Succession Planning: What Is It and Why?

Within any organization, people in leadership positions eventually cease to fulfil that role. This can occur for a variety of reasons, such as:

• promotion within the organization
• move to part-time arrangements for better work-life balance
• voluntary departure from the organization to pursue a career elsewhere
• involuntary departure from the organization
• retirement
• serious illness
• death

Organizations that fail to plan for the timely and effective filling of such leadership roles can be caught off guard, with the consequent disruption to normal business activities and the loss of market share. Succession planning is the pre-emptive process of identifying significant leadership positions that could put the organization at risk if left unfulfilled, targeting current employees that could move into such roles and grooming them for succession. Managing leadership succession effectively requires a structured approach that is agreed, understood and followed by everyone involved in the planning process.

The Succession Planning Process

Succession planning requires steps to obtain leadership guidance, collect relevant information, make key decisions, and execute succession and development actions. If undertaking this activity for the first time, you should consider creating a process that is "separate" from other, related activities such as performance management and development planning. Later, after you have executed your process a couple times, you may take down the special elements and start to integrate it with these other activities. The steps below outline such a stand-alone process.

Define purpose, goals, and scope

The top leader of the organization outlines the purpose, goals, and scope of the succession planning activity.

Assemble an oversight committee

The committee’s role is to establish a succession planning process that can fulfil the purpose, goals, and scope outlined by the top leader, and to govern over the process until most of the major questions and issues have been resolved.

Set policy

The oversight committee creates policy around such issues as data security, assessment, succession nominations, communication and development.

Define operational parameters

Again, this is the purview of the oversight committee. Operational parameters include: positions for which successors will be nominated, the scope of the pool of succession nominees and the rating scales used for assessing contribution and potential.

Develop and conduct the assessment

The assessment is essential for comparing succession candidates and slotting them against specific succession positions. The assessment data, generally provided by direct managers of the succession pool, should be reviewed for equity in the ratings and for consensus in the nominations.

Compile and organize the data

The voluminous data that is collected must be compiled into the kind of information needed by leaders to make key decisions. Some of the compilations include: coded organization charts, a “contribution-potential matrix,” reports of any “at risk” positions or individuals, and profiles for all individuals and positions. A spreadsheet or dedicated tool for organizing and displaying such information is recommended.

Conduct organizational reviews

Starting with business unit/functional heads, the succession plan and reports compiled are reviewed and key decisions made. These decisions could range from developmental opportunities for future leaders to actual leadership appointments. The business unit/functional level reviews are followed by reviews at the highest level – with correspondingly higher level decisions.

Implement development plans

While succession decisions may be executed immediately after the reviews, the developmental opportunities must be pursued over the following weeks and months. For future leaders to realize their potential and be better positioned to “step up” when the time comes, these development opportunities must not be allowed to languish once the spotlight is off the succession planning process.

Assess process effectiveness

Like any other business process, your succession planning process will need to be improved, streamlined, integrated with other human resources processes and possibly expanded to accommodate additional participants. While the experience is fresh, take a moment to gather feedback and assess process effectiveness – then set and achieve the most critical improvement objectives.

Leadership Succession

When key leadership roles in your organization become available, how ready are your future leaders to step up to the challenge? World-class organizations know the importance of having top talent lined up and ready to go. The many benefits of effective talent management convey to both the organization and to the individual . . . as do the risks of failing to plan for your organization’s leadership succession.

Preparing your employees for future leadership roles consists of two activities: planning and development. Planning includes the following activities:

• identifying employees who show potential for assuming greater responsibility
• assessing those individuals against some kind of leadership model to understand their strengths and development needs
• developing your leadership model – or set of models – that describe the elements of leadership critical to your organization
• identifying the kinds of roles that will need to be filled
• ensuring a flow of succession opportunities – even if it means removing current leaders that are performing adequately in their role

Developing future leaders goes beyond the classroom. In fact, successful leaders cite other factors besides training when asked to describe their best source of preparation:

• stretch experiences
• a formative mentor
• dealing with hardship and conflict

A progressive view of leadership development will emphasize all of these strategies over a training-heavy approach. However, often an element of “divine intervention” by a development-minded CEO is needed to execute some of the riskier strategies:

• putting an employee in charge of key negotiations with a competitor, vendor, or union
• tapping an employee to turn around a struggling division or function
• tasking an employee to build out a new capability, develop a new product, or enter a new market

The benefits of a thorough approach to succession management accrue to the organization as well as the individual. Organizations achieve the primary goal of having employees ready to step into leadership roles. And they avoid much of the risk linked to bringing too many outsiders into key, high-level positions.

However, not to be undervalued is the benefit felt by employees even before their opportunity emerges. These employees, who are often star performers as middle managers or even individual contributors, can too easily be attracted away by offers from other organizations. “You have to leave to get ahead” is commonly heard in organizations without a capable approach to developing and promoting future leaders. Organizations that prepare their aspiring leaders for higher levels of responsibility replace this talk with higher levels of employee engagement, retention and hope. And they then follow through with those appointments.

Gain the benefits of effective succession planning in your organization by putting in place a robust leadership succession process.

Succession Planning Program Evaluation

Succession planning programs can take many forms. Some rigorously identify specific future career moves for their upwardly mobile leaders, while others may use a more general system of leadership “turns” to be accomplished. Some may clearly publicize their succession planning process and its results, while others perform activities in the background and communicate only to those who “need to know.” The most important thing is for your organization to develop a process that works within your culture and gets the results you need. That said, here are some key questions for when you are evaluating your succession program with an eye to improvements, as well as for when you are just starting to design your own approach.

