P Finance

Personal FinancePersonal Finance

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4/3/2014Pankaj Mathpal,CFP,CWM,CIWM

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Brief Overview To Brief Overview To Financial Markets


Financial Markets33

A Market is a place where buyers and sellers come together to and sellers come together to exchange something

Financial Markets are where Financial Markets are where financial Instruments/products are exchanged.

A Financial Market is known by type of product traded in it


Different Financial 4 Markets4

FINANCIAL MARKET

Money Debt Forex CapitalMoneyMarket

Debt Market

Forex Market

CapitalMarket


Money Market5 y

Markets for short term5

BorrowingLending

Primarily used by BanksTypical Financial Instruments Typical Financial Instruments Bankers Acceptance

C tifi t f D it (CD)Certificate of Deposit (CD)Treasury Bills

R Repos4/3/2014Pankaj Mathpal,CFP,CWM,CIWM

Debt Market6 Debt

Contract One Party lends to another Party

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OnePartylendstoanotherParty Predetermined

InterestRatesandTerm Participants

Banks FinancialInstitutions MutualFunds InsuranceCompaniesetc.

I t t Instruments GovernmentSecurities(GSecs) PublicSectorUnitsBonds CorporateSecurities


Foreign Exchange Market7 Market

Foreign Goods

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Foreign Goods Payments in Foreign Currency Forex Market

Participants Government

Payments for Importsy p Repayment of Loans

Importers Exchange Rates One Currency in terms of other (Eg 1 US Exchange Rates One Currency in terms of other (Eg. 1 US

Dollar = 62 Rupees) Bid Rate

Off R t Offer Rate4/3/2014Pankaj Mathpal,CFP,CWM,CIWM

Capital Market8 Cap a a e8

Long Term Funds Raised by

Government Corporates

Trading Instruments usedTrading Instruments used Shares Derivatives Units of Mutual Funds


Financial Markets9

Primary Market Instruments issued for first time

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Used by Government/Corporates/PSUs

IPO Initial Public Offering

FPO (Follow on Public offer) Right IssuesRight Issues

Secondary Market Trading of already issued

Stocks Bonds

Stock Exchange


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I t d ti T D bt Introduction To Debt ManagementManagement


Introduction11 Introduction11

DEBT MANAGEMENT:

P f i l i d i t d thi d t Process of involving a designated third party assisting a debtor with repayment of his/her debtdebt

2 types of third party companies:-

Fee charges Free or low cost services


Importance Of Debt M t12 Management12

Helps the borrowers to manage the huge debts It helps in :It helps in :

-debt negotiation

debt consolidation-debt consolidation

-debt elimination

Helps in enhancing personal financial stability Helps the debtors to remove the pressure from creditors


Types Of Public DebtTypes Of Public Debt13

Government loans are of different kinds, they may differ in respect of time of repayment, the purpose, conditions of repayment, method of covering liability etc. Thekinds are:

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Productive and Unproductive debtsThe debts which are productive for the economy are known as productive similarly theThe debts which are productive for the economy are known as productive, similarly thedebts which do not benefit the economy are unproductive.

Voluntary and Compulsory Debt Voluntary and Compulsory Debt Generally the debts taken are voluntary, on the part of the government, known as voluntary debts whereas in times of wars or crisis there is a mandatory loan taken by thegovernment known as compulsory debt. It is a rare phenomenon.

Internal and External DebtInternal debt refers to public debt floated within the country; While external debt refersInternal debt refers to public debt floated within the country; While external debt refersloans floated outside the country.


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Short-Term, Medium-Term & Long-Term DebtsThe debts maybe for short, medium or long periods.

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Redeemable and Irredeemable DebtsThe debts which the government promises to pay at a future date The debts which the government promises to pay at a future date

are known as redeemable and Irredeemable is vice-versa. It does not have a maturity period.

f Funded and Unfunded Debts The funded debts are those which are paid after a long period of

time with a fixed rate of interest.Unfunded debts are incurred to meet the temporary needs of the Unfunded debts are incurred to meet the temporary needs of the

government. They are of a comparatively short period say a year.


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Personal Financial Personal Financial Statement AnalysisStatement Analysis


Net Worth16 Net Worth16

The amount by which assets exceed liabilities. Net worth is a

concept applicable to individuals and businesses as a key

measure of how much an entity is worth.


Cash Flow17 Cash Flow17

A revenue or expense stream that changes a cash account over

a given period. Cash inflows usually arise from one of three

activities - financing, operations or investing - although this also

occurs as a result of donations or gifts in the case of personal

finance. Cash outflows result from expenses or investments. This

holds true for both business and personal finance.


