Money Scripts (Klontz-Money Script Inventory)

 

Today I would like to explain about the interesting paper published in the year 2011 in Journal of Financial Therapy, Volume 2, Issue 1, authored by Brad Klontz, Sonya L. Britt, Jennifer Mentzer, and Ted Klontz. 

This paper has considered original list of 72 commonly heard money scripts, the factor analysis revealed four distinct money belief subscales: (a) Money status, (b) Money worship, (c) Money avoidance, and (d) Money vigilance; these are known as the Klontz-Money Script Inventory (Klontz-MSI). Klontz et al. have based these research on the extension of previously published paper of Yamauchi and Templer’s (1982) and Money Attitude Scale and Furnham’s (1984).

In the simple term, these above-mentioned Money Scripts actually explain approach of investors towards Wealth and categorize them in 4 broad categories.

(a) Money Status

This belief links a person’s self-worth to their net worth. People with this script often feel that having more money makes them more valuable or respected.

Impact: People who tie self-worth to wealth may overspend to maintain appearances. This can lead to debt, poor savings habits, and risky investments. They might also avoid financial help out of pride, worsening their financial health.

(b) Money Worship

Money worshipers believe that more wealth will solve all their problems and bring happiness. They often think that having more money will lead to better relationships, less stress, and more freedom.

Impact: Believing money solves everything can drive compulsive earning and spending. These individuals may chase wealth at the cost of relationships or health, and still feel unsatisfied. They’re prone to financial stress and poor long-term planning.

(c) Money Avoidance

This script reflects a negative view of money. People with this belief may think money is bad or that rich people are greedy. They might feel guilty about having money or avoid dealing with financial matters altogether.

Impact: Viewing money as bad or shameful often leads to neglecting financial responsibilities. These individuals may under-earn, avoid budgeting, or fail to invest. Their finances can suffer due to lack of engagement or avoidance of financial literacy.

(d) Money Vigilance

Money vigilance is about being cautious and alert with finances. People with this belief value saving, budgeting, and financial security. They may be secretive about money and feel uncomfortable spending it, even when it’s necessary. While this script can lead to financial stability, it may also cause some uncomforted feeling to enjoy the wealth.

Impact: While this belief promotes saving and caution, it can also lead to excessive frugality or anxiety around spending. People may miss out on opportunities or struggle to enjoy their money. However, they’re usually better at budgeting and long-term planning.

Conclusion: Each of these beliefs is shaped by early experiences and can influence financial behavior in powerful ways. These frameworks, like the money script theory, challenge the idea that we as an investor are always rational. 

Understanding our own money script can help us make better financial decisions and improve our overall financial well-being. In short, these beliefs act like invisible scripts that guide financial behavior. Recognizing our dominant script can help us break unhealthy patterns and build a more balanced relationship with money.

These factors strengthen my earlier article explaining importance of choosing right wealth advisor is a critical factor to consider for balancing our dominant money script and helping us to grow better with less biased approach.

Understanding Retirement Planning: Key Phases, Risks, Withdrawals, and Investments

 Planning for retirement is an important step to ensure you have enough money to live comfortably when you stop working. Retirement planning involves two main stages: saving money while you work (accumulation phase) and using those savings after you retire (decumulation phase). It also involves understanding important ideas like the funding ratio, matching your investments to your future needs, dealing with risks, choosing how to withdraw your money, and picking the right investments.

Saving for Retirement: The Accumulation Phase

The accumulation phase is the time when you are working and putting money aside for your retirement. You save money through plans like NPS, pensions, or  with multiple investment tools. During this time, your money is often invested in things like stocks that can grow over time. The goal is to build a good amount of savings to support you when you retire.

Using Your Savings: The Decumulation Phase

This phase starts when you retire and begin to use the money you saved to pay for your living expenses. Since retirement can last many years, it’s important to plan how much money you take out each year so that you don’t run out too soon. At this stage, your investments often shift towards safer options that provide steady income and protect your savings.

What Is Funding Ratio?

The funding ratio tells you how well your savings cover your future retirement needs. It is the value of your savings compared to the amount of money you expect to spend in retirement. A ratio of 1 means you have just enough saved, while less than 1 means you might need to save more or adjust your plans.

Matching Investments to Future Needs

It’s important that your investments behave in a way that matches your future expenses. For example, if your costs go up with inflation, you want investments that also grow with inflation (Asset having high Correlation with Inflation). This reduces surprises and helps make sure your money lasts.