Results

• Does your succession planning program consistently produce a slate of qualified candidates for any given leadership position that needs to be filled?
• Is your organization able to select internal succession candidates when desirable, rather than have to bring in outsiders with “more experience”?
• Do newly placed (promoted) leaders feel ready and confident about stepping into the new role?
• Do leaders placed (promoted) as a result of your succession planning process typically succeed in their new roles?
• Do your leadership candidates typically stay with the organization longer?
• Is your organization viewed as “the place to go” for MBAs and other aspiring, young professionals?
• Are your future leaders aggressively recruited by other organizations?

Process

• Does top leadership move future leaders around to ensure they experience many parts of the organization?
• Does top leadership aggressively “move out” incumbent leaders who are underperforming in a key role so that ready successors may be “moved up”?
• Do your future leaders “know where they stand”?
• Do your future leaders get the “real world” development they need to prepare them for new leadership roles?
• Does your succession planning process operate “year round” (versus an event that occurs annually)?
• Do current managers willingly “let go” when their staff is selected for new roles or for developmental assignments?
• Is your succession planning process reviewed at least annually and any deficiencies corrected or improvements implemented?
• Is your succession planning process reviewed at least annually and any deficiencies corrected or improvements implemented?

Any evaluation questions that do not receive a resounding “Yes” might provide some fodder for rethinking and enhancing your current approach. However, remember that succession planning can take many forms, and your approach needs only to work for you.

body THE ART OF ASKING QUESTIONS

BY RON ASHKENAS

How well do you ask questions? From my experience, most managers don't think about this issue. After all, you don't usually find "the ability to ask questions" on any list of managerial competencies; nor is it an explicit part of the curriculum of business schools or executive education programs. But asking questions effectively is a major underlying part of a manager's job — which suggests that it might be worth giving this skill a little more focus.

We've all experienced times when we've failed at being good questioners, perhaps without realizing it. For example, not long ago I sat in on a meeting where a project team was reviewing its progress with a senior executive sponsor. During the presentation it was clear from his body language that the executive was uncomfortable with the direction that the team was taking. As a result, without any real questioning of the team, he deferred approval of the next steps until he could have a further discussion with the team leader. When he met with the team leader later, he ripped into him for allowing the team to go off-course. Eventually the team leader was able to explain the thinking behind the plan, convinced the executive that they would indeed achieve their objectives, and was given the go-ahead to proceed. But in the meantime the team had lost its momentum (and a week of productivity), and began to focus more on pleasing the sponsor rather than doing the project in the best way.

This is not an isolated incident. Many managers don't know how to probe the thought process of their subordinates, colleagues, and bosses — and instead make assumptions about the basis of their actions. And when those assumptions are wrong, all sorts of dysfunctional patterns can be created. In a financial services firm, for example, a major product upgrade was delayed by months because the product and IT managers had different assumptions about what was to be delivered by when, and kept blaming each other for delays. When a third party finally helped them to ask the right questions, they were able to come up with a plan that satisfied both, and quickly produced incremental revenue for the product.

There are three areas where improved "questioning" can strengthen managerial effectiveness; and it might be worth considering how you can improve your skills in each one.

First is the ability to ask questions about yourself. All of us fall into unproductive habits, sometimes unconsciously. Good managers therefore are always asking themselves and others about what they could do better or differently. Finding the right time and approach for asking these questions in a way that invites constructive and candid responses is critical.

Second is the ability to ask questions about plans and projects. The examples mentioned above both fall into this category. The challenge with questioning projects is to do so in a way that not only advances the work, but that also builds relationships and helps the people involved to learn and develop. This doesn't mean that your questions can't be tough and direct, but the probing needs to be in the spirit of accelerating progress, illuminating unconscious assumptions and solving problems. This is in contrast to some managers who (perhaps out of their own insecurity) ask review questions either to prove that they are the smartest one in the room, or to make someone squirm. On the other hand, many of the best managers I've seen have an uncanny ability to engage in Socratic dialogue that helps people reach their own conclusions about what can be done to improve a plan or project, which of course leads to much more ownership and learning.

Finally, practice asking questions about the organization. Although usually unspoken, managers have an obligation to always look for ways that the organization as a whole can function more effectively. To do this, they need to ask questions about practices, processes, and structures: Why do we do things this way? Is there a better approach? Asking these questions in a way that does not trigger defensiveness and that is seen as constructive is an important skill for managers.

Most of us never think about how to frame our questions. Giving this process some explicit thought however might not only make you a better manager; it might also help others improve their inquiry skills as well.

Points to ponder over:

Have you seen good and bad examples of how to ask questions?

What's your own self-assessment?

Are you asking yourself the right questions?