Budget18 Budget

A ti ti f th d ifi d

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An estimation of the revenue and expenses over a specified

future period of time. A budget can be made for a person,

family, group of people, business, government, country,

multinational organization or just about anything else that

makes and spends money. A budget is a microeconomic

concept that shows the tradeoff made when one good is

exchanged for another.


C l l ti f R tCalculation of Returns

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Holding Period Return20 Holding-Period Return20

Yield to maturity is a measure of return if a bond is held to maturity, and all interest income is reinvested at the yield to maturityyield to maturity

The holding-period return measures return for a shorter period of time

Pankaj Mathpal,CFP,CWM,CIWM 4/3/2014

Holding Period Return21 Holding-Period Return21

Ending price Beginning price + CouponHolding period Return = g p g g p pHolding-period Return =Beginning price

For a single period

P P CP

1 0 + HPR =P0


Holding Period Return22 Holding-Period Return22 The holding-period return can be decomposed into

two parts Ending price Beginning price CouponHolding-period Return =

Beginning price Beginning priceBeginning price Beginning price

1 0 HPR = +P P CP P0 0P P

HPR = Percent capital gain (loss) + Current yield


Total Return23 Total Return23

Like the holding-period return, the total return on a bond is a measure of the bonds yield over a shorter period of time than until maturityperiod of time than until maturity

The total return incorporates an explicit assumption about the reinvestment rate


Computing the Total Return 24 Computing the Total Return for a Bond

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Step 1 Compute the total coupon payments plus the interest on interest based on the assumed reinvestment rate (use the equation for the future reinvestment rate (use the equation for the future value of an annuity)

Step 2 Determine the projected sale price at the end of the planned investment horizonp

Step 3 The total future dollars that will be received from the investment, given the reinvestment rate and the projected required yield at the end of the p j q yinvestment horizon is the sum of Steps 1 and 2


Computing the Total Return 25 Computing the Total Return for a Bond (cont)

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Step 4 Obtain the semiannual total return

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Total future dollars 1Purchase price of bond

h

Step 5 As interest is assumed to be paid semiannually, double the

p

p yinterest rate in Step 4 the result is the total return for the investment horizon


IRR26

The discount rate often used in capital budgeting that makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return the more

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higher a project s internal rate of return, the more desirable it is to undertake the project. As such, IRR can be used to rank several prospective projects a firm is considering. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

IRR is sometimes referred to as "economic rate of return (ERR)."


Returns27 Returns27

XIRR Used to calculate internal rate returns with irregular cash

flowflow.


Example28 Example28

An investor bought 1,000 units in the dividend payoutoption of a scheme, on January 15, 2011, when theNAV was Rs 14 per unit On July 1 2011 the schemeNAV was Rs. 14 per unit. On July 1, 2011 the schemedistributed a dividend of Rs. 2 per unit. Another dividendof Rs. 1.50 per unit was distributed on December 10,2011 The investor exited the scheme on February 12011. The investor exited the scheme on February 1,2012, when the NAV was Rs. 15 per unit. The applicableexit load was 1%.


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Suppose the investor bought another 500

units on September 15, 2011 at Rs. 13 per p p

unit. The investor sold only 1,000 units on

February 1 2013February 1, 2013.


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Compounded Annual 32 Compounded Annual Growth Rate (CAGR)

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The year-over-year growth rate of an investment over a specified period of time. The compound annual growth rate is calculated by

taking the nth root of the total percentage growth rate, where n is the number of years in the period b i id dbeing considered.This can be written as follows:


Compounded Annual 33 Compounded Annual Growth Rate (CAGR)

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The year-over-year growth rate of an investment over a specified period of time.

Th d l th t i l l t d b The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being consideredconsidered.

This can be written as follows:


An investor bought 1,000 units in the dividend payout 34

option of a scheme, on January 15, 2011, when the

NAV was Rs. 14 per unit. On July 1, 2011 the scheme

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distributed a dividend of Rs. 2 per unit. Another dividend

of Rs. 1.50 per unit was distributed on December 10,

2011. The investor exited the scheme on February 1,

2012, when the NAV was Rs. 15 per unit. The applicable

it l d 1% S th di id d NAV ft exit load was 1%. Suppose the ex-dividend NAV after

dividend distribution was Rs. 12.50 per unit on July 1,

2011 and Rs 13 594 per unit on December 10 20112011 and Rs. 13.594 per unit on December 10, 2011.


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Absolute ReturnThe return that an asset achieves over a certain period of 36 The return that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset -usually a stock or a mutual fund - achieves over a given

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period of time.

Absolute return differs from relative return because it is concerned with the return of a particular asset and does concerned with the return of a particular asset and does not compare it to any other measure or benchmark.