Risks You May Face in Retirement

There are several risks to consider when planning for retirement money:

• Living Too Long (Longevity Risk): You might live longer than expected and run out of money.

• Running Out of Money (Probability of Ruin): There’s a chance your savings could be used up if withdrawals are too large or investments don’t perform well.

• Inflation Risk: Rising prices can reduce the purchasing power of your money.

• Market Risk: Investments like stocks can go down in value, especially early in retirement.

• Sequence of Returns Risk: The order in which your investments earn or lose money matters; bad early years can hurt your savings more.

• Health Costs: Medical emergencies or long-term care expenses can be very costly.

Ways to Withdraw Money in Retirement

How you take money out affects how long your savings last. Some common methods are:

• Fixed Amount: Withdraw a set dollar amount each year. Simple but risky if the market falls.

• Fixed Percentage: Withdraw a set percent of your total savings each year. Amount varies with portfolio value.

• The 4% Rule (Popular rule globally, might not fit well in Indian Scenario): Withdraw 4% of your savings in the first year, then adjust that amount each year for inflation. This is a guide to help money last about 30 years.

• Required Minimum Distributions (RMDs): Certain retirement accounts require you to withdraw at least a minimum amount each year by law.

• Minimum and Maximum Amount Cap: Fixing a a general withdrawal rate but putting and Minimum & Maximum Cap rate to counter volatility in the portfolio.

• Bucket Strategy: Divide your savings into different “buckets” for short, medium, and long-term needs. This helps manage risk and income better.

Investment Options for Retirement

Choosing the right investments helps balance growth, income, and safety. Some options to consider:

• Stocks: Good for growth and beating inflation.

• Bonds: Provide steady income and are less risky. Inflation-protected bonds guard against rising prices.

• Annuities: Insurance products that guarantee income for life, helping protect against living too long.

• Target-Date Funds: Automatically adjust to become safer as you get closer to and into retirement.

• Real Estate: Can provide rental income and diversify your investments.

• Cash: Keeps money safe and available but doesn’t grow much.

Combining these options with your withdrawal plan and risk comfort can help you have enough money throughout retirement. Regularly reviewing and adjusting your plan is also important.

In Summary

Retirement planning means saving carefully during your working years and spending wisely when you retire. Understanding the funding ratio and how your investments relate to future costs helps keep your finances on track. Being aware of risks like living longer than expected or market changes lets you prepare better. How you withdraw money and the investments you pick will greatly affect your financial security. A well-thought-out plan can help you enjoy your retirement without money worries.

Choosing the Right Wealth Manager: A Strategic Approach

 

🧭 Choosing the Right Wealth Manager: A Strategic Approach

Wealth management may seem straightforward during stable or bullish market conditions, but true expertise is revealed when markets turn volatile. In such times, the ability of a wealth manager to protect and grow your portfolio becomes critical. Selecting the right professional requires thoughtful evaluation—not just of returns, but of skill, service, and judgment.

🎯 Decision Outcomes in Wealth Manager Selection

When deciding whether to hire or reject a wealth manager, we encounter four possible outcomes. These can be categorized as follows:

Decision Actual Skill Level Outcome Type of Error Select the manager Has the right skills ✅ Correct decision None Reject the manager Lacks the right skills ✅ Correct decision None Select the manager Lacks the right skills ❌ Incorrect decision Type 1 Error Reject the manager Has the right skills ❌ Incorrect decision Type 2 Error

📉 Why Errors Matter

• Type 1 Error (False Positive): Choosing someone who lacks the necessary skills can lead to poor portfolio performance, especially in turbulent markets.
• Type 2 Error (False Negative): Rejecting a skilled manager means missing out on potential gains and quality service.

Minimizing both errors is essential. This requires a structured evaluation process that goes beyond surface-level performance.

📊 Skill vs. Market Conditions

In bullish markets, most portfolios show positive returns, making it hard to distinguish between luck and skill. However, during volatile or bearish phases, a skilled manager stands out by:

• Preserving capital
• Rebalancing effectively
• Communicating clearly during uncertainty
• Making informed decisions based on macro and micro trends

🧠 What to Evaluate Beyond Returns

While performance is important, a holistic assessment should include:

• Service Standards: Is the manager proactive and client-centric?
• Responsiveness: Are queries and concerns addressed promptly?
• Knowledge Depth: Does the manager understand complex financial instruments and macroeconomic trends?
• Communication: Are portfolio decisions explained clearly and regularly?
• Transparency: Are fees, risks, and strategies disclosed openly?