About The Author: Ron Ashkenas is a managing partner of Schaffer Consulting and a co-author of The GE Work-Out and The Boundaryless Organization. His latest book is Simply Effective.

~~~Finance Terminology~~~

Options Backdating

Setting the date of an employee stock option to an earlier time than when the option was actually granted. This can allow for a more favorable strike price. Backdating the option is not illegal, but the improper disclosure of the activity to the Securities and Exchange Commission is considered illegal.

Variable Annuity

An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio.

Pension fund

Pooled-contributions from pension plans set up by employers, unions, or other organizations to provide for the employees' or members' retirement benefits. Pension funds are the largest investment blocks in most countries and dominate the stock markets where they invest. When managed by professional fund managers, they constitute the institutional investor category with insurance companies and investment trusts. Commonly, pension funds are exempt from capital gains tax and the earnings on their investment portfolios are either tax deferred or tax exempt.

Discovery

Pre-trial disclosure process during which several legal devices can be employed by any litigating party to obtain relevant non-privileged information from the opposing or non-opposing party/parties. These devices include depositions, examinations of witnesses, inspection of documents, and interrogatories. If any party is unwilling to cooperate, the court may subpoena the party or the documents, or (after failure to make discovery) dismiss the action or enters a summary judgment.

Cost Estimate

An approximation of the probable cost of a product, program, or project, computed on the basis of available information.</p> <p>Four common types of cost estimates are: (1) Planning estimate: a rough approximation of cost within a reasonable range of values, prepared for information purposes only. Also called ball park estimate. (2) Budget estimate: an approximation based on well-defined (but preliminary) cost data and established ground rules. (3) Firm estimate: a figure based on cost data sound enough for entering into a binding contract. (4) Not-to-exceed /Not-less-than estimate: the maximum or minimum amount required to accomplish a given task, based on a firm cost estimate.

Roy's Safety-First Criterion – SFRatio

An approach to investment decisions that sets a minimum required return for a given level of risk. The Roy's safety-first criterion allows portfolios to be compared based on the probability that their returns will fall below this minimum desired threshold. It is calculated by subtracting the minimum desired return from the expected return of the portfolio and dividing the result by the standard deviation of portfolio returns. The optimal portfolio will be the one that minimizes the probability that the portfolio's return will fall below a threshold level.

The safety-first ratio is calculated as:

= E(r) - Threshold Return
... Standard Deviation

 

Markets in Financial Instruments Directive

MFID. A set of guidelines created by the European Union that created common regulations across the various investment services in each member state. MFID authorizes member states to regulate their own financial firms, requires that firms offer sufficient transaction transparency, and requires that firms offer the best trade execution for clients..

Five Questions That Should Shape Any Change Program

by Scott Keller and Colin Price

Most organizations will shrink or disappear in the long term: only a third of excellent companies remain excellent for decades, and when organizations try to transform themselves, even fewer succeed. But as economic, political, social, and technological change continue to accelerate, and competitive pressure grows more intense, leaders can't afford those odds. The likeliest way to overcome them, we found as we wroteBeyond Performance, is to address the underlying problem: organizations that focus too much on short-term financial performance, at the expense of organizational health, are those that most typically need transformational change; but, unfortunately, the change programs they create are similarly shortsighted.

Change programs that succeed, we've seen, put an equal emphasis on both performance and health in answering five basic questions that should shape any change program. Leaders who do this not only get near-term improvements, but also successfully build their organization's capacity to learn and keep changing over time — keeping them ahead of the pack.

1) Where do we want to go? Sounds simple, but answering this question for both performance and health means setting an aspiration at the intersection of where market opportunities exist, what capabilities your company has, and where you and your employees are passionate about making a difference. Wells Fargo CEO John Stumpf knew the company needed to improve performance, which was becoming increasingly difficult in the lead-up to the financial crisis. Stumpf was also passionate, however, about positioning the company for success in the longer term, by creating a new spirit and way of thinking in the company. So he and his top team set the aspiration of "One Wells Fargo," which included equal focus on performance measures such as earnings growth and cross-sell and on creating a lasting culture of customer-centricity and collaboration.

2) How ready are we to get started? Leaders of most failed change programs we've seen moved straight from aspiration to action. But you can't know what actions to take if you don't have a clear view of the capabilities and mindsets you'll need to develop to make the change stick. When Pierre Beaudoin took over the aerospace division at Bombardier with a mandate for change, he and his team understood that boosting factory performance would require building lean capabilities, something the company sorely lacked despite its engineering experience. Crucially, they also took the time to figure out that ensuring those capabilities were put to full use would mean changing workers' mindsets, from a focus on what engineering could make possible, to valuing individuals, enhancing the role of teamwork, and understanding the needs of customers.

3. What practical steps do we need to take? We've found that leaders need to be as clear about what the company won't do anymore as about what it will do to improve both performance and health. A.G. Lafley, in his famous turnaround of Procter & Gamble, established a portfolio of performance initiatives that, for instance, gave priority to four core businesses. At the same time, he created a "not-to-do" list including projects that were driven by technology rather than customer needs. What's more, he ensured every initiative — whatever its specific focus — included building mindsets and capabilities related to focusing on customers and forging external partnerships as part of its implementation.

