Category Archives: My Blog

The relation between Investment and Inflation

 

Financial experts, economist, policymakers all have one thing on their mind does inflation reduce the investment? Well, there is a fair share of analysis been done to prove it has and it does not, the retired people are the most hurt during the phase of the situation when the demand exceeds the supply of goods, thus creating a price increase and push in the cost of production. Being monetary phenomena, it often presses the government to circulate more paper currency to combat and come out of the whirlpool of inflation.

It’s relation to investment

  • with rising prices, people, in general, are unable to buy as much as they could earlier, resorting to either put the additional money which is not used to buy the goods in other avenues like investing them or try to procure the goods at the high prices if they are absolutely essential and perishable goods
  • savings are generally discouraged as money is not worth what it was prior to inflation, making an investment, to save not absolutely necessary
  • the expectation from all sectors reduces the economic boost to maintain a level of investment and increase the investments for the economy to bounce back and function for growth
  • businesses find it a tough path to plan for the future as several of their projects would be on hold due to a steep rise in prices
  • it is difficult to decide how much to produce as the demand for the product cannot be predicted in the rising price situation to cover their costs accordingly
  • it disrupts the operation of financial institutions and markets, discouraging their integration with other global markets
  • there is a high amount of uncertainty in the future prices, the interest rates and exchange rates which could discourage trade and financial investments would not be economically viable

The risk associated with investments is high during inflation and production activity of industries at large. Individuals may be reluctant to enter into contracts as how much the relative pricing would be affected by inflation will be ambiguous. Overall negativity sets in the industry as an investment is either directly or indirectly affected, making the nominal value uncertain, making it difficult to plan investments for fixed income groups. The most common way, during the inflationary period, is that investments inhibit the economic growth, the trust on the demand and supply of money is affected as investors rethink on making financial decisions due to unpredictable rise in prices.

 

 

 

The Do’s And Don’ts Of Capital Budgeting

Doing a financial audit, capital budgeting, or any other investment calculation requires a lot of effort, practice, and experience. You cannot afford to commit mistakes even to the smallest decimal value while computing, as this, will result in an overall loss for the business, probably in hundreds and even thousands.

Hence, even the smallest of things can contribute to the deepest loss. Therefore, it is essential to scrutinize every element of a capital budget individually before planning the next course of action. In lieu of this, here is a list of what you must do and what you must avoid doing while carrying out a capital budget for any investment project.

The Do’s Checklist

  1. Base all your decisions on all the cash flows that are involved in the investment project. This will include even the incremental cash flows.

  2. Always remember to make proper adjustments for all the risks involved in the project, such as the opportunity costs of the capital locked.

  3. Accept projects that will maximize the income for the shareholders or accept those that are in line with their interests.

  4. Always accept investment projects that estimate a higher rate of return on the capital invested.

  5. Evaluate the turnaround period and accept proposals with the shortest turnaround time, as it will generate profits early.

  6. Similarly, choose projects that offer quick break-even points to start generating profits at the earliest.

  7. Do not forget to include and calculate the effect of all the taxes involved in each transaction.

  8. Always identify all the possible opportunities available in hand and evaluate the pros and cons of each opportunity individually, before discarding any option, in order to select the most economically profitable option.

  9. All operational costs must be listed out before commencing budgeting and every cost must be evaluated separately. Additionally, the cost of implementation of each must be studied in parallel, in case it is approved.

The Don’ts Checklist

  1. Do not include cash flows that consider the time value of capital or money. This can be ignored.

  2. Do not accept projects that are against the interests of the stakeholders, offer a low return on investments, have longer turnaround periods, and extended break-even points. All these will delay profit generation and may even result in the shutting down of the business.

If you ensure to keep in mind these very basic and simple rules of budgeting, then you can prepare an excellent budget plan to determine the feasibility and future prospect of your investment project.

Microfinance Products

The Microfinance started with the idea of helping the poor and the low-income individuals financially so that they can find a positive solution to come up in their life. But, today the microfinancing concept is also extended to certain small businesses that are unfortunate to avail the help of the financial mainstream either due to poor credit or due to the institution’s stringent policies and therefore, a widely growing financial concept of the era. But, Microfinance is not limited to the microloans, there are other options or products involved in the concept, which we are here to discuss in detail.