✅ Final Thoughts

Choosing a wealth manager is not just about returns—it's about trust, skill, and long-term alignment. By applying a structured decision-making framework and evaluating both technical and interpersonal qualities, investors can reduce the risk of costly errors and build a more resilient financial future.

 

Shall we worry for market corrections?

Today the market has seen  2.7% fall and last one month market return is -1.5%.

Though this correction is not significant, most of our colleagues are worried. It's not this small market changes they are worried about rather they are considering the possibility of deep market correction which is due since long time. Last 4 years, the Indian Equity market has been uni-directional and delivered a good return, but every market rally has to correct at some point. Equity markets always grow between up and downs. 

None of us can predict the market with certainty but what we can do is to keep our portfolio aligned by taking notes from the current economic outlook. 

Its time to tilt our portfolio towards the large cap and hybrid funds. These portfolio actions will keep our portfolio better equipped to manage any unfavorable conditions. 

Investment is boring

Market Updates and Investment Strategies. 

Sensex and Nifty are touching new highs, then we question ourselves whether these numbers are well supported by fundamentals. 

Nifty50 earnings have improved from 400 to 1050; which means earnings have improved over 2.5 times. 

Inflation number is less than 5% . 

10 year G Sec yield is at 6.98℅ which is almost at the same level where it was last month. We expect yield will move downward over next 1 year. 

Similarly IIP, CAD, PMI, Fiscal Deficit etc are provinding support to the market rally. 

These numbers give us comfort; i.e. market rally is not being irrational but has fundamentals supporting it. 

Still as always I reiterate my believe on traditional investment strategies, that is maket scenarios are subjective and keep changing but the key of success in investment is to have long-term asset allocation and to keep our basics right.

 Market conditions are useful only upto taking positiin in a tactical part of portfolio (which is a very small portion of individual portfolio). 

Whenever we interct with you, our focus is on constructing a well-balanced investment portfolio given your requirement and risk profile. 

1. Diversification:

Diversify across asset classes to manage risk. A balanced portfolio typically includes equities, debt, and other instruments.

Equities can provide growth potential, while debt offers stability.

2. Equity Allocation:

Allocate a portion of your portfolio to equities. Despite market volatility, they tend to outperform other asset classes over the long term.

Consider allocating large-cap, mid-cap, and small-cap funds (depending upon market scenario at the time of initial investment) for diversification.

3. Hybrid and fixed-income scheme Allocation:

Include Hybrid and fixed-income schemes like BAF, fixed deposits, or traditional guaranteed schemes. These provide relatively steady returns and act as a cushion during market downturns.

4. Gold and Real Estate:

Allocate a *small portion* to gold or real estate for diversification.

Gold acts as a hedge against inflation, while real estate provides stability. 

5. Alternative Investments:

Explore alternative investments like AIFs or PMS funds.

AIFs, PMS allow us to invest in assets/strategies which can offer high returns but come with higher risk.

6. Risk Assessment:

Assess your risk tolerance. Understand how much volatility you can handle.

Adjust your asset-class mix accordingly.

Remember, market conditions can change rapidly. Regularly review and rebalance our portfolio help us better equipped to handle in case of downturns.

Investment and wealth creation process is boring but certainly very fruitful in the long term.

Hybrid Category Mutual Funds

 What are the different kinds of Hybrid funds in MF? How they are different? What is applicable tax towards these?

Hybrid funds are the schemes which has equity, fixed-income and sometime other asset class in the portfolio. Mix of these asset class can be different, so accordingly they are categorized in different schemes and applicable for different taxation.

Let me explain benefits of Hybrid funds.

1- Biggest benefits of investing in Hybrid fund is regular rebalancing of portfolio. When equity market goes up, equity portion of portfolio grows and it become higher percentage of portfolio. Then fund manager sells equity shares and buy fixed-income papers. Means profit booking.

Similarly if equity market corrects (goes down), then fund manager has to sell fixed income papers and buy equity to make it again at least 65 % of portfolio (as per regulatory requirements). Means cost averaging.