4. How do we manage the journey? Implementing a portfolio of performance initiatives can take different forms — everything from running pilots to 'big bang' roll outs. But too often leaders underestimate the amount of energy that is needed to roll out large scale change. To avoid losing momentum, Julio Linares, the CEO of Spain's incumbent telecom operator, Telefónica de España, used three tactics that we've seen succeed at many companies. The first was clear communication so people understood how their project contributed to that year's targets and to the overall transformation program. Second, Linares ensured that a large portion of the company's 20,000 employees felt a meaningful degree of ownership of the changes by involving people at different levels in designing and tweaking them as they went on. Finally, Linares made sure they were making real progress and that the goals were still relevant by holding regular progress evaluations, the results of which were also widely communicated.

5. How do we keep moving forward? Those few leaders who actually reach their performance goal too often see it as the end of the road, and don't plan a transition to a period of continuous improvement. This creates a risk that the company won't be able to sustain the impact it's achieved. Avoiding this trap involves re-purposing some of your transformation infrastructure to have an ongoing role in facilitating knowledge sharing and learning methods, and providing expertise to help the company continue to improve. For these to be embraced in the long term, the right leadership skills and mind-sets must also be in place. After the formal end of a transformation program at ANZ Bank, for example, the company trained more than 6,000 leaders in areas such as self-awareness, resilience, and the ability to energize oneself and others. With these leaders, ANZ has enjoyed an era of continued high performance for more than a decade.
These five questions are straightforward, but too few leaders answer them with equal emphasis on performance and health. The benefits of putting in the time to do so, however, add up to nothing less than far better odds to achieve, sustain, and improve your change aspirations over time.

Companies that have survived 100 years in India

Two World Wars, the Great Depression, India's independence struggle, the Hindu rate of growth, the licence-permit raj, controls on foreign exchange and expansion, and the reforms of the 1990s: a handful of Indian companies have seen it all, and adapted along the way to do well. India has around three dozen century-old companies that are listed and still actively traded. Of these we have selected a dozen that have done especially well at responding to change. "Response to change is the first condition for survival in business," says Dwijendra Tripathi, a former IIM professor who authored The Oxford History of Indian Business. A hundred years is a long period. Dive into the exciting journey of these intrepid survivors.

1788: Breen & Co founded; to become Jessop in 1820

1838: The Times of India launched

1898: Calcutta becomes first city in India to get electricity

1902: Shalimar Paints sets up first paint factory in SE Asia

1902: Tatas open first hotel, Taj Mahal Palace

1910: Advent of electricity helps Britannia biscuits mechanise operations

1911: Shift of India's capital to Delhi announced; ITC gets stalls to advertise at Durbar

1919: Birlas defy Yule and other Scots to get into jute manufacture, WWI fuels boom

1926: Kirloskar makes first diesel engine in India

1929: TVS bags General Motors' dealership

1931: CESC builds tunnel under river Hoogly

1940: For the first time, The Times of India publishes news items

1945: Britannia sales surge, fuelled by contract to supply biscuits to Allied troops

1951: R.D. Birla acquires control of Century Textiles

1953: Bengal Chamber of Commerce completes a 100 years

1958: Godrej & Boyce makes the fi rst Indian refrigerator, in collaboration with GE

1969: Managing Agency system abolished

1975: ITC makes fi rst diversification, into hotels

1988: Jessop celebrates 200 years of existence

1998: Burman family hands over Dabur management to professionals

2007: Tata Steel acquires Corus

Management Tip of The Day by HBR

Getting People to Decide Already:

Indecisiveness plagues many companies. Often, both leaders and employees struggle to make or follow through on decisions. The result? Chronic underperformance. You can conquer this and infuse decisiveness throughout your organization by doing these three things:

• Engage in decisive dialogue. During each interaction with employees, model honest, open, and decisive dialogue. Make sure every meeting ends with a clear understanding of decisions and next steps.
• Turn dialogue into action. Indecision is often the result of confusion. Clarify accountability for reaching and executing decisions.
• Use follow-through and feedback to sustain action. Once you've set an expectation for decisiveness, you need to follow through. Give people honest feedback and discourage indecisive behaviors.
  
  Know Your Unwritten Plan

  When preparing for the future, you need two plans—one you write down, and one that's unwritten, fluid, and evolving. This blueprint exists in your mind as a living, changing understanding of where you're going, why you're going there, and how you're going to get there—all based on your current understanding of how the future will unfold. While your written plan includes specific objectives, action steps, and clear assumptions, the unwritten one consists of gut feel, general direction, and broad priorities. Over time, as you gather information and test ideas, you'll move many of these elements from hazy and unspoken to focused and written.

Commercial Terms

Bifurcation

The splitting of something into two separate pieces. Bifurcation occurs when a company divides into two separate divisions to create two new companies and issue two new shares. Existing shareholders before the split are given shares of the new company though a corporate re-organization.

Byproduct

Output other than the principal product(s) of an industrial process, such as sawdust or woodchips generated in processing lumber. Unlike joint-products, byproducts have low value in comparison with the principal product(s) and may be discarded or sold either in their original state, or after further processing.

Underwater

A call option whose strike price is higher than the market price of the underlying security, or a put option whose strike price is lower than the market price of the underlying security. Thus, there is no incentive to exercise the option today. However, the option still has "time value", value based on the fact that the prices of the underlier can change. This "time value" diminishes as the option approaches maturity.

Dim Sum Bond

A bond denominated in Chinese yuan and issued in Hong Kong. Dim sum bonds are attractive to foreign investors who desire exposure to yuan-denominated assets, but are restricted by China's capital controls from investing in domestic Chinese debt. The issuers of dim sum bonds are largely entities based in China or Hong Kong, and occasionally foreign companies. The term is derived from the Chinese cuisine that involves serving a variety of small delicacies and is especially popular in Hong Kong.

Adjusted Basis Value

Original cost or base price of a fixed asset from which depreciation is deducted, and to which capital expenditure is added. It is a taxpayer's equivalent of book value, and is used to arrive at capital gain or capital loss (resulting from the sale of an asset) for computing applicable tax. Also called adjustable basis value.

The Heart of a Teacher

The child arrives like a mystery box...
with puzzle pieces inside
some of the pieces are broken or missing...
and others just seem to hide

But the HEART of a teacher can sort them out...
and help the child to see
the potential for greatness he has within...
