knowingly taken, inform a strategy mix that might most capably protect from a variety of systematic shocks, and ultimately lead to results that should more closely reflect the original intent and objectives of the client.
For practical purposes, EPM classifies assets into seven “active risk portfolios.” Each portfolio consists of managers and strategies that share specific active risk signatures and exhibit stable covariance properties. These portfolios are categorized as follows: “Long Equities,” “Long Fixed Income,” “Long-Short,” “Tactical Trading,” “Event Driven,” “Relative Value,” and “Private Equity.”
In determining which assets are eligible for inclusion into EPM’s active risk portfolios, investment supervisors engage in a deep and intensive process of manager and investment diligence. In this evaluation, two considerations typically emerge. First, the key evaluation criteria are both quantitative and qualitative. Second, building a portfolio of active assets involves more than simply finding the managers and investments that produce the best returns in isolation. It also requires understanding how they might behave in different economic environments and how they might correlate with one another—and with the passive risk portfolio—particularly during periods of high market volatility. Such analyses are critical, as correlation map surfaces can change dramatically as volatility, liquidity, and other “market stress” factors materialize.
The resulting active risk portfolios are then evaluated in terms of their marginal contribution to the risk (volatility, skew, and kurtosis [VSK]) of the passive risk portfolio. As stated before, the object of this analysis is to determine which combinations of the passive risk portfolio and the individual active risk portfolios produce the risk signature that best satisfies the client’s original risk constraints and investment objectives.
Once such a combination has been identified, investment supervisors once again utilize reverse optimization to determine what the implied views (on the expected excess returns of the active risk portfolios) must be in order to satisfy mean-variance skew-kurtosis (M-VSK) optimality conditions.
Investment supervisors again compare their proprietary views of expected excess returns in one or multiple active risk portfolios to the implied views from M-VSK. Any variance is treated in similar fashion to the Black-Litterman approach utilized in the construction of the passive risk portfolio. The resulting portfolio becomes the client’s global investment portfolio.
A Dynamic Process
Once the global investment portfolio is established, continuous monitoring and supervision of the portfolio must be conducted on an ongoing basis to confirm the variance, covariance, and other risk characteristics of the underlying investments. Such supervision includes performance attribution (relative to absolute and style benchmarks as well as relevant peer groups), risk control and monitoring (tests of manager adherence to active investment mandates, style drift compliance, short and long-term volatility) and ongoing personal reviews with investment managers (including regular communications, verification of manager commitment to client goals and objectives, and custody and reporting).
Critical to the process, however, is the periodic validation of the original risk constraints and investment objectives set forth in the wealth planning activity as well as the continuous supervision of the portfolio to ensure that its portfolio-level risk signature does not materially deviate from such specifications. Under the EPM approach, there is no distinction between the investment supervision process and the risk management process; they are one and the same by design.
Over time, changes to the investment portfolio can arise from three different sources:
Changes in views:
Investment supervisor proprietary and market-implied views can and do change. Obviously, the results of the strategic asset allocation will change as its inputs change.
Changes in active risk attribution:
The constituents of the active risk portfolio may change due to style drift, lack of continuing edge, lack of attractiveness in a portfolio-level context, or other diligence-related reasons.
Changes in client goals and objectives:
Client preferences and constraints related to risk aversion, tax regime, income requirements, time horizon, and other considerations may dictate a change from a planning perspective.
As a result, client portfolio management is a dynamic process that is responsive to both external (market and economic) as well as internal (client) influences.
EPM: The Benefits of Synthesis
The EPM approach is intended to engineer a portfolio that is capable of obtaining the “biggest bang for the buck,” by carefully defining the clients’ limited tolerance for risk and then allocating that scarce resource to those areas where it can be most efficiently rewarded.
As noted, EPM accomplishes this objective by explicitly segmenting the universe of investment assets by their risk characteristics; in particular, based upon of the level of systematic (beta) or nonsystematic (alpha) exposure each asset exhibits. In making this distinction, the most appropriate techniques drawn from strategic asset allocation and active risk budgeting can be applied to determine what levels of exposure and combinations of assets best produce the desired portfolio characteristics.
EPM is designed to directly address a variety of issues that are often poorly addressed in the typical applications of asset allocation and portfolio management. Consequently, the process actively: considers the relative market efficiency of various asset classes, includes the higher order moments of asset class distributions in evaluating risk, and incorporates non-traditional, “alternative” asset classes.
