In the previous article , we have seen how to calculate your net worth. Lets us now get to know how to improve your net worth. One of the tool that can be used to improve your net worth is your cash flow statement.
Cashflow statement is nothing but a measure of how much money is coming in and how much money is being spent by you.Lets start creating your cashflow statement by doing the following steps.
1. List down all your incomes. Identify all your source of incomes like monthly income,dividends,rental income and other sources.List down the monthly income and also list down the annual estimate of your income from each source.
2.List down all your expenses which may include credit card payments,rent/emi,grocery expenses,children's fees.
3. Calculate your cash flow by
Cashflow = Income - Expenses
After arriving at your cash flow, check if the cashflow is positive or negative. Lets see how to read/analyse cashflow statement.
4. Cashflow analysis
a) Look out ways to increase your income. Check if your hobby or your skill set can generate a significant income.
b) Check if you could reduce your expenses. Classify the expenses as necessary and unessential ones. Try to reduce the unessential expenses if possible.
c) Try to reduce your debt component and try to reduce taxes by investing in tax instruments.
Cashflow is directly proportional to the net worth and hence start creating your monthly cash flow statement and track them regularly to increase your net worth which would in term let you give you leeway for investments.
Learn More : What are Fixed Maturity Plans?
What are the different types of stocks?
Many of us wanted to choose the right stock at the right time and make a good profitable investment,but this is easier said than done. Before picking up the right stock, you need to figure out what kind of stocks that you would like to invest.There are a wide variety of stocks.Let us go through them.
1. Growth Stocks - These are the companies whose earnings growth is much higher than the other peer companies in the stock market. The tag of "growth stocks" rotates among various sectoral stocks as time evolves and it is not a fixed one. In the last 3 years, capital goods,infrastructure,realty stocks were considered as growth stocks.
2. Income Stocks - These are stocks which have a good rate of dividend paid out to the shareholders consistently over time. Mostly these will be companies from a sector wherein after establishment of the business, there will be constant flow of income. For eg, power generation sector. While it takes more capital and time to build the power plant, but once its commissioned, there is a constant stream of revenue and hence these companies keep giving constant dividend to the share holders.
3. Value Stocks - These are stocks whose market value is much lower than the real value of the stock.These have a very low PE value and the marketmen have not yet identified the true potential of the stocks.
4. Defensive Stocks - These are stocks which are not affected by economical cycles of growth and slowdown. For eg, Pharma sector. People will not stop buying medicines if the economy is slowing down or growing fast. These companies will have moderate growth of income over a longer time of time and have stability in revenues.
5. Cyclical Stocks - These stocks are influenced by the current state of the economy. If the economy is growing , these stocks get benefited with the higher growth rate and if it slowsdown,these stocks also have the effect in them. Eg. Banking,Real Estate.
6.Momentum Stocks - These stocks are those which drive the market and influence the trend or mood of the market to a greater extent. Eg. Infosys,RIL.
So before you put your penny into stock market,figure out on which category of stocks are u gonna invest.
Learn More about Investment
1. Growth Stocks - These are the companies whose earnings growth is much higher than the other peer companies in the stock market. The tag of "growth stocks" rotates among various sectoral stocks as time evolves and it is not a fixed one. In the last 3 years, capital goods,infrastructure,realty stocks were considered as growth stocks.
2. Income Stocks - These are stocks which have a good rate of dividend paid out to the shareholders consistently over time. Mostly these will be companies from a sector wherein after establishment of the business, there will be constant flow of income. For eg, power generation sector. While it takes more capital and time to build the power plant, but once its commissioned, there is a constant stream of revenue and hence these companies keep giving constant dividend to the share holders.
3. Value Stocks - These are stocks whose market value is much lower than the real value of the stock.These have a very low PE value and the marketmen have not yet identified the true potential of the stocks.
4. Defensive Stocks - These are stocks which are not affected by economical cycles of growth and slowdown. For eg, Pharma sector. People will not stop buying medicines if the economy is slowing down or growing fast. These companies will have moderate growth of income over a longer time of time and have stability in revenues.
5. Cyclical Stocks - These stocks are influenced by the current state of the economy. If the economy is growing , these stocks get benefited with the higher growth rate and if it slowsdown,these stocks also have the effect in them. Eg. Banking,Real Estate.
6.Momentum Stocks - These stocks are those which drive the market and influence the trend or mood of the market to a greater extent. Eg. Infosys,RIL.
So before you put your penny into stock market,figure out on which category of stocks are u gonna invest.
Learn More about Investment
How to calculate your net worth?
Many of us have investment in stock market in our financial planning and all of us wanted to reap the benefits of booming stock markets across the world.
But WAIT, before start analysing the balance sheets of companies to invest in them, one should first analyse his/her own balance sheet and analyse if he/she has a NET WORTH that can be invested in stock markets.
To arrive at your net worth, carry out the following steps.
1. Keep an emergency fund to meet financial disruption or job loss or any other critical emergency.As a thumb rule one should always have 3-6 months expenses in the emergency fund.Do not take this emergency fund into account while calculating your net worth.
