Beware Of Bad Debts.

wealthymattersAs per RBI figures, a debt of Rs. 5.65 lakh crore (a fifth of the total debt in India) was shared by 67 of the 441 top indebted companies in India at the end of the year 2014-2015. This theoretically makes these companies financially insolvent, which means that the company is no longer able to meet it’s financial obligations.

This number has increased from 49 in the previous year to 67 in 2014-2015.

The return on capital employed has hit 7.4%, barely a few basis points ahead of the average interest cost of 7.1%.This is the lowest value recorded in the decade; in 2004-05, the reported RoCE was about 18% while the interest cost was 6.9%. Read more of this post

MIPs – Monthly Income Plans

MIPs are hybrid debtoriented mutual fund products.They are great places to park money if you have a 2-3 year horizon.The majority of the money in this case is invested in debt and the NAVs fall when the interest rates rise.Currently the equity  markets are showing some weakness and the interest rates are high,so MIP NAVs are low.So its a good time to pick up MIPs .HDFC and Reliance are 2 fund houses that are known for their treasury management operations.And HDFC and Birla Sun Life MIPs have perfomed well due to superior management of the equity component.

Here is a video that walks you through the ABCs of MIPs:

Liquid Funds + USTBs Vs. FDs

Here is a video laying out the pros and cons of investing in liquid and liquid plus funds vs FDs.Where you invest will depend on the guarantees you seek,the amount you wish to deposit,the interest rate scenario in future,prevailing interest rates,tax liabilities,the use you wish to put your cash to in future etc.Do watch the video before you decide either way.

Personally I have found that sometimes you get short term FDs that offer better rates for senior citizens than the mutual funds.And the most important takeaway from the video is that FDs can be used to lock in high rates in a falling interest rate scenario.

Economic Life,Sinking Funds,Amortization and RDs

wealthymatters.comHaving an abundance of material resources and never having to hustle round in the last-minute to find the funds to do what we want to do is a good indicator of wealth.

I first came across the concepts of economic life,sinking fund and amortization as an engineering student.Adapted to our personal finances and business these concepts help us to always have enough money at the right time.

Economic life , a.k.a useful life is the period of actual usefulness of an asset.Beyond this period it is cheaper to replace or scrap the asset than to continue maintaining it.

A sinking fund is a reserve created by periodically setting aside certain sums in an account to replace  an asset in future or to repay a liability.

Amortization refers to spreading an asset’s replacement cost over it’s economic/useful life. Read more of this post


wealthymatters.comNormally,for fixed income instruments , the interest rates corresponding to longer terms are higher than those for shorter terms.However,locking in money for longer periods is not always an option.One way of ensuring a greater degree of liquidity while taking advantage of the higher rates offered for the longer tenures is laddering.

If you want to create a 5 year ladder you could buy a 1year, 2year, 3year,4year and 5year instrument .Then after the first year,renew the matured 1 year instrument for a term of 5 years.Then the following year do the same with the matured 2year instrument.Continue the process.

Laddering ensures that at least some of the higher interest rates are locked in and that the average rate is higher than the rates at the lowest point in the interest rate cycle.

If you are drawing an income from your fixed income instruments say to pay or part pay you a pension,your EMIs,a tution fee or get some passive income,laddering smoothes out the variations.

Laddering is possible with bonds,NCDs,FDs,CDs etc.

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