Portfolios resulting from the EPM process tend to exhibit the following characteristics (versus other more traditional methods):
Greater protection from the risks that clients choose to avoid and greater control over the risks that clients choose to take.
Higher degrees of efficiency in the compensation for risks that are taken
More rigorous standards for the acceptance of active risk
Higher quality diversification across asset classes, managers, and strategies, based upon specific and tangible opportunities for incremental risk-adjusted return
Lower sensitivity to estimation errors in asset class and strategy return forecasts
Taken together, these benefits lead to intelligent portfolio management solutions capable of more tightly meeting each client’s individual goals and objectives.
III The Investment Process: Tax Accounting and Portfolio Reporting
Although the accounting and reporting function is often overlooked or treated as an afterthought, the effective utilization of accounting reports can be a powerful tool in assessing and diagnosing portfolio performance.
Reports can come from a variety of sources, including: investment manager statements, reports from prime brokers and custodians, and valuation audits by independent accountants. The investment supervisor’s role is to provide an additional level of independence and produce analytic diagnostics that can be used to make effective investment decisions.
In this regard, investment supervisors must maintain an extensive, redundant database of transactions and tax-lot accounting when this information is obtainable from various custodians. The maintenance of an independent database allows us to analyze investments at the overall client family level, entity-level, and other customizable sub-groups of interest. Investment supervisors can also conduct broad tests of concentration and diversification across various managers and custodians, track cash inflows and outflows to ensure proper deployment, and test the veracity of month-end and quarter-end statements produced by the investment managers.
The reporting function is also useful for aggregating data for the purpose of performance measurement. Producing uniform performance and position reports allows fair comparison of different investment managers, regardless of their own internal performance reporting systems, which may vary by manager. Such reports also enables investment supervision analysts to conduct detailed style regression and returns-based attribution analyses, tools that are particularly invaluable in evaluating managers who may not share granular information on their underlying investments.
Finally, tax reports should be analyzed on an ongoing basis to identify and account for realized and unrealized gains/losses (by entity and by account), income and expense accruals (including amortization and accretion schedules), and potential “cross-manager” wash-sale violations, and for the identification of other tax-minimization strategies.
III Concluding Remarks
The finance and investment literature is full of a variety of (sometimes conflicting) approaches to the proper and effective supervision of investment portfolios for clients. All too often, academic treatments of the subject fail to recognize the realities of the investment world. Investment supervisors are in the challenging position of having to apply otherwise “elegant theories” to the typically messy “real world.”
In so doing, however, they must properly blend the best ideas from financial economics with the realities and opportunities that present themselves. As such, no single prescription can work all the time and, indeed, any suggestions must continuously evolve to adapt to the constantly changing nature of the capital markets.
The most important priority for an investment supervisor is to design and build an investment portfolio that best meets client goals and objectives. In the end whatever methodology best satisfies this priority in a way that optimizes performance, cost, and tax efficiencies—and is rooted in sound financial economics and not arbitrary logic—is bound to be a viable approach.
Investment corporations, also known as investment funds, are institutions of collective investment. They gather capital from the public to reinvest it collectively and diversely, therefore the investment risks are lower and the returns to the investors are in theory going to be enhanced. It is a Panama vehicle to raise third party investment funds.
Definition – An investment corporation in Panama is any judicial person (corporation or foundation), trust or contractual agreement that, through the issuance and sale of its own participation quotas, is dedicated to the business of obtaining monies from the investment public, through one time payments or periodical payments, with the object of investing and negotiating, either directly or through investment managers or administrators, investments in securities, bonds, options, futures, metals, real estate or any other recognized investment medium. The Panama investment corporations are entities that gather funds from the public to reinvest them collectively. The intent is that they can offer lower risks and costs of administration (reduced trading commissions for instance) and a professional capability of investment analysis, administration, follow up and financial control of the investment. Investment Corporations Conducting a Public Offering in Panama
It is legally understood that a public offering of participation quotas of an investment corporation is taking place when it or its investment administrator, or another entity on behalf of it, offers securities through marketing and promotion activities in the territory of the Republic of Panama. These marketing and promotional activities are any form of communication targeting potential investors with the object of promoting the subscription or obtaining participation quotas (investments) in an investment corporation vehicle, and will be considered to be in the territory of the Republic of Panama as long as it is addressed to people domiciled in Panama. This is probably not of interest to many of you since you are reading this in English not Spanish. It is useful to read through this article to see how the law operates and how one can be excluded from registration which will probably be of great interest to you.