2- It has lower volatility than pure equity portfolios.

3- these funds required almost no market timing for entry and exit.

We can broadly classify Hybrid funds in 4 categories.

Aggressive Hybrid funds- As name suggest, these are aggressive funds which has more than 65% Equity in portfolio (Equity taxation- as it has more than 65% portfolio in dimestic equity) and remaining in Fixed Income portfolio (and mostly in high quality-medium duration portfolio). We also known these schemes as plain vanilla balance funds. As they have least 2/3rds of portfolio in equity, they are the most volatile among Hybrid funds.

Because of above higher equity portion, most of these aggressive funds deliver similar returns to any large cap category funds with lesser volatility.

Dynamic Asset Allocation- This is the category of scheme which keep changing their net-equity position of portfolio as per market valuation. Idea is to increase equity percentage in portfolio when market looks under valued and similarly decrease equity weight when market look expensive.

Most of the funds in this category uses either PE ratio of PB ration to determine valuation of equity market and their net-equity portfolio keep changing from as low as 10% to as High as 90 %.

Remaining portion of the portfolio has arbitrage and fixed-income papers (in efficient combination to qualify Equity taxation).

Conservative Hybrid funds- These funds have very high amount of fixed-income papers and a small percentage (most case 20 to 25%) is equity. These funds are liable for debt taxation.

Equity Saving fund – These funds broadly follow principle of one third to each asset class (Equity, arbitrage and fixed-income). This composition might change slightly depending upon market outlook of fund manager. This fund also qualify for equity taxation. 

Allocate your funds in these categories as per your requirements. 

 

Why we need Advisor

 

Self-medication and web-based diagnosis is something we all avoid.

Similarly when it comes to investment, we must take help of experts. This will optimize our investment results and will reduce volatility. Investment has multiple options, it has multiple possible combinations and the most important it is never been as simple as it looks.

You need advisor for below reasons.

• He (or She) will understand your risk profile.

• He will be able to segregate your goals in different timelines.

• He will create be-spoke asset combination suitable to you.

• He will be the one evaluating your assets from tax-angle too.

• He will execute all your transactions.

• He will monitor your transactions on your behalf.

• He will re-balance your portfolios in frequent intervals.

• He will provide consolidated report of your complete assets at regular intervals.

• He will be the one who will help you for any changes or updatie required in your investment (Eg Nominee & Contact update, bank change, address change etc).

• He is the one who will understand complexity of economic situation and will provide ideal solutions in those troubled period.

• Last but important- in case of your death, he will help your family to transfer these assets and will advise on the tax angle of the same.

In short, we all need a personal advisor to our portfolio.

Global Investment- Requirements and benefits

 

Diversification is something which we talk about everyday. Yet we miss taking advantage of it in many aspect.

Geographical diversification means having some part of our asset must be allocated into various geographical market. This reduces our risk of depending completely with home economy and also provide cushion of global investment & currency diversification.

Every economy has some unique characteristics and so it has its own inherent market cycle. So when we allocate to any other country (popularly US, Europe, South Korea and Japan etc.), we actually reduces standard deviation of portfolio. This help us to reduce volatility.

That's why expert suggest a small portion of your portfolio should allocated in global market.

SIP and Top-up SIP

Investment is one of the most simple and yet confusing need of our life. When we think investment, we start assuming making super abnormal return overnight or to become rich by investing for couple of years. 

Thankfully, we Indian understand patience is key ingredient of creating wealth, our parents and grand parents use to save bigger percentage of earning and kept investing in limited popular options available to them, mostly bank or post office deposits. They did for many years and with lot of patience. 

Unfortunately, our generation has no such good term deposit rates offered by banks nor by any postal certificates but I am sure we still have patience to create wealth. 

Yes patience is a key to investment, it gives your investment a good time to accumulate, deliver power of compounding and provide chances to take benefit out of market volatility. 

Systematic Investment Plan (now onward SIP) is a simple investment tool where we keep investing a small amount monthly (or any other frequency but monthly is most popular method) over long period of time.

Lets understand this by example, if Mr X invest Rs 10000 monthly SIP for 20 years and if return expected to be 10% , his accumulated wealth at the end of 20th year will 76 lakh (invested Rs 24 lakh over the period). 