a picture of what he can be

Her goal isn't just to teach knowledge...
by filling the box with more parts
it's putting the pieces together...
and creating a work of art

The process is painfully slow at times...
some need more help than others
each child is a work in progress...
with assorted shapes and colors

First she creates a classroom...
where the child can feel safe in school
where he never feels threatened or afraid to try...
and kindness is always the rule

She knows that a child
can achieve much more
when he feels secure inside
when he's valued and loved...
and believes in himself
...and he has a sense of pride

She models and teaches good character...
and respect for one another
how to focus on strengths...not weaknesses
and how to encourage each other

She gives the child the freedom he needs...
to make choices on his own
so he learns to become more responsible...
and is able to stand alone

He's taught to be strong and think for himself...
as his soul and spirit heal
and the puzzle that's taking shape inside...
has a much more positive feel

The child discovers the joy that comes...
from learning something new...
and his vision grows as he begins
to see all the things that he can do

A picture is formed as more pieces fit...
an image of the child within
with greater strength and confidence...
and a belief that he can win!

All because a hero was there...
in the HEART of a teacher who cared
enabling the child to become much more...
than he ever imagined...or dared

A teacher with a HEART for her children...
knows what teaching is all about
she may not have all the answers...
but on this...she has no doubt

When asked which subjects she loved to teach,
she answered this way and smiled...
"It's not the subjects that matter...
It's all about teaching the CHILD

by Paula Fox

The listening problem

A skilled graphologist can understand if an individual is open to new ideas or is someone who is adamant and likes to do things on his own.
Sometimes, even a skilled graphologist can go wrong. :)
I recently met a very self made man, someone who had defied all the customs possible and made life on his own. His handwriting pointed out that he was not a very good listener and didn't really accept advice as graciously as one should.
I told him that, and he said I was wrong. This was my 2nd or 3rd point but he said that he listens to everyone. There was no way I was wrong. I tried to give him examples so I could explain my point. He refused. I couldn't really argue with such a senior business man...but this was so wrong. He just didn't budge, he was proving my point and I tried to point it out, but he still didn't agree. He told me to move on.
I carried on with my points and soon he started developing his trust. We came to the main reason for his analysis and I gave him the reasons. I was telling him something about his wife and the point drifted to how businessmen have to act in a way to be accepted by society. He said he understood it and we discussed how people close to us can nag us and constantly give ideas to help us improve. He then came to the listening point again and told me that he too faces the same issue. He had 3 wellwishers who always told him the right way of doing things. Like when one of them told him that the business won't work and his wife would come on the road, he transferred one of his flats on his wife's name and made his wife secure with a fd deposit and made arrangements for his child in next 3 months. When his aunt told him about looking good and dressing well, he bought the best quality clothes and a really pricey car in few days.
I realized one thing, Human beings are the most complex complex beings possible. He did listen to people but only to stop them from talking. He has lost those well wishers now but is happy in his own world. I tried to point this out in a subtle way that he didn't listen to ideas because the idea made sense, but only to prove a point and hence it showed in his handwriting but I don't think he was ready for that yet.
About Sunayna Navani
The corporate world didn't hold my interest for long and a 9 to 5 didn't appeal me one bit, So, I converted my hobbies into my profession and started art with sunayna (www.artwithsunayna.wordpress.com)to teach and sell art from quilling and became a full time graphologist. I use mix of Graphology, some spiritual practices and healing and to help you understand yourself and the world around you better or get a good life partner or help corporates hire better.

Rogue Trader

A trader who acts independently of others - and, typically, recklessly - usually to the detriment of both the clients and the institution that employs him or her. Rogue traders typically trade in high risk investments which can create huge losses but also large gains.

Reinvent Your Professional Identity

A mid-career switch can be challenging, especially if you've become pigeonholed in your current role. But it's possible to recreate your work identity, as long as you don't get stuck at the introspection phase. Take action by doing these three things:

• Craft experiments. Take on freelance or pro bono assignments that allow you to try new roles while staying in your current job.
• Shift connections. To move in a new direction, you need a new network. Reach out to people who can give you a fresh perspective on what you're trying to achieve.
• Make sense of it all. Tell others the story of who you hope to become professionally. This will help clarify your intentions and keep you motivated. Plus, you might win the support of your listeners.

Avoid 3 Common Decision-Traps

Making decisions is your most critical job as a leader. The more high-stakes a decision is, the more likely you are to get stuck. Here's how to avoid three of the most common traps:

• Anchoring. Many people give disproportionate weight to the first information they receive. Be sure to pursue other lines of thinking, even if the first one seems right.
• Status quo. Change can be unsettling and it's easy to favor alternatives that keep things the same. Ask yourself if the status quo truly serves your objectives and downplay the urge to stay in your current state.
• Confirming evidence. If you find that new information continually validates your existing point of view, ask a respected colleague to argue against your perspective. Also try to avoid working with people who always agree with you.

Expiration Month/Time

Options have a defined life and option traders select the duration that matches their forecast. Most stock and cash settled index options expire on the third Friday of every month. The expiration months are categorized as, front month, back month and LEAPS. Options that expire in less than four weeks (five weeks in a five week cycle) are considered front month options. Options that have more than four weeks of life are considered back month options. Options that have six or more months of life are called LEAPS. The more time an option has, the greater the time premium. Intuitively, a stock option with a great amount of time has a higher probability of being profitable. A $45 stock has a greater probability of moving above $50 in a three month period of time than it does in a three-week period of time. Option traders that believe a stock is poised for a quick explosive move should trade front month options. They will be cheaper and the trader can buy more options. Time premium decay is a factor and the move must take place quickly in order for the trade to work out. Option sellers like to sell front month options because of accelerated time decay in the last few weeks of life. An option trader who believes the stock will continue a long-term trend might consider buying a back-month option. An investor looking for a leveraged stock position might consider buying a LEAP call instead of the stock.