An investment corporation is considered to be administered in or from Panama when one of the following applies:
1. That the investment corporation designates an investment administrator in the Republic of Panama. 2. That the principal domicile of the investment corporation is located in the Republic of Panama, or the prospect or any other advertisement material indicates that it is located in Panama. 3. That the investment corporation designates a custodian in the Republic of Panama 4. That the directors necessary to adopt a resolution of the Board of Directors of the investment corporation have their domicile in Panama.
Investment Corporations Requiring Licensure with the Panama Securities Commission
1. Simple Investment Corporations: Only have one type of participation quotas and one investment portfolio. 2. Umbrella Investment Corporations: Have multiple series of participation quotas with different investment portfolios. 3. Multiple Class Investment Corporations: Have multiple series of participation quotas, each one of those series with different terms regarding the payment of commissions and subscription fees, redemptions and administrative fees. 4. Principal Fund Feed by other Funds: This is best described as an investment corporation that invests in other investment corporations.
Requirements for the Registration of an Investment Corporation in Panama
1. Name and incorporation information. 2. Legal and commercial domicile of the corporation. 3. Designation of an investment administrator who will have to have a License issued by the National Securities Commission. When the investment corporation will be administered for itself, the documentation regarding the person who will be the principal executive and the compliance officer must be submitted. 4. Designation of a custodian for the investment corporation. 5. Identification of the type of fund. 6. Authorized share capital and minimum capital to initiate the operation. 7. Amount of participation quotas required to be registered for public offering and value of the initial offer.
Documents to be Submitted with the Application
1. Authenticated copy of the articles of incorporation, which must establish that the corporation will exclusively operate as an investment corporation and the accounting books will be kept in Panama. Must be in Spanish but a certified English translation can be obtained. 2. Copy of passport or Panama Cedulla of Directors. 3. Audited financial statements or audited initial balance. 4. Curriculum Vitae of Directors and Dignitaries and Legal Representative. 5. Informative prospect of the investment corporation. 6. Signed contract with the investment administrator and signed contract with the custodian. 7. Draft Code of Conduct for those investment corporations that will assume their own administration and representation. 8. Advertisement and other publicity material that will be used by the investment corporation (everything that will be used even once). 9. Draft of the investment contract to be subscribed to every potential investor. 10. Draft Minutes of the Board of Directors establishing all terms and conditions related to the operation of the investment corporation.
This type of investment corporations are not required to be registered in the Securities Commission and therefore are not subject to the rules that applies to registered investment corporations found above.
The Commission can sanction any representation or declaration that the investment corporation does, stating that it is registered in the Commission.
It is considered to be a private investment corporations when it is administered in the Republic of Panama or from the Republic of Panama, and has participation quotas that are not offered in the Republic of Panama and that its Articles of Incorporation includes one of the following two dispositions:
1. One disposition that limits the amount of effective owners of its participation quotas to 50, or that stipulated firmly that the offers for the investment will be done through private communications only and not through public communication such as web sites, newsletters, print or media ads etc. 2. A disposition that establishes that its participation quotas will only be offered to qualified investors in minimal initial investment amounts of 0,000.
The private investment corporations must designate a representative in Panama, who can be an licensed investment administrator, a securities house, a licensed investment advisor, a licensed Bank, an Accountant or a Lawyer, who must be able to dully represent the investment corporation before the Securities Commission at any time.
They must provide copy of the Articles of Incorporation, the Offering Prospectus, Audited Financial Statements, name and address of Directors. Yearly audited statements must be submitted. Self-Administered Investment
When the investment corporation decides not to use an outside investment administrator, it must comply with the following:
1. The investment corporation must have at least 3 members of the Board of Directors, all of whom must have renowned business and professional honorability. They must be able to demonstrate that they are reputable well-regarded business professionals. This is generally established with reference letters, education and professional licensures. 2. At least one third of the members of the Board of Directors must have adequate knowledge and experience in fields related to securities market and financial market in general. This would be established through professional licenses, work experience, references and education. 3. Have a complete administrative and accounting organization, in addition to technical (Information Technology, Legal) and human resources for the administration of the investment corporation. They must be able to clearly demonstrate that all the pieces are in place to be able to competently and profitably administer the investment. 4. An internal code of conduct. 5. Designate a compliance officer that can ascertain all investment and due diligence requirements are being complied with.