Similarly his friend Mr Y also did sip of Rs 10000 but kept investing for additional 5 years and ended his sip after 25 year. With similar expected rate of return (10%), Mr Y will have corpus of Rs 1.33 Crore at the end of 25th year. 

So just by adding another 5 year, his wealth is increased by 57 lakh. 

In simple words, this magic is called power of compounding. 

SIP has additional benefits apart from compounding. 

SIP can be done with any asset class Equity, Hybrid (mix of Equity and Fixed Income), Gold or Fixed Income but most popular is Equity and Hybrid fund SIP. 

SIP actually debit a specific amount from your account and buy units of fund as per prevailing market rate. This rate is called Net Asset Value (NAV). NAV can go up and down depending upon underlying assets in fund. So any point of time your fund valuation is nothing but multiple of current NAV and accumulated units. 

SIP done over long period of time actually goes through multiple market phases. Most of the time Equity market is volatile. So when equity market goes down, your Equity fund SIP will be buying funds at NAV meaning more accumulating more number of units. We can safely say, during volatile market SIP investors accumulate more units by just keep running their SIPs. 

We can also create additional wealth for us by just taking few additional steps. We can start a Top-up SIP than a traditional SIP.

Top-up SIP is a SIP where you customise increase of SIP amount (with some specific percentage or fixed amount) in future at specific intervals (may be annually) considering increase in your saving and income rate of future. 

So Mr X can start sip of Rs 10000 and keep increasing 8% additional SIP amount every year by just starting Top-up SIP in place of traditional SIP. 

Most of fund houses offer SIPs which can be paused and cancelled at any point of time without any additional cost. This make it more simple and friendly tool for all of us. 

Happy Investing !

What is diversified portfolio and how to create it

What are basics of creating portfolio and why to add so many different kind of asset classes in our portfolio?

These are the few questions we ask to our advisors. 

Let me try to explain this. Our idea is to create portfolio with two basic objectives. First to create wealth or in layman terms a good return and second objective is to reduce risk of negative or low returns. 

Financial basics says, if you chase higher return, there is always higher amount of risk associated with it, we measure these risk for equity assets in terms standard deviation. 

Every asset class has there own cycle of performance, meaning different asset classes have different cycle of good and poor performance. 

When we add these 2 fundamentals in our consideration, then logical way to create portfolio of assets in such a way that at any point of time one or more asset class should deliver good return while may be one or more assets might have delivered bad returns. By doing this we assure lesser volatility in our portfolio. 

Now question is how we know, is my portfolio have properly diverse asset class or not? 

Actually it is simple, we have create portfolio of low correlated assets. Correlation is mathematical number ranging from -1 to +1 which explains relationship between two asset class. Where +1 indicate the two assets are of similar kind and having exactly similar cycle of performance and -1 correlation explains they are of exactly opposite cycle of returns. 

In practical investment world, we do not find any two asset of perfect +1 or -1 correlations. All assets have correlation between these two numbers. Our idea of creating portfolio is to create mix of low correlated asset classes. 

If we look into correlation of share prices of stock, returns of index funds and of equity mutual fund, they will be closer to +1 correlation so they are not diversified asset class. 

While in other hand Equity assets (equity mutual fund, shares, index funds, etc) and Fixed Income assets (like fixed income mutual funds,  corporate bonds, term deposits etc) is of low correlated and ideal mix to create portfolio. 

Ideally, we should hold mix of Equity,  Fixed Income and Gold in our portfolio. We can diversify further by adding International equity funds in portfolio. 

Percentages of these mix should be different for different age groups and their financial requirements. If investor is of 30s or 40s of age group should have higher equity (may be 50 to 70%) and can have 20 to 40% Fixed income asset and approximately 10% gold). Where investors of 50s age group and he is in earning phase can reduce equity to 30 or 40%. In the retirement age, there should be negligible equity exposure and investment should be kept in low volatility assets. 

These are all indicative examples, they may or may not fit to your portfolio. Please take help of advisor to find your optimal mix. 

Amitav Ghosh my new favourite

Its always peace and relax whenever you feel your parent is nearby to you, and this was awesome week when my papa is here in Bangalore, i read great number of books, more than 7000 pages but restricted myself to only three writers and all this in category of fiction.

