Investments for Financial Planning Mcom Sem 1 Delhi University
Investments for Financial Planning Mcom Sem 1 Delhi University – The objective of financial Planning is to acquaint the students with essentials of finance so that they have requisite knowledge, skills and confidence to take charge of their financial future. Further, this paper intends to foster critical thinking skills for personal financial planning and handling financial market constraints.
Investments for Financial Planning Mcom Sem 1 Delhi University
Delhi University Mcom Financial Planning detailed Syllabus is available here.
Unit I: Introduction to Financial Planning: Globally accepted six steps financial planning process; General principles of cash flow planning, budgeting, legal aspects of financial planning. Overview of risk management: investments, insurance, retirement solutions, tax and estate planning.
Unit II: Investment Environment: Types of investment options available to an individual investor – bonds, equity shares, mutual funds, fixed deposits, PPF, financial derivatives, commodity derivatives, gold and bullion, ETFs, REITs, real estate etc. Objectives and rewards of investing. Investment constraints (tax considerations, unique needs etc.). Impact of inflation and indexation. Sources of financial information. Understanding mutual funds (Schemes, NAV calculation, load structure, Systematic Investment Plans, Systematic withdrawal plan etc.)
Unit III: Return-Risk Assessment: Risk aversion and risk profiling. Concept, types and calculation of returns. Assessment of risks in various financial instruments. Power of compounding and Time value of money. Rupee cost averaging. Concept of Portfolio and Diversification. Basics of Portfolio risk and return (two assets case). Tactical and strategic asset allocation.
Unit IV: Personal Financial Planning: Personal financial planning process. Setting personal financial goals. Life cycle approach to financial planning. Components of financial plan; developing financial plan; Using time value concept to estimate savings. Evaluation of tax saving instruments. Objectives of will and creating a valid will; living will and power of attorney. Planning for life insurance and health insurance. Primary clauses in Insurance agreement. Main contents of healthcare insurance.
Unit V: Credit Planning and Retirement Planning: Assessment of credit – types, advantages, disadvantages. Consumer and housing finance planning. EMI calculations – methods and implications. Reverse mortgage. Education loan. Credit card management; credit limits, overdraft protection, grace period. Credit Bureaus – individual credit history and ranking, identity theft and protection against identity thefts. Retirement planning and pension plans. Impact of taxes and inflation.
Unit VI: Investor Protection: Role of SEBI. Investor grievances and redressal system in India.
Investments for Financial Planning Mcom Sem 1 Delhi University
Investments for Financial Planning Mcom Sem 1 Delhi University – What is the investment environment? The investment environment is the international economy and the domestic economy, developments in which have an effect on the values (prices) of the assets of the asset classes. It is well known that the prices of financial assets, particularly shares, can be extremely volatile (see Figure 3), and this introduces the element of risk in financial markets. Investment risk is broadly defined as volatility in asset prices and it is measured in these terms (see later).
Ultimately, gross domestic product (GDP) growth is the major driver of asset prices, and asset price changes (positive and negative) are often exacerbated by the irrational behavior of participants in the investment arena (known as the “herd instinct”). GDP is driven by gross domestic expenditure (GDE) and the trade account balance (TAB). GDE is driven by the consumption expenditure (C) and investment expenditure (I) of the private and government sectors, such that C + I = GDE. This is domestic demand. Foreign demand for local products is reflected in exports (X) while imports (M) reflect domestic demand for foreign goods. So, X – M = TAB = net foreign demand. The “big picture” (the entire economy) is complete:
GDP is the total of net domestic production in a year, also called aggregate demand.
Types of Investment
Investments for Financial Planning Mcom Sem 1 Delhi University – Investments made in the finance industry can be divided into two distinct types namely, Traditional and Alternative. Let us look into each of these types one by one and see what investment categories fall into which type.
Investing in well-known financial products falls into the category of traditional investments. These include bonds, shares, real estate etc. These are categories which are quite popular among investors as active investment strategies to make your money grow. Following are the investment products that fall under the category of traditional investment.
A Bond can be understood as an IOU which is issued by an issuer (borrower) and to a lender. Generally, bonds are instruments used by public and private sector enterprises to raise huge sums of money which any bank is incapable of lending. These bonds are then issued in the public market by the borrowing entity and are bought by lenders for specific amounts of money. Thousands of lenders then come together to lend the required amount and the borrowing organization is able to raise capital for its operational or growth purposes.
However, since money is being lent to the issuer of bonds, there is also an interest component involved that is paid back to the investor in turn for his/her money. This interest is paid at a predetermined rate and for a specific period of time. Bonds fall under the category of fixed income securities since the interest on these can be exactly calculated for the time for which the bond is held. Bonds fall under the debt category and are therefore, comparatively safer financial instruments to invest in. However, with all financial tools risk is inversely proportional to returns and as such the low-risk attribute of this tool makes it a low return instrument as well.