2. List all your assets. These can be stocks,savings deposit,fixed deposit,post office deposits,life insurance sum assured,mutual funds,gold,real estate. Classify the assets as liquid and illiquid assets.
What is Liquidity?
Liquidity is the ability to convert an asset into cash quickly. Stocks,savings deposit are highly liquid assets whereas real estate is a illiquid asset since it will take more time to convert the asset to cash.
3. List all your liabilities. These include credit education loan,card payments,personal loan,home loan and all other types of consumer loans.This can also include personal financial commitments like paying your parents monthly.
4. Net worth = Assets - Liablities.
If Net worth is positive, you have surplus and you can invest a portion of surplus or entire surplus in stocks from a longer term perspective.
If Net worth is negative, you have some homework to do in terms of bringing the net worth to the positive and then plan for your stock market investments.
Learn More - How to pick a stock
But WAIT, before start analysing the balance sheets of companies to invest in them, one should first analyse his/her own balance sheet and analyse if he/she has a NET WORTH that can be invested in stock markets.
To arrive at your net worth, carry out the following steps.
1. Keep an emergency fund to meet financial disruption or job loss or any other critical emergency.As a thumb rule one should always have 3-6 months expenses in the emergency fund.Do not take this emergency fund into account while calculating your net worth.
2. List all your assets. These can be stocks,savings deposit,fixed deposit,post office deposits,life insurance sum assured,mutual funds,gold,real estate. Classify the assets as liquid and illiquid assets.
What is Liquidity?
Liquidity is the ability to convert an asset into cash quickly. Stocks,savings deposit are highly liquid assets whereas real estate is a illiquid asset since it will take more time to convert the asset to cash.
3. List all your liabilities. These include credit education loan,card payments,personal loan,home loan and all other types of consumer loans.This can also include personal financial commitments like paying your parents monthly.
4. Net worth = Assets - Liablities.
If Net worth is positive, you have surplus and you can invest a portion of surplus or entire surplus in stocks from a longer term perspective.
If Net worth is negative, you have some homework to do in terms of bringing the net worth to the positive and then plan for your stock market investments.
Learn More - How to pick a stock
What is Earnings per share?
We often come across the term EPS(Earnings per share) in the television channels when the companies report their quarterly/annual reports. Lets see whats exactly is EPS
Earnings per share = (Net Income - Dividend paid) / Outstanding shares
Where Outstanding shares = Total number of shares held by the investors. This is referred to as Capital stock in the company balance sheet.
EPS can be used as a comparison tool for evaluating companies. However we should compare EPS of companies in the same domain and not across various sectors.The decision to buy a company's share should not be totally dependent on one technical parameter. It should be based on collection of all technical parameters.
Instead of comparison of two companies by comparing their net income , comparing their EPS would give a more better comparison in terms of efficiency of the company to generate profit for each share that the investor holds.Two companies may have same net income,but one might have a higher EPS, because it has used less number of shares to generate that income.Given that net profit of two companies are same, the one with a higher EPS is better for investment.
There are three types of EPS reported.
Trailing EPS = Net profit for the last financial year/outstanding shares.
Current EPS = Estimated profit for the current financial year/outstanding shares.
Future EPS = Estimated profit for the upcoming financial year/outstanding shares.
When the company splits the stock bases, say from a face value of Rs 10 to face value to Rs 1,the EPS of the company would also get adjusted.
EPS is used in measuring PE ratio,which is again much discussed technical parameter.We shall see this in detail in the next blog entry.
Learn More....
Earnings per share = (Net Income - Dividend paid) / Outstanding shares
Where Outstanding shares = Total number of shares held by the investors. This is referred to as Capital stock in the company balance sheet.
EPS can be used as a comparison tool for evaluating companies. However we should compare EPS of companies in the same domain and not across various sectors.The decision to buy a company's share should not be totally dependent on one technical parameter. It should be based on collection of all technical parameters.
Instead of comparison of two companies by comparing their net income , comparing their EPS would give a more better comparison in terms of efficiency of the company to generate profit for each share that the investor holds.Two companies may have same net income,but one might have a higher EPS, because it has used less number of shares to generate that income.Given that net profit of two companies are same, the one with a higher EPS is better for investment.
There are three types of EPS reported.
Trailing EPS = Net profit for the last financial year/outstanding shares.
Current EPS = Estimated profit for the current financial year/outstanding shares.
Future EPS = Estimated profit for the upcoming financial year/outstanding shares.
When the company splits the stock bases, say from a face value of Rs 10 to face value to Rs 1,the EPS of the company would also get adjusted.
EPS is used in measuring PE ratio,which is again much discussed technical parameter.We shall see this in detail in the next blog entry.
Learn More....
What is Liquid fund?
Liquid funds belong to the category of ultra short term debt funds. These can be used as alternative for short term bank deposits (deposits for less than a year).
1. They invest in debt instruments which have maturity of 1-2 months.
2. They have a lock in period of only few days unlike banks wherein you have to pay penalty if you preclose your FD.
3. They have a lower tax rate than a bank FD for a person in 30% tax bracket.The tax on dividend paid out is less than the income tax slab rate of a person in 30% tax bracket.
