Financial Management and Planning

A ctivity factor for sound investing. Safety can be ensured by Owning securities in both government and private sectors like National Savings Certificate (NSCs), Public Provident Fund (PPF), Kisan Vikas Patra (KVPs), fixed deposits in banks Investing in companies in different geographical zones Owning shares and bonds in different companies Studying the market reputation of the issues of the securities Varying the kind of securities purchased – agricultural land, real estate, stocks, bonds, fixed deposits, etc. Understanding prevailing phase of business cycle (ii) Reasonable rate of return: In general, the higher the rate of return on an investment, the greater the risk, i.e., safety of principal and rate of return are inversely related. To some people, particularly those depending upon investments as their major source of income, regularity of income is more important than a higher but fluctuating return.

This is determined by the selection of securities. Therefore, before investing money one should compare the rate of interest and the associated risk under various schemes and options. (iii) Liquidity: It is the ability to convert the securities into cash without sacrificing value. The more liquid an investment is, the higher is its price, or in other words, the lower the return to the investor.

Hence income and liquidity must be balanced. (iv) Recognition of effect of world conditions: Changes in business trends will affect both the amount of protection needed, the ease of providing it and the methods chosen to provide it. Considering the long time business trends, a family must recognise the effect of their savings on the entire economy. Their willingness or unwillingness to invest in business enterprises at various stages in the cycle may well have an effect in reducing the extremeness of the cycle.

(v) Easy accessibility and convenience: While choosing an investment option for family funds, one must consider the knowledge required for its success. A family may choose an investment which might result in loss simply because they did not foresee the problems involved in the management of security or property acquired. (vi) Investing in needed commodities: The date on which an investment is to mature is important for a family that plans to have funds available for a known future need. Therefore, while investing money, families should purchase securities of lengths and durations so that they mature close to the time of the envisaged need or needs, e.g., for the child’s higher education.

(vii) Tax efficiency: Investments should be made in those instruments which lead to tax saving. A number of provisions in the Income Tax Act can be used to save taxes. Investment in insurance policies, Employees Provident Fund, PPF, etc., have built-in tax rebates with a specific ceiling limit. (viii) After investment service: While selecting an investment instrument, customer care or customer service must be a critical decision-making factor.

Good customer care includes easy encashability of securities, good communication network, timely dispatch of interest or dividend warrants, timely disbursal of the due amount after completion of investment period, keeping the customer posted about changes in the policies, interest rate, etc. A customer-friendly company provides the needed support and protection to the investor as and when required. (ix) Time period: The “lock in” period is a critical aspect to be considered before deciding on an investment. The longer the period of investment the higher is the rate of return.

For example in most fixed schemes the rate of interest is higher for long-term deposits compared to short-term deposits. Thus the investor must choose between a higher return with a longer waiting period or a comparatively lower return for a short lock- in-period, based on the needs and requirements of his/her family. (x) Capacity: One should not invest beyond one’s capacity so that the investments can be free of undue hardships. It is important to balance present needs with future needs and security.