Stocks or equity are shares that are issued by companies and are bought by the general public. This offers an avenue to companies to raise funds. Stocks entitle a customer ownership of a company. Shares, stocks and equity all imply the same thing. Shares are one of the most popular investment avenues in the world. This is because the returns offered by stocks is generally higher than any other financial instrument. However, to balance out the high return associated with stocks, the risk associated with these products is also quite high.
Any business may issues different types of shares based on the financial urgency and need. In exchange for the money, shareholders are issued Stock certificates.
Stocks are mostly divided into two basic types, common stocks and preferred stocks.
- Small saving schemes Small savings is another popular savings tool in the Indian financial market. The name itself suggests that these tools are meant for saving money in small amounts. The idea behind this financial tool is to enable the habit of saving in people from almost all economic sections. Some of the most common small savings tools are Sukanya Samriddhi Scheme, EPF (Employees Provident Fund), NPS (National Pension Scheme, Kisan Vikas Patra, Personal Provident Fund (PPF) etc. Almost all small savings schemes are initiated and facilitated by the government so as to enhance the spread and penetration of savings schemes in the country. Let us look into some of the most prominent schemes out of these.Employees Provident Fund Employees Provident Fund is another small savings scheme that is primarily offered by your employer. This includes salaried individuals of both private and public organizations. Any company with a workforce of more than 20 employees is mandated to register for the EPF scheme. Around 12% each month is deducted from the salary and contributed towards the EPF account of an employee. This EPF account is maintained by the Employees Provident Fund Organization, commonly known as the EPFO. The amount deposited towards EPF is eligible for tax exemption under section 80C of the Income Tax Act.Sukanya Samriddhi Scheme Sukanya Samriddhi Yojana is a special scheme which has been launched by the central government to facilitate the financial wellbeing of girl child in the country. This scheme can be availed by parents or legal guardian of a girl child and an amount as low as Rs.1000 per annum can be deposited under the scheme. The account matures only after the girl child reaches the age of 21. Premature withdrawal is allowed only after the girl reaches the age of 18 years and has financial need pertaining to wedding or education.
National Pension Scheme National pension Scheme is one of the most popular schemes for ensuring a regular pension amount to individuals working in both the private and the public sector. NPS is offered to individuals either as part of their corporate perks or is availed by individuals on their own. The amount set aside towards NPS is eligible for tax rebate under section 80C of the Income Tax Act. The scheme offers withdrawal of deposited amount only once the account holder reaches the age of 60 years. The corpus withdrawn on maturity is absolutely tax-free.
- Mutual Funds
Investments for Financial Planning Mcom Sem 1 Delhi University – Mutual funds are financial instruments that are professionally managed and that invest money on behalf of any investor, in different securities. These mutual funds are classified into various types based on the type of securities that they invest in. Some of the most popular mutual fund types are balanced funds, stock funds, open-ended funds etc. These funds are classified based on their percentage allocation in different securities. So, an equity fund invests purely is equity and is a high risk high return product while a debt fund invests purely in debt and money market instruments and is hence a low risk low return financial product.
- Fixed Deposits
As the name itself indicates, fixed deposits are financial instruments that are one of the oldest and safest ways to save money. These are not necessarily active investment tools, but are rather a passive way to save and earn returns. A fixed amount of money is kept aside with a financial institution for a fixed number of days or months or years. In turn, interest is earned on this money. The rate of interest differs with the deposit tenure and also with the banking entity.
Similar to fixed deposit is the concept of recurring deposit. However, the only point of difference in the two investment tools is that while a lump-sum amount needs to be fixed in case of fixed deposit, a smaller amount needs to be deposited at regular intervals in case of a recurring deposit. Hence, customers who do not have a large chunk of money to fix in a single go can opt for a recurring deposit wherein money is usually deposited monthly for a specific deposit tenure. The rate of interest earned on recurring deposit is similar and comparable to that earned on fixed deposit.
- Real Estate
Property rates are soaring with every passing day which has made real estate a hot investment avenue for investors. Buying, selling and leasing of property offers substantial returns to investors. Appreciation of property makes real estate a good investment tool. With urbanization gaining ground rapidly, real estate prices in certain major cities like Mumbai, Bangalore, New Delhi, are skyrocketing. This has made these places hot hubs for real estate investors. Most investors take loans from banks to purchase real estate and then lease out or sell the same property to enjoy returns offered due to appreciation in price of the property.