Amitav ghosh, i have never done much reading of his work before The Calcutta Chromosome, it is the most complicate novel I have read recently. Even after 24 hours since reading the book, still I couldn’t come to a conclusion whether I liked the book or not. There are so many fine points to say about this book. At the same time, this book left me in utter confusion which had never been managed by any other books I have read so far. If I don’t like a book, I will just drop it and go for the next one. But this is not the case with ‘Calcutta Chromosome’. Each page was crafted with skill and that alone makes me adore Mr.Gosh. There is a deep mystery that lurks on every page and that makes the reading more fascinating. The story shifts between different time frames among various characters. I found myself eager to know what would happen next to each of them.

Having said all these, there comes the sad part – the conclusion. I found the ending abrupt. I expected big explanations but much were left to reader’s choice which was frustrating. This was beautifully told tale page by page, but only to leave the reader in chaos at the last page.  There were so unanswered questions that will haunt sometime after done with this novel. 2nd was in this series was Sea of poppies, varied collection of characters to love and hate, and provides wonderfully detailed descriptions of opium production and variety.

Mr Kamkazi and different kind of PE

Mr Kamkazi have tried explaining about Valuation methods to his students.

PE Multiple

Price-earnings or PE is the most commonly used multiple. But it may have several variants- current PE, trailing PE and so on.

The ‘plain vanilla' PE is computed by dividing the share price of the firm by its earnings per share. PE multiples usually take into account the current market prices of a company.

When it comes to the denominator - the per share earnings, one can use the company's earnings for the past twelve months (known as trailing EPS), estimated earnings for the next 12 months EPS (forward EPS) or the earnings for a future year (future EPS).

A higher PE ratio indicates that the market perceives the company's growth rate to be higher or its risks to be lower and its payout ratio too could be higher (alternatively the company's reinvestment needs are lower).

PEG ratio

The “Price Earnings Growth ratio” compares a company's PE multiple with its expected growth rate in profits.

It is computed by dividing the PE multiple of the company by its expected growth rate in EPS. Note that the number used for EPS should be the same in the calculation of both “PE multiple” and “G”. For instance, if Company A expects a 10 per cent growth in its EPS this year and its current PE is 18.15, then its PEG would be 18.15/10 = 1.815 times. A PEG multiple of 1 is considered a rule-of-thumb measure of ‘fair value'.

PEGY Multiple

It is another variant of PE multiple. It is calculated by dividing the PE ratio of a company by the sum of its growth rate and dividend yield, the idea being that dividends also add to an investor's total return.

Here, dividend yield is computed by dividing the expected dividend payout of the company by the market price of the stock. PEGY is relatively better than PEG as it considers the differences between companies in growth rate in EPS as well as expected dividend yield.

For example, if TVS motor's growth rate is 8 per cent and its expected dividend yield is 7 per cent, if the stock's PE is 18.65, then the PEGY for TVS Motors is 18.65 / (8+7) = 1.24 times while its PEG is 18.65/8 = 2.33 times. If a company's PE multiple is lower than the sum of its growth rate in EPS and expected dividend yield, then the company is undervalued.

Relative PE

The PE ratio or PEG may help you evaluate if a stock appears expensive or cheap relative to its profits or growth rates, but how do you decide which stock within the market or a sector is a good buy?

One relative valuation measure is to divide a company's PE multiple by the PE ratio of the market.

For example, the PE ratio for Nifty (this is available from the website www.nse-india.com) as on 24-12-2010 was around 24.

The relative PE for company B was 17.80/24 = 0.74 times. We can state that B is undervalued compared to the Nifty or the market. While using relative valuations here, it is also necessary to take into account the company's historic premium or discount to the markets. For example, if B has historically traded at 90 per cent of the market PE, it is now undervalued.

The above variants of PE ratio measure the market value of a company's shares by comparing it to its earnings. But these multiples do not value the entire firm. This drawback is addressed by the following measures.

Value to Earnings Multiple

It is arrived at by dividing the value of the entire firm by either its pre-tax profits (earnings before interest and taxes or EBIT) or its post-tax profits from operations, operating earnings.

What is the value of the firm here? It is the “Enterprise Value”, calculated as (Market value of Equity +Market Value of Debt – Cash). Higher the number, higher is the valuation the market is assigning to the company.

Value to EBITDA multiple

A small variation of the above, this measure uses EBITDA (Earnings before interest, tax, depreciation and amortization); this is especially applicable to loss-making companies. Some investors may want to value a company before considering the impact of financial leverage and depreciation on its earnings.