Microloans

Microloans or microcredit is the financial assistance offered to the growing business, whose value is smaller in number than the one that can be availed from the conventional bank. Initially, microloans were limited to a maximum of $100 offered to the micro-entrepreneurs running micro-enterprises in the developing countries. But, today the microloans are offered to even the small business entrepreneurs in the developed nations like the USA, typically in the range of $35000 – $50000, appreciably. On an average, the interest rates are higher than the conventional bank’s interest rate but, since it is predominantly a group lending process, the repayment rate is also higher, admirably!

Microsavings

Everybody has the right to save for their future and so the people with the low-income, who can be best benefitted by this Microsavings scheme. Unlike the savings scheme of the conventional banks that expect minimum balance for the participation, a person with a Microsavings account can save as much little as possible without worrying about the minimum balance factor at all. By this way, they can grow their little money uncomplicatedly to meet their future needs, satisfactorily!

Micro-insurance

While financial emergency seems unbearable for the affluent, understand the pathetic state of the financially deprived, for whose rescue this concept of Micro-insurance arose. Just like the traditional insurance process, this micro-insurance process too pools the risks together to offer the suitable risk management benefits but, by only accepting lower premiums and policy amounts, favoring the current financial state of the pursuers, appreciably. Thus, low-income individuals can now safeguard them against any threatening conditions like the death, illness, natural calamities and so on that would greatly alleviate their fear about the future, certainly!

Thus, within the significant concept of the Microfinance there lies, at least, 3 more significant variations or the product, each designed to cater to the practical financial needs of the respective individuals, appropriately.

What would you do when you fund manager quits 

 

There are several ways to manage your funds. Seeking the assistance of a fund manager makes the process more convenient. But there are worst case scenarios where the fund manager quits due to some reason. If you had started out on your own then your fund management strategies might have been different. But once you start managing your funds along with a fund manager getting back to doing it yourself might be a little tricky. You should stay prepared as this transition is prone to occur at some point.

Read about Bitcoin Loophole

There are various reasons why a fund manager might leave the company. But you should ensure that you take the right steps to avoid this situation from affecting your fund manager. As an investor, this situation might make you anxious. But you should avoid taking hasty decisions.

Is there another fund manager you can trust?

Fund management firms do not always depend on a single fund manager. Of course, there would be the most reliable one. But soon after you get to pick your fund manager you should also look for information to create a backup plan. Find out if there is a close associate, another fund manager who can take over in the absence of your current manager. If the management firm happens to shut down then you have no choice but to rework your investment and asset management strategies.

Will there be a change in your goals?

If you are being assigned a new fund manager it might take some time to develop that rapport. To ensure, that you keep a check on your financial goals. If required you could slow things down a little bit. But in the end, the investment strategies that the new manager then works out with you should be in line with your financial goals.

Understand the company culture

A fund manager’s role is definitely stressful. So unless the firm takes proper measures to ensure employee satisfaction the best of talents would slowly start leaving the firm. So when you look at a fund management company do not just look at the experience of the firm and the skill set of the employees. Also look at the company culture. An employee friendly organization has better chances of employee retention. So your fund manager quitting the firm while your portfolio is still being managed by the firm would be less likely to happen.

 

Fintech as something that acts as a great leveler

Answer one question in all honesty. Would you buy something online from a store that has no online payment system in place and you will be required to actually go to an institution to make the payment after which the product will be dispatched to you? Would you?

This question was posed to 980 followers of my blog on finance and technology and the majority of them declined. Obviously, because today technology especially that is related to financial process acts a great leveler. As a result, the consumer today does not care if the organization he is dealing with is a small one, medium one or a larger corporation; he demands the same thing from a small business as he expects to form the larger one.

The mobile phone:

Another catalyst of the Fintech movement is the mobile phone and the various applications that it feeds on. Today, it is so easy for people to access a hell lot of information relating to their financial portfolio that was hitherto not available at their fingertips. A routine visit to the bank, financial institution or a financial consultant was the order of the day while taking out a perfectly working day but today people can choose their own financial portfolio, check their balances, open accounts and even transfer big sums of money while doing mundane jobs.

For instance, I indulge in small trading of the things that I handcraft from home and while my customers pay me online to my mobile wallet I pay my suppliers through instant online transfers that help them get cash in real time. I do all this even while my dishes are being washed in the washer and the food is getting cooked in the oven!

Did you know that businesses that do not accept online payment can be out of the league soon?