Annualized Return The average amount of money earned by an 37 The average amount of money earned by an

investment each year over a given time period. An annualized total return provides only a snapshot of an investment's performance and does not give investors any indication of its volatility. Annualized total return

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any indication of its volatility. Annualized total return merely provides a geometric average, rather than an arithmetic average.

A mutual fund could earn returns varying from 3 to 5% h d h li d t t l t f each year and have an annualized total return of

3.995%. On the other hand, a fund could also be much more volatile, losing 3% in one year, earning 12% in another and have an annualized total return of 4 23% Th diff i th fi t f d ld ff 4.23%. The difference is the first fund would offer steady returns while the second would offer widely fluctuating returns.

i ( ) ( ) ( ) (1/ )Annualized Return = [(1+R1)*(1+R2)...*(1+Rn)] ^ (1/n)

Where R = annual return for a given year


Arithmetic vs Geometric 38 Arithmetic vs. Geometric mean

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Arithmetic Mean: Always greater than geometric mean. Superior statistical properties. * Best "estimator" or

"forecast" of "true" return. Mean return components sum to the mean total return

Most widely used in forecasts & portfolio analysis.


Arithmetic vs Geometric 39 Arithmetic vs. Geometric mean (contd)

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Geometric Mean: Reflects compounding ("chain-linking") of returns:

* Earning of "return on return" Earning of return on return .

Mean return components do not sum to mean total return * Cross-product is left out.

Most widely used in performance evaluation.


Arithmetic vs Geometric 40 Arithmetic vs. Geometric mean (contd)

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The two are more similar:

- The less volatility in returns across timey

- The more frequent the return interval

(Note: "continuously compounded" returns (log

differences) side-steps around this issue. (There is only

one continuously-compounded mean annual rate:

arithmetic & geometric distinctions do not exist).


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Time Value Of MoneyTime Value Of Money


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Time Value of Money42

Theideaisthatmoneyavailableatthepresentisworthmorethanthesameamountinthe future due to its potential earning capacitythefutureduetoitspotentialearningcapacity.

M i bj i fl i iMoneyissubjecttoinflation,eatingawayatthespendingpowerofthe currencyovertime,makingitworthlessinthefuturefuture.


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PresentValue:tellsyouthecurrentworthofa

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yfuturesumofmoney

FutureValue:givesyou thefuturevalueofcashthatyou have nowyouhavenow

NetPresentValue: valueastreamoffuturepaymentsintoonelumpsumtodayp y p y

DiscountRate:Theinterestrateusedindeterminingthepresentvalueoffuturecashflows.

IRR:TheIRRisadiscountratewherethepresentvalueoffuturecashflowsofaninvestmentisequaltothecostoftheinvestment.


Inflation44

Inflation is defined as a sustained increase in the

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Inflationisdefinedasasustainedincreaseinthegenerallevelofpricesforgoodsandservices.

subsequently,purchasingpowerofRupeefalls.

Itismeasuredasanannualpercentageincrease.


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Calculation Of Loan


Calculation of Loan46 Calculation of Loan46

EMI Calculation Principal repaid during a particular period Total interest paid during a particular period Calculating outstanding balance


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Total Assets, Net Worth And Fi i l R tiFinancial Ratios


Total Assets48 Total Assets48

The sum of current and long-term assets

d b th owned by a person, company, or other

entity.


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Total Assets

Financial Assets

Non Financial

Assets

Equity Debt Commodity Real Estate


Net Worth50 Net Worth50

Net worth (sometimes called net ) is the total assets

minus total outside liabilities of an individual or a

company.


Personal Financial St t t R ti51 Statement Ratio51

On The Basis of Liquidity

Basic Liquidity Ratio = Liquid assets / Monthly expenses

Expanded Liquidity Ratio = Liquid Assets and Other Financial Assets / Monthly Expenses

On The Basis of Debt

Liquid Asset Coverage Ratio = liquid assets / total debt

Solvency Ratio = liquid and other financial assets / total debt


Current Ratio = liquid assets / non-mortgage debt


On The Basis of Risk Exposure

Life Insurance Coverage Ratio = Net Worth + Death Benefits of P i i l W E / S l f P i i l W E Principal Wage Earner / Salary of Principal Wage Earner

On The Basis of Tax Burden

Effective Income Tax Ratio = Income Tax Liability / Total Realized Increases in Net Worth

On The Basis of Inflation Protection On The Basis of Inflation Protection

Inflation Hedge Ratio= equity, tangible and personal assets / net worth



On The Basis of Net Worth

Net Cash Flow Ratio =

1 -Realized Decreases in Net Worth /

Realized Increases in Net Worth)Realized Increases in Net Worth)

Net Worth Growth Ratio = Net Increase in Net Worth / Net

Worth at Beginning of the Year


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