It is also possible that some companies may operate in industries with a longer gestation period. In all these situations, one can not arrive at the appropriate value for a company by employing the value to earnings multiple.

Investors able to estimate the future cash flows of a firm also employ a measure called value-to-free cash flow, which examines cash flows to a firm instead of its book profits.

So what is the ideal measure of value? Maybe a combination of the above. Apart from ascertaining the value of a firm using earnings multiples, one should also measure using traditional methods such as discounted cash flow to arrive at the correct value of business.

Each of the above multiples is suitable for a particular situation and no two multiples act as substitutes. After all, the valuation lies in the minds of the valuer.

Why should i write blog?

Great! I guess blogging came about when folks (including me) moved away from their 'Dear Diary' moments onto the web. I wish Anne Frank (Acknowledged for the quality of her writing, her diary has become one of the world's most widely read books, and has been the basis for several plays and films) had lived to see this day.

With some amount of surprise, I read somewhere that if you own a blog, it better be something special. I have also read that, if one is not putting up something useful or interesting, they are not blogging, they are 'blagging'. Honestly speaking, I am happy doing blagging (though that's a criminal misuse of sacred space) for next few years before I think of professional writing. 

Here, this being my blog post, I will write about things or events or situations especially Economics and Finance that affected me.

And I promise to myself i ll never write more than 0.5% of what I read, so i have to read more and more to improve my level of understanding and quality of writing.

Mr Kamkazi and Trade Deficit

FEW Questions to Mr Kamkazi

Question from student 1

How would lower trade deficit strengthen rupee and its effect on economy??what is trade deficit?

 

Answer from Mr Kamkazi

in simple terms

Trade deficit

=imports minus exports

 

suppose 2009: India exported 10 billion$ worth stuff, and imported 50 billion$ worth stuff.

So trade deficit (2009)=50-10=40 billion$.

 

in 2010, the case improves, our import remains same, but we export 20 billion$ worth stuff. So,

trade deficit (2009) = 50-20=30 billion$

 

As you see, our trade deficit has lowered from 40 to 30.

Question from student 2

How would lower trade deficit in above example, strengthens rupee?

 

Answer from Mr Kamkazi

Forex market is a place where people buy and sell currency, based on supply and demand.

When you've to import from USA to India, you goto forex market, get your rupees converted into dollar$ to pay the bill and import it.

 

When an American, is importing mangoes from India, he pays the Indian seller in dollar$, and that Indian guy, goes to forex market and gets those dollar$ converted into Rupees, so that he can do his son's wedding, payback the home-loan etc. for which he needs Indian currency (Rs.)

 

So like that, there is a supply-demand of currencies in the Forex Market.

Question from student 3

How a currency strengthens when its in more demand in forex market?

 

Answer from Mr Kamkazi

When trade deficit is lower,

means we are exporting more.

Means we are receiving more dollars than earlier.

Means people are demanding more rupees than earlier @ Forex Market.

So Rupee is in higher demand @ Forex market, hence Rupee is strengthened.

 

Question from student 4

How does it effect on economy?

Answer from Mr Kamkazi

When Rupee strengthens, i.e.

(2009) 1$=60 Rs.

(2010) 1$=40 Rs.

 

In above case, Rupee is strengthened. So, when you're importing, you've to pay less Rupees.

But when you're exporting, you also get less Rupees money as payment.

 

So Rupee's strengthening or appreciation, is good for importers but bad for exporters.

Hence lower trade deficit, in long term is good for importers but bad for exporters.

 

In such a scenario, If a country has export oriented economy (like China or Taiwan) it'll move towards recession.

Majority of people make living by working in some export oriented mobile-phone, stuffed toys factory. when they receive less money for export = job loss etc bad things.

 

 

 

Mr Kamkazi and Bond

"So boys today we are going to discuss basics about bonds" Mr Kamkazi started his class, 'There are certain things you must understand about bonds before you start reading about them. Not understanding these things may cause you to purchase the wrong bonds, at the wrong maturity date. The three most important things that must be considered when purchasing a bond include the par value, the maturity date, and the coupon rate".