Surveys have conclusively affirmed that small businesses who have still not adopted online payment methods cite cost as a primary barrier to card payment processing. Such businesses that do not follow the latest trends are at a risk of being eliminated because they will miss out on a lot of customers who today insist that payments be made online only.

We are at the threshold of change!

Fintech is only in its nascent stage now. We have a long way to go still. Having said that it is a welcome change that transfers and other financial processes are now not only easy and convenient but also cost effective!

 

The significance of working capital for expansions

That one important factor:

Besides the fuel that fires you, there is something more important to help you realize your BIG dream and that is to generate or be able to generate working capital for your business which has already germinated in your head but needs to be transplanted into the real world to be able to get the adequate sunshine and water for it to bloom and provide shade not just to you and your dependents but also to a lot of other people who will benefit it in myriad ways in the form of employment, opportunities or even improved products and services.

So, what is hampering you?

If you were to dismantle all the processes of setting up a successful business, perhaps the most daunting of them all is the first step and that is to set up a working capital for the business. In the simplest of terms, working capital is the first investment that you put into your dream enterprise. In the widest sense, it could mean any amount of capital that you put in into the business to realize either a short-term or a long-term goal.

Here is an example why an enterprise can need working capital albeit even after a roaring startup:

Case study:

Smith and Wilbur is a partnership firm that deals in niche stationeries. Smith is of the opinion that they need to increase their shop space and also their warehouse space to accommodate more stocks. Wilbur knows that it is high time they expand physically but they have no extra cash to accommodate any more buying of real estate.

Now, the adjacent shop owner is in dire needs and decides to sell his shop. As a pre-emptive right, he asks Smith and Wilbur if they would be interested in acquiring the place before he puts it on the block. The two partners know that they are lucky but for the shortage of funds!

They decide to go in for a loan to infuse some more working capital in order to buy the land. Why they think acquiring working capital from outside is worthwhile is that if they try to downgrade investment in stocks, they could lose out to competition.

In course of time, they identify a bank and apply for a loan. Fortunately, the requisites for a loan are all fulfilled and in time they get enough money to acquire the neighboring place. In a couple of months, they have erected a superstructure expanding their business premises as well as their storage capacity. Smith and Wilbur are presently doing really well as they are able to attract great custom based on the size of their enterprise as also with their variety in stock!

 

All about mutual funds

Have you heard this term in the financial circles yet?

If you are someone who is in the financial or the banking sector or you have been on the investment and the asset building scene for a while now, you may have heard the term mutual funds being thrown into conversations. Have you ever wondered what the term means and why suddenly everyone seems to be talking about it?

What is mutual fund?

A mutual fund as the name itself suggests is a collection of investment from a large number of people which is accumulated with the sole purpose of reinvesting in other companies in the form of shares, stocks, etc.

The mutual fund company uses its own discretion to invest your money so received as investments in various companies that are called a portfolio.

There are many kinds of mutual funds of which two are most popular. They are

  1. Equity mutual funds and
  2. Debt mutual funds

Out of the two, equity mutual funds are the most preferred mode of investment across the financial sector. Let us see what this form of mutual funds is all about.

Where does the mutual fund agent invest the money:

In equity mutual funds, the money so pooled from numerous investors is pooled and reinvested in shares of companies. The way the company performs at the stock exchange and also the occasional high and the low of the price of the share will be the determinant of how well the investor’s portfolio in the equity mutual fund does.

Now, a lot of people think that the growth in the equity mutual fund is sluggish:

This may largely be the case that the growth may be slow and it may take a while before it earns a good amount of profit but at least the corpus is safe. Imagine if the same amount was directly invested in the stock market or as shares in a company in the personal capacity, it is likely that the risk associated with the investment would be even more to the extent of even losing the entire investment in one shot also.

The net asset value or the NAV

The price that a mutual fund customer pays to acquire one unit of the mutual fund plan is called the Net Asset Value of the fund. This NAV is a fair reflection of the fluctuations in the market because the prices fluctuate with the fluctuation in the price of the stock of the company.

Qualified Fund Manager:

Every customer is assigned a fund manager who is a person qualified in managing funds who shall professionally manage the fund. There are two types of investment in the equity mutual fund:

  • one time investment where the customer may invest the entire surplus in one go; and
  • SIPS or Small Investment Plan which works more like a saving account but with the security benefits of a mutual fund.