Investments for Financial Planning Mcom Sem 1 Delhi University – Alternative Investments are those that are not regular investments like stocks, bonds etc. These are investments made in order to acquire jewelry, precious metals etc. which are expected to yield returns in future. Hedge funds, some real estate types, venture capital and derivatives also form a part of alternative investment. Alternative investments are so called due to their non-traditional as well as complex nature. Also, another distinguishing feature of alternative investments is relatively low liquidity and well as very high minimum investment limits.
While a common investor may not access alternative investments like hedge funds or derivatives due to their complex nature, others like gold and real estate are available to even the common man. Let us look into some of the most prominent alternative investment tools known to investors.
- Hedge Funds
These can be understood as a professionally managed private investment company or partnership structure. Techniques to manage the fund can be those that are not commonly allowed for SEC regulated companies. Hedge funds invest in both financial derivatives and/or publicly traded securities. These are popular as an alternative investment tool owing to their high leverage and high returns. However, they are characterized by high fees as well as low liquidity. It is seen that managers of hedge funds generally have a personal stake in the fund.
- Private Equity
Private equity is trading in shares of an operating company that is not publicly listed and whose shares are not available on the stock market. Institutional investors employ various strategies to indulge in private equity trading. Private equity is popular since it offers diversification of financial portfolio by allowing investment in avenues that are not tightly coupled to normal investments.
- Venture Capital
Venture Capital is one of the most popular investment strategies currently being deployed by investors in the Indian start-up scene. The idea behind this investment strategy is to invest substantial capital in a budding company in return for stocks of the same. This is done with companies who are either in their initiation phase or in their growth phase. Venture capitalism is generally based on ideas that find substance with the investors or any new technology that the investors feel might take the market by storm in future.
- Managed Futures
This type alternative investment involves managers using futures also as part of their investment portfolio. Managed futures are a great tool to offer portfolio diversification and therefore are a great alternative to minimize risk and maximize returns. In general, a managed futures account will have sufficient exposure to different markets like energy, agriculture, commodities, currency etc.
- Structured Products
Structured products are alternative investment tools that generally combine two or more financial instruments to make a packaged investment strategy in a single product. Most often, derivatives are combined with securities or with other derivatives. Structured products have a fixed maturity date like bonds. These offer a convenient strategy to implement a complex investment strategy across various financial products.
- Collectible items
Collecting artifacts that have substantial value and those that have historical and artistic significance is one of the most difficult types of alternative investments. This requires knowledge of the article that you are purchasing. Mostly, collectibles like stamps, jewelry, boats, planes, art works etc. tend to appreciate in value and are considered good and profitable assets to own. The value of artifacts is generally expected to appreciate and keep pace with inflation and hence collectibles make a good form of alternative investment.
Investments for Financial Planning Mcom Sem 1 Delhi University – There are a few more alternative investment instruments available in the financial world. However, their use is limited since these are more complex products and are hence not considered by the common investor. Seasoned investors and professional investors tend to consider these alternative investment strategies to increase wealth.
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Financial Planning: The importance of saving and investing
Investments for Financial Planning Mcom Sem 1 Delhi University – Investment starts only after savings. To invest your money, you need to focus on factors like risk, return, tenure, tax, and liquidity. It is better to start investing at an early stage of life. Once you start investing, the compounding effect starts appreciating your infused capital, gradually growing it day by day. Investment requires great discipline and patience. You can make an investment for short term, medium term and long term and also select the appropriate instrument as per your planning.
While investing, taking care of tax implications. Investment requires periodical reviewing of the portfolio as per the prevailing macroeconomic conditions. You can switch from you preferred investment assets in the future, taking into account alterations in your risk capacity and return requirements. An investor with a higher risk appetite can invest in the stock market whereas moderate risk takers can opt for mutual funds. Low risk taker can invest in instruments like bank deposits, PPF etc. The selection of the investment instrument boils down to one’s risk profile.
Which is more important: saving or investing?
Investments for Financial Planning Mcom Sem 1 Delhi University – Investment follows acts of saving. Unless you already own a huge amount of money, the only way to accumulate it is through saving. Once you have created a corpus, its value starts eroding due to inflation. Therefore to maintain or grow the value of your corpus, you must invest it in a higher return asset. We can say that without savings, we can’t invest, and without investment, we lose the value of saving. Hence both go hand-in-hand and are equally important.
When to switch from saving to investment
Investments for Financial Planning Mcom Sem 1 Delhi University – Investments for Financial Planning Mcom Sem 1 Delhi University – You should ascertain the savings required to meet all your expenses and uncertainties. Payments for utilities, loan instalments, credit card, rent etc. should be prioritised, as should be premium for health and life insurance. Once these are done, you get a clear idea of what your surplus is, and you can divert it into investment assets.
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