'The par value of a bond refers to the amount of money you will receive when the bond reaches its maturity date. In other words, you will receive your initial investment back when the bond reaches maturity. The maturity date is of course the date that the bond will reach its full value. On this date, you will receive your initial investment, plus the interest that your money has earned. The coupon rate is the interest that you will receive when the bond reaches maturity. This number is written as a percentage, and you must use other information to find out what the interest will be. A bond that has a par value of Rs1000, with a coupon rate of 10% would earn Rs100 per year until it reaches maturity. Because bonds are not issued by banks, many people don’t understand how to go about buying one. There are two ways this can be done. You can use a broker or brokerage firm to make the purchase for you or you can go directly to the government. If you use a brokerage, you will more than likely be charged a commission fee".

Mr Kamkazi took a break and again came back to topic, explaining equations about the topic.

Notes of Mr Kamkazi- Few Investment options

Few Investment options available in India

1. Fixed deposit - Money placed with banking institutions for a fixed tenure.

2. Bond fund - An investment fund that invests primarily in bonds or other debt securities.

3. Capital guaranteed product - A product that provides a return while at the same time provide capital guarantee at the end of maturity.

4. Corporate bond - A debt instrument for a loan which is issued by a borrower to an investor who is the buyer of the bond and lender of the money. In return for the money, the issuer agrees to pay regular interest to the bondholder for the term of the loan and the principal sum borrowed upon maturity.

5. Equity fund - An investment fund that invests primarily in shares.

6. Investment linked insurance - A life insurance plan that combines investment and protection. The premiums paid will partly be used to pay for life insurance cover and partly for investment in specific investment funds of the policyholder's choice.

7. Listed large capital stock - Companies whose shares are listed on BSE or NSE with market capitalization of generally above Rs 5000 cr.

8. Listed small capital stock - Companies whose shares are listed on BSE or NSE with market capitalization of generally below Rs 5000 cr

9. Option/warrant - An instrument that gives the holder the right but not the obligation, to subscribe for a particular instrument, e.g. new ordinary shares, at a pre-determined exercise price within a stipulated validity time frame (exercise period). The warrant becomes worthless after the expiry of the exercise period.

10. Separately managed equity portfolio - A portfolio managed by fund manager where investors own the securities individually.

11. Mutual Funds - Pools of money managed by an investment company. They offer investors a variety of choice, depending on the fund and its investment objective.

12. Gold funds- Gold is a liquid form of investment and is usually incorporated in investment portfolios to hedge against other market positions. This is especially true when you have exposures in the currency and stock markets. But if you are planning to invest in gold as a primary investment vehicle, then timing is the key - as they say “Buy Low, Sell High”. But then again, it is not as simple as that. Lows and highs happen every hour – minutes even.

There are many gold investment products to choose from and they are primarily classified as “physical” and “paper” gold investment products. The appropriate gold product to invest in depends on how much you are willing to invest in, and how long you are committed to stay in the market. Deciding on your gold investment plan needs careful study - if not, an expert’s advice. Whichever step you take, starts with knowing the different gold investment products available in the market today.

Mr Kamakazi and CDO

It was usual day for Mr Kamkazi , class was not much interactive, students took no interest in class. But at the end of class one student asked one Question, `sir please explain me CDO and use of it in our banking system”.

Mr Kamkazi knew this is one of the complex topic to explain, it need utmost care to use examples otherwise it may be misunderstood and the most important is to keep check on your emotion towards this particular instrument.

He explained `Few years back banks were operating at the limit of Basel Norms and were eager to tap into the lending business without diluting their equity capital. Part of the reason securitization picked up so rapidly was that it offered a way lender to do just this. The method was simple. Say a bank has 100 crore as the equity capital and is allowed by the Basel Norms to lend up to 1000 crore of home loans. If the NIM on such loan asset is 1%, the bank can lend the Rs 1000 crore and make Rs 10 crore of net income every year. Alternatively, if it securitizes Rs 800 crore out of Rs 1000 crore of loans, and sell them to other investors, this investment tool is called as Collateralized Debt Obligation(CDO). Now bank`s  lending come down to Rs 200 crore. Within the limits of Basel Norms it can again relend Rs 800 crore more”.

`Now you may raise the question ,what is the benefit of it on the other part? And my answer is simple, while securitizing , it makes the fee out of the difference of interest rate paid by the home loan borrowers and that received by CDO investors. In doing so , on the Rs 100 crore of Equity capital, instead of earning Rs 10 crore in the single lending case, it can make Rs 20 crore or more.”

Now Mr Kamkazi take a look over all his students and satisfied.