This document was basically translated from Spanish Legalese and putting it into English Legalese which if you have ever tried it you would know it is not easy so do feel free to ask questions.
Global Forum VIII on International Investment Image by OECD
7-8/12/2009 – Left to right: Dr. Ibrahim Assane Mayaki, Chief Executive Officer, New Partnership for Africa’s Development (NEPAD) with Ambassador HE Konji Sebati (chair), South Africa, at the GFII Special Session on recent NEPAD initiatives, including the NEPAD-OECD Africa Investment Initiative. Global Forum VIII on International Investment. Paris, France.
10 Questions to ask before investing online or elsewhere
We are faced with so many investment choices today, it Is sometimes difficult to decide which investment will best serve our purpose; as well as which investments are the safest, while giving us the best bang for our buck. While not specifically indicating particular investments, I want to
give you the appropriate guidelines in determining which investment is best suited for you.
Are you happy with the current 1% – 2% a year that most financial institutions are offering? Or does a higher rate of return appeal to you? There are investment opportunities that do offer a higher rate of return with limited risk. However, there are certain guidelines you must follow to determine which of these investments are best suited for your pocketbook and your personality.
As technology has advanced today, so have new investment opportunities, with higher returns; some, obviously safer than others. While the Forex market is now available to the average investor, it is truly a high risk arena and not appropriate for most. Other avenues of investing, which have not previously been available to the average investor, offer a handsome return, with a low risk. How do you find these investments? By doing your due diligence and following these guidelines I’ve outlined below.
10 Frequently asked questions:
1. How much money do I need to start investing online or elsewhere?
2. What are the costs or fees associated with the particular investment?
3. Once I’ve earned money, how fast can my funds be withdrawn?
4. What regulations are involved with the particular investment?
5. How do I assess the risks of a particular investment?
6. What are some of the highest return investments that the average investor can participate in?
7. Do I need to participate in the particular investment?
8. What are the minimums needed to fund the investment account?
9. Is there a guaranteed return on investment funds?
10. Over what period of time are funds held in order to produce a return?
How much money do I need to start investing online or elsewhere?
With the advent of online investing, it has become very easy to open various accounts with as little as a few hundred dollars. For instance, online investing has made it easier to invest in the stock market, including equity and derivatives, along with areas that up until a few years ago, could not be accessed or utilized by the average investor – Forex (Foreign Exchange) trading for one. Now, if there a market out there, it is possible that market can be traded online. So, the prudent advice would be to start with what you are comfortable in investing.
What are the costs or fees associated with the particular investment?
Many investments do charge fees or subscriptions as part of their service. The question to ask yourself would be, “Is this fee or charge too detrimental to the potential profit? In other words, am I investing enough to offset the fees or charges that are going to erode my earnings? You will need to look at your potential profit and subtract the account charges from your profit to determine your actual percentage of profit.
Once I’ve earned money, how fast can my funds be withdrawn?
This question falls under the term “liquidity”. With some investments, like equity stock, it is possible to buy the stock one-day and sell the next or even within hours or minutes of the purchase. This is typically referred to as “Day Trading”. Keep in mind that there is also a settlement period of 3-5 days before the funds are realized. Other investments may want you to commit your funds for a period of time before the principal and profit can be extracted. If it is possible to extract funds earlier, you may be charged a penalty for doing so. For instance, if you buy a CD (Certificate of Deposit), the bank usually wants you to keep that for a specified period of time and you are rewarded with the appropriate interest depending on the length of term that you have committed to, typically, the longer the term, the greater the reward, but remember, you have diminished your liquidity. Shorter-term commitments increase your liquidity and this is something to keep in mind, particularly if you might find yourself in need of these funds at some point in the future.
What regulations are involved with the particular investment?
When talking about regulations, we must first decide in what arena the particular investment falls public or private. For our discussion in this book, we have limited our focus to areas outside of the real estate market and have primarily been referring to investments of money into equities, bonds, CDs, commodities and the like.