Fraption

Also known as an interest rate guarantee, this type of option allows an investor to set up a forward rate agreement during an agreed amount of time that triggers in response to a pre-set strike price. Fraptions are used to protect investors from dramatic declines in interest rates.

Whitewash Resolution

A term used in Europe to refer to a specific portion of the corporation act (called the Companies Act in Europe). This portion of the act indicates that a specific resolution must be passed before a company being bought out can provide financial assistance to the company which is buying it out. This is to prevent companies from taking advantage of the companies they are buying out.

Accounting Information System (AIS)

A system, typically computer-based, used for storing, collecting, and analyzing a company's financial and accounting data. Accounting information systems are generally used by executives to make decisions, develop company strategies, and generate reports for shareholders, internal personnel, and regulatory agencies. Accounting information systems also streamline accounting cycles and reduce the incidence of accounting errors.

Bank Deposits

Money placed into a banking institution for safekeeping. Bank deposits are made to deposit accounts at a banking institution, such as savings accounts, checking accounts and money market accounts. The account holder has the right to withdraw any deposited funds, as set forth in the terms and conditions of the account. The "deposit" itself is a liability owed by the bank to the depositor (the person or entity that made the deposit), and refers to this liability rather than to the actual funds that are deposited.

Quick Response

Just in time inventory partnership strategy between suppliers and retailers of general merchandise. It is aimed mainly at reducing order response time, and achieving greater accuracy in shipping the correct goods in correct quantities, by employing computerized equipment such as barcodes and EDI to speed up flow of information. Its other objectives include reduction in operating expenses, out-of-stock situations, and forced mark-downs (discounts).

Debt-To-GDP Ratio

A measure of a country's federal debt in relation to its gross domestic product (GDP). By comparing what a country owes and what it produces, the debt-to-GDP ratio indicates the country's ability to pay back its debt. The ratio is a coverage ratio on a national level.

Rate differential swap

A swap in which the two payments are tied to two currencies in two different interest rate indexes, but in which the payments are exchanged in one base currency. For example, a rate differential swap might have payments denominated in U.S. dollars, but could have one set tied to the Japanese LIBOR and another to the U.S. LIBOR. The Japanese LIBOR payments will still be made in dollars. The rate differential swap allows investors to profit from changes in the interest rates of the two indexes. also called cross-index basis swap, cross-rate swap, differential swap, interest rate index swap, LIBOR differential swap.

2 Ways to Spot Industry-Changing Trends

All leaders want to know what trends will shape the future of their industries before they happen. To spot them early, you can't mingle with the usual suspects at industry events. You need to interact with the peripheries of your industry. Here are two ways to do that:

• Spend time with peripheral customers. Every industry has cutting-edge users that know—or are even setting—the trends. Find these customers (hint: they are often the younger, technology-focused ones) and tap them for their insights.
• Investigate peripheral companies. Be on the lookout for interesting startups or established companies that could one day edge into your market. Don't be limited by traditional industry demarcations. Investigate companies solving similar problems that you solve for your customers..

Currency Strategist

A financial professional who evaluates economic trends and geopolitical moves to forecast price moves in the foreign exchange market. A currency strategist is often employed by a forex brokerage firm to perform research and analysis, and to form opinions regarding current and future currency price moves.

Currency strategists often use a combination of technical and fundamental analysis to make forecasts. A currency strategist usually has a degree in economics, international finance or international politics, and has a deep understanding of the international monetary system.

A currency strategist may also be called a currency researcher or a forex market analyst.

Urgent Opening in one of the International BPO for the "Voice Coach" for Gr. Noida.

 

Got an email, publishing for your interest…

Degination :Voice Coach
Work location – Greater Noida
Skills Required :International voice process experience
• 1 yr experience in International voice process
• Only Graduate can apply
• Flexible to work 24/7
• 5 Days working
• Good communication skills required
Wud Be responsible for taking care of Agents livecall and supervising the agents in rectifying the errors
Interested Candidate can forward their CV as soon as Possible to swatigupta@firstcalli.com
Interviews r on 18th August,2011 So hurry up to grasp the opportunity
Regards
Swati
First Call
0120-4336508
08527933058

Job Opening in Accounts

I got this email, publishing for your interest…. hope it will help out for a good career.

Good luck..!!

Experience required for the Job: 0 - 3 years

Job Location: Noida

Dear Candidate,

Dear Candidate,
This is in reference to your cv on a job site. We are currently processing a position for candidates holding B.Com with 0-3 year of industry working experience. Your current job profile and academic credentials seem to be in line with our client's requirement. Please note that the above-mentioned position is with our client. The current position is based at their Noida Operations. Please note that your cv is being considered for the position of Accounts.
Following is the brief company profile and job description for the mentioned position for your reference:
Our Client is a leading provider of Transformation and Outsourcing services to Global 1000 companies in multiple industries including insurance, banking, financial services, utilities, transportation and travel. Our solutions integrate our knowledge and experience in Decision Analytics, Financial & Risk Management, Operational & Process Excellence, Re-engineering and Integrated Transaction Processing to provide our clients with immediate business impact and long term financial value. We customize our solutions to improve the economics of business performance, transform organizations to be leaner and more flexible and provide a competitive edge in the marketplace. Our Client leverages its highly qualified and experienced professionals at its offshore, near-shore and onshore to address our clients’ present challenges and prepare them to Go Next. Now. to effectively address future challenges.