4.The interest rate varies with the market and it is a good option in a increasing interest rate scenario unlike bank FDs where interest rate is fixed.
5. They accept a minimum investment of 10,000.
6. These are suitable for investors who don want to lock in their money at banks for a shorter while but at the same time want to get interest on their amount.
1. They invest in debt instruments which have maturity of 1-2 months.
2. They have a lock in period of only few days unlike banks wherein you have to pay penalty if you preclose your FD.
3. They have a lower tax rate than a bank FD for a person in 30% tax bracket.The tax on dividend paid out is less than the income tax slab rate of a person in 30% tax bracket.
4.The interest rate varies with the market and it is a good option in a increasing interest rate scenario unlike bank FDs where interest rate is fixed.
5. They accept a minimum investment of 10,000.
6. These are suitable for investors who don want to lock in their money at banks for a shorter while but at the same time want to get interest on their amount.
What is index fund?
There are two kinds of investing.
Active Investing
This involves active analysis of the company while investing. It involves answering the following questions
1. How is the company performing?
2. At what price should i buy?
3. What %age of my portfolio, should the stock occupy
and more questions.
Passive Investing
This involves creating a portfolio by simply replicating an already existing system witout any change at all.
Index Fund
Index funds are an example of Passive Investing where in the fund's portfolio is created completely by replicating an index.For eg, nifty index fund will constitute stocks present in nifty in the same ratio as it is in nifty
Advantages
1. The index fund has a lower cost attached to it. Since it has minimal transactions in terms of selling and buying stocks, it has a lower expense ratio. Lower expense ratio reflects in the NAV of the fund.
2. The investment objective is simple to understand and easy to track since its a mirror image of an index.
3. There will not be any change in fund's objective since it is based on index.Today lot of funds are churning their portfolio often.
Disadvantages
1. In the downward market, there will not be any cushion against the fall, since it does not have cash in its portfolio and is always fully invested.
2. When the tracking error(diff between fund's return n index return) is more than 2-3%
3. It can not outperform the benchmark index since it exactly replicates the index portfolio.
Target Investors
It is suitable for investors who are contempt with the broader market returns given by various indices.
Active Investing
This involves active analysis of the company while investing. It involves answering the following questions
1. How is the company performing?
2. At what price should i buy?
3. What %age of my portfolio, should the stock occupy
and more questions.
Passive Investing
This involves creating a portfolio by simply replicating an already existing system witout any change at all.
Index Fund
Index funds are an example of Passive Investing where in the fund's portfolio is created completely by replicating an index.For eg, nifty index fund will constitute stocks present in nifty in the same ratio as it is in nifty
Advantages
1. The index fund has a lower cost attached to it. Since it has minimal transactions in terms of selling and buying stocks, it has a lower expense ratio. Lower expense ratio reflects in the NAV of the fund.
2. The investment objective is simple to understand and easy to track since its a mirror image of an index.
3. There will not be any change in fund's objective since it is based on index.Today lot of funds are churning their portfolio often.
Disadvantages
1. In the downward market, there will not be any cushion against the fall, since it does not have cash in its portfolio and is always fully invested.
2. When the tracking error(diff between fund's return n index return) is more than 2-3%
3. It can not outperform the benchmark index since it exactly replicates the index portfolio.
Target Investors
It is suitable for investors who are contempt with the broader market returns given by various indices.
How to calculate your insurance cover?
There are well known methods to arrive at a ideal insurance cover for an indiviual.These further explains the significance of term insurance
Income Replacement Value
1. Age = 40
Annual Income = 5,00,000
Retirement Age = 60
Insurance Cover needed = (60-40) * 5,00,000 = 1 crore
Another variation, is to mutiply the income with a mutiplier to calculate your life cover.The multiplier differs across various age groups
20-30 years = 5-10 times annual income
30-40 years = 15-20 times annual income
40-50 years = 10-15 times annual income
50-60 years = 5-10 times annual income
So when you fit into any of this category and calculate your insurance cover it would be amounting to a significant sum.
When going for a typical endowment policy for such a insurance sum(eg 1 crore for 40 years old earning 5 lacs annually) , the premium would shoot to very high levels.
Term insurance 's cost benefit will be best exploited in these scenarios.
Always keep Insurance and Investment seperate.
Related Topics
What is term insurance?
Income Replacement Value
1. Age = 40
Annual Income = 5,00,000
Retirement Age = 60
Insurance Cover needed = (60-40) * 5,00,000 = 1 crore
Another variation, is to mutiply the income with a mutiplier to calculate your life cover.The multiplier differs across various age groups
20-30 years = 5-10 times annual income
30-40 years = 15-20 times annual income
40-50 years = 10-15 times annual income
50-60 years = 5-10 times annual income
So when you fit into any of this category and calculate your insurance cover it would be amounting to a significant sum.
When going for a typical endowment policy for such a insurance sum(eg 1 crore for 40 years old earning 5 lacs annually) , the premium would shoot to very high levels.
Term insurance 's cost benefit will be best exploited in these scenarios.
Always keep Insurance and Investment seperate.
Related Topics
What is term insurance?
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