On the public side of things, the largest regulatory agency is the SEC (Securities and Exchange Commission). With the Security Exchange Act of 1934, Congress created the SEC and empowered the SEC with authority over all aspects of the securities industry including oversight of brokerage firms, transfer agents, clearing agencies as well as the self-regulatory organizations (SROs). SROs are such entities as the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers (NASDAQ). The SEC has the power to administer disciplinary action and will prohibit certain types of conduct.
On the private side of investment are those investments not required by law to register with the SEC, which can include private companies, trusts, corporations or LLCs, but who may wish to post their financial and significant information regarding their business as a show of “good faith” to their investors. This gives the company legitimacy, more transparency and validity for any investor they may wish to attract. In private transactions, as much information as can be gleaned before investing, including knowing the principals, the track record and seeking out satisfied investors, would be a prudent move. The more disclosure, the better it will be for your peace of mind.
How do I assess the risks of a particular investment?
As we discussed in the previous question, doing your due diligence is always advisable and educating yourself on the particular industry and investment vehicle, may turn up other areas of concern. Move forward only when you feel comfortable and confident with who and what you are dealing with. Seek out other advice from professionals as well as talking with other investors particularly those who have specific experience with the type of investment you are considering, but remember, don’t let “one bad apple spoil the whole bunch” when it comes to soliciting investor advice. Get a broad range of facts and opinions in order to formulate the most prudent and judicial analysis.
What are some of the highest return investments that the average investor can participate in?
In trying to answer this question, one must look at the relationship between risk and reward. Typically, the higher the risk, the greater the reward and vice versa. It is not uncommon for an individual equity stock to post tremendous gains on an annualized basis many times over 100%! One small cap stock that I am familiar with grew 1600% over the past decade. Sounds too good to be true, doesn’t it, but it’s not. Please keep in mind that this particular stock is an exception, not the norm. In fact, most stockholders recently have been happy to see a profit at the end of the year and are happy just to avoid a loss.
With that said, there are plenty of other offerings that provide huge upside potential with limited risk. One of these is in the physical commodities buy/sell contract arena. This particular area of commodities has been highly mischaracterized because most people and investors tend to lump these types of investments in with futures or exchange traded funds, and nothing could be further from the truth. Physical commodities buy/sell contracts are pre-arranged cash contracts that typically range anywhere from 2 weeks to a month or two in length, thus offering greater liquidity and at the same time, offering lucrative returns with limited risk. This is a relatively new arena for the average investor because it has been the arena of the very wealthy, although, now there are companies emerging that offer the average investor participation at smaller amounts than what previously required.
Do I need to “qualify” to participate in the particular investment?
Depending on the type of investment vehicle and the amount of money required to invest along with the level of risk, will dictate whether or not a person needs to be considered as an “accredited” investor. In terms of individual investors, this type of classification refers to the individual or couple gross annual revenue or net worth. Typically, net worth is considered “accredited” at or above ,000,000 or an individual who has an income in excess of 0,000 in each of the 2 previous years or a joint income with that person’s spouse in excess of 0,000 per year. Outside of that, the basic rule is whether or not an individual has sufficient liquidity to invest without harm and has the appetite for the given risk.
What are the minimums needed to fund the investment account?
This will vary from investment to investment. You may have a mutual fund that requires a minimum investment of 00, whereas you may be able to participate in an equity stock with as little as a few hundred dollars – it all depends.
Is there a guaranteed return on investment funds?
Outside of a CD, loan or bond, there is no guarantee of return. Anyone telling you that the return is guaranteed is, more than likely, misrepresenting the risk associated with the typical investment. With most investments, you should hear that “past performance is no guarantee of future results”.
Over what period of time are funds held in order to produce a return?
I covered this somewhat in a previous question, but the answer to this depends on the particular investment vehicle. For instance, a CD may hold funds for months or years depending on the rate of return being offered. With equity stocks, you can buy one minute and sell the next. Every investment stands on its own rules and how the vehicle works in producing a return for the investor. Certain investments with a specified time period and a projected rate of return help to minimize risk especially long term risk, and improve liquidity. Depending on your investment objectives, a diversification of an investment portfolio is also very much advised by most in the investment arena in an effort to hedge against one area or another producing a devastating loss. It is also a good idea to rank your priorities in terms of liquidity, risk and reward. What’s most important to you will ultimately dictate the type of investment you may wish to seek.
For additional information go to: http://www.siteproweb.com/20-questions-lead-page
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