Our Client is a U.S. company that was incorporated in 1999. Our headquarters are based in New York City and we operate 15 state-of-the-art delivery centers in India, the Philippines, US, Czech Republic, and Romania with sales offices in New York, New Jersey and London. Our solutions help organizations achieve a competitive edge by managing their legal support operations from our global delivery centers. Organization can gain significant cost advantage and better quality of service.
Following is the brief job description for this position: A/P, A/R, Reconciliation, Invoice, B/R, Accrued Income / Expenditure, General Accounting etc.
Academic Background
· Must be B.Com
· Strong analytical skills
· Good Written and Verbal Communication Skills
· Sensitivity to quality of deliverables & meeting deadlines
· Ability to function in a team.
Please immediately forward us your updated cv along with the details of your present and expected salary.

Please immediately forward us your updated cv along with the details of your present and expected salary.
Thanks n Regds,
Pooja Goel
Intellect Career Solutions
9899515244, 0129-4011180
E-mail: pooja@intellectsearch.in

3 Ways to Build Confidence

Few people succeed in business without self-assurance. But, everyone has bouts of insecurity from time to time. Here are three ways you can bolster your confidence:


Be honest. Know what you're good at and what you still need to learn. With an accurate assessment of your abilities you can tell the difference between self-doubt and lack of skill.

Practice. If there's a job or task that you're worried about, practice doing it. Preparation builds both skill

and confidence.

Embrace new opportunities. Playing to your strengths is smart, but not if it means you don't try new things. Conquer fresh challenges to remind yourself what you are capable of.

THE NEW BENCHMARK FOR HIRING MANAGEMENT GRADUATES

The All India Management Association (AIMA) – the apex body for management in the country has launched a new test – MAST – Management Aptitude and Skills Test to bridge the gap between education and employment market.

 

Demand for Management Knowledge and Skills is increasing exponentially in the current business scenario and MAST will cater to the candidate’s aspirations and companies expectations from Management postgraduates.

 

A high profile advisory committee consisting of senior HR professionals under Chairmanship Mr. D Shiva Kumar, Managing Director, Nokia India is mentoring this Test. AIMA will conduct MAST on 18^th September 2011. The score card along with the professional details will be shared with the endorsing recruiters through AIMA portal.

 

MAST is a 2 ½ hours duration test and has three components

 

1.      General Aptitude   2. Domain Knowledge (Specialisation Area)   3. Psychometric Profiling

Key Features

 

1.      Test designed to evaluate Managerial skills of the MBA/PGDM candidates

2.      Computer adaptive objective type test to be conducted across India

3.      Fees  - Rs 1750

4.      Test scores to be accessed by Recruiters for full 1 year 

 

Why you should take MAST if you are MBA/PGDM pass out after 2008

 

•          Assessment of Managerial skills set sought by recruiters

•          Level playing field for the candidates irrespective of the geographical location and category of B School

•          Sharing of resume and MAST score  with endorsing recruiters at pan India level

•          Help streamline career growth and choose right career path    

 

MAST is being aggressively promoted to the HR fraternity, Placement Consultants & Job Portals in India and is backed by the best companies such as Dabur , Parle , ITC , JK Cement , Metlife , HDFC , Camlin ,Britannia  Intex etc which will be using  MAST score for their fresher hiring process.

 

Also click the below links for more information

 

Website: http://www.aima-ind.org/mast.aspx

 

MAST Flyer:   http://www.aima-ind.org/pdf/Mastflyer.pdf  

 

Registration Form: http://202.138.125.132/aima/Home/Menu.aspx

 

Feedback Form: http://www.aima-ind.org/AIMAFeedback_MAST.aspx

 

If you wish to have a great start to your career then please take MAST and brighten your chances of being picked by the company matching your managerial skills.

 

Best Regards

Team

Management Aptitude and Skills Test

All about ETFs (Exchange Traded Funds)

Exchange traded funds or ETFs have revolutionized the global investment industry in recent times due to their simplicity, low costs and ease of use.

In India, exchange traded funds have been in existence for quite some time now. But they have not been able to attract investors' attention and money unlike its global peers.

The foremost reason for ETFs not being popular among investors in India is the lack of understanding of the concept of ETF.

What are ETFs? How are they different from a normal MF? How does ETF work? Are ETFs worth investing? We look at the answers to these and some other common queries regarding the ETFs.

1. An exchange traded fund (ETF) looks like a mutual fund that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange.

ETFs experience price changes throughout the day as they are bought and sold throughout the trading day. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index.

Buying/selling ETFs is as simple as buying/selling any other stock on the exchange allowing the investors to take advantage of intra-day price movements. The main difference between ETFs and other types of index funds is that ETFs don't try to outperform their corresponding index, but simply replicate its performance. ETFs don't try to beat the market, they try to be the market.

2. Convenience: ETFs can be bought/sold any time of the day when the market is open, as they are traded on a real time basis.

Diversification: By investing in ETFs an investor can enjoy the diversification benefits of an index fund with the flexibility of a stock.

ETFs can be bought and sold anytime during market hours at a price which closely replicates the actual NAV of the scheme.

With a small amount of money an investor can get the benefit of an entire underlying asset which could be an Index or a commodity like gold.

Lower expense ratio: ETFs are managed passively. Hence administrative charges are low which pushes down the expense ratio.

Tracking error, which is divergence between the NAV of the ETF and the underlying Index, is generally observed to be low as compared to a normal index fund due to lower expenses and the unique in-kind creation / redemption process.

3. Investors can use ETFs for strategic asset allocation and tactical asset allocation to reflect their short-term investment insights.

Investors can use ETFs to make sector bets or reduce their sector exposure.

Investors can effectively short or hedge Index exposure by selling ETFs against long stock holdings, thereby reducing the broad market risk exposure or beta of the portfolio.

An investor in an open-ended mutual fund can only purchase or sell at the end of the day at the mutual fund's closing price, while ETF is continually priced throughout the day and therefore is not subject to this disadvantage, allowing the user to react to adverse or beneficial market condition on an intraday basis.
Tax efficiency: ETFs generally generate relatively low capital gains, because they typically have low turnover of their portfolio securities. While this is an advantage they share with other index funds, their tax efficiency is further enhanced because they do not have to sell securities to meet investor redemptions.

4. An investor can invest in ETF through AMC or an exchange. Expense ratio for ETFs is generally low but there are certain costs unique to the investors.

As investors can buy or sell ETF in the exchange like stocks, for every transaction he has to bear a brokerage commission. Investors may also have to bear costs related to difference in the ask-bid spread.

But these costs are not related only to ETF, even plain vanilla funds are also charged the same expenditure rather indirectly, as the fund pays for these costs.

5. One of the most important differences between open-ended mutual fund and ETF is that ETF are traded on an exchange on an intra-day basis and an investor can buy/sell ETF units at the prevailing market price.

While in an open-ended mutual fund, NAV is declared once a day and the investor can buy/sell at that NAV only.

6. Though ETFs and Futures provide an exposure to the same underlying index, they also differ on these points:

ETFs trade in much smaller investment sizes than a futures contract, making it possible for retail investors to participate in index investing.

Futures trading require an account with a broker having derivatives terminal and are subject to margin requirements prescribed by the exchanges.

Futures involve significant leverage which magnifies losses in the vent of prices moving against the positions held by the investor.

Futures contracts must be rolled over every three months (or every one month if liquidity is poor in far month contracts) which can lead to higher trading costs and tracking error.

7. Equity ETFs: Equity ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a mutual fund that you can buy and sell in real-time at a price that changes throughout the day. Currently there are eleven equity ETFs which can be traded in BSE.

Liquid ETFs: Liquid ETFs are the money market ETFs, the investment objective of which is to provide money market returns. Liquid BeES launched by benchmark mutual fund is the first money market ETF in the world. Liquid BeES will invest in a basket of call money, short-term government securities and money market instruments of short and medium maturities.

Gold ETFs: Gold ETF is a special type of exchange traded fund that tracks the price of gold. Currently there are six gold ETFs which can be traded in BSE.

8. Gold ETF is a special type of exchange traded fund that tracks the price of gold. Uses of gold ETF:

To keep gold as part of your portfolio, invest in gold ETFs

To accumulate gold for special obligations, and you can sell them to purchase jewellery or other forms of gold when you desire

Advantages of gold ETF

Price approximately equal to 1 gram of gold

Backed by physical gold holding of 0.995 purity

No wealth tax

Long term capital gains after on year

No STT

No storage issues and fear of theft

No need to bear insurance cost

No need to shell out a huge sum of money to purchase ETF units.

9. ETFs trade just like any other normal listed security on the BSE , settlement is just like any other stock.

In case an investor has purchased ETF from the market, he has to pay the broker before the pay-in on T+2 and in the case of sale, an investor has to transfer ETF units from his demat account to his brokers account before the settlement on T+2.

Are ETF's For ME ... . . .??

10. Here are some guidelines to help you know when to consider an ETF and when not.

If you're trying to get market returns or believe the index will yield good long-term returns, ETFs may be a good choice because of their low cost and diversification. But ETFs make little sense if you're trying to beat the market, since they only track market indices.

When you're looking for wide diversification, but have only a small sum to invest, an ETF may make sense.

When you're unsure what to buy but want to invest in equity, an ETF lets you invest in the stock market without betting on a particular company.

5 Reasons Not To Fear The Stock Market

According to a recent survey released by Prudential Financial, fear and disillusionment have once again grabbed hold of many individual investors. Nearly 60% of the survey respondents said that they had "lost faith" in the stock market, while 44% said that they are unlikely to ever put more money in the stock market again. (Why have stocks historically produced higher returns than bonds? It's all a matter of risk. Check out Why Stocks Outperform Bonds.)

TUTORIAL: Investing 101

Those are sobering statistics, but not terribly surprising. When times are good and the markets are running hot, people feel great about the markets and throw money at stocks. When times are bad, people swear off the markets and promise "never again" - until the next big thing dominates the headlines again.

For those who don't wish to ride that pendulum between frenzy and despondency, there are several solid reasons not to fear the market.

1. Volatility Is Not Risk
Investors should perceive the difference between long-term risk and short-term volatility. Risk is the chance that an investor experiences a permanent loss of value, while volatility is the turbulence along the way. Although it is not exactly true to say that an investor has not really lost anything until he or she sells, it is true that no stock ever goes up in an unbroken line; there are always pullbacks and sell-offs. Most people would not quit a job, sever a relationship or abandon a friend over one or two rough patches and the same should be true of the stocks of solid companies - a momentary setback is just that and one or two down years is no reason to abandon an investment (or investing altogether).

2. Long-Term Losses Still Rare
It may seem crazy to raise this point in the wake of a decade that saw the tech bubble crash and the housing market drag down the stock market, but long-term losses in the stock market are actually uncommon. It is true that the Nasdaq still has not regained its tech-bubble highs, but the S&P 500 and Dow Jones Industrial Average both did before investors fled the market amidst the credit crisis and pushed them down to the post-tech bubble lows again.

In point of fact, it is uncommon for the markets to be down over five-year stretches and very rare to see long-term declines beyond that length of time. That means that investors who can block out the volatility and stick to their plan do win in the end. Invest less money when stocks are overpriced (when you have a hard time finding bargains) and you limit the damage even further.

3. The Market is the Only Proven Way to Outpace Inflation
The stock market happens to offer one of the only proven ways to grow wealth faster that the rate of inflation. While bonds rarely offer more than 1% or 2% more than inflation (and sometimes much less), stocks have historically offered much better returns. This is a key consideration for those saving for retirement, as inflation represents a persistent economic loss on your savings and investing too conservatively (i.e. not beating inflation) is tantamount to locking in that loss.

Some will argue that gold is just as good at outpacing inflation, but the record on gold is dicey. Long stretches of outperformance in gold are frequently followed by major pullbacks, and it often takes decades to see those inflation-beating benefits. Unlike stocks, it is much more common to see five or ten-year losses in gold.

Likewise, real estate is another asset class famous for beating inflation, but like gold it is prone to huge run-ups and crushing pullbacks. Real estate also requires a large amount of capital and a fair bit of savvy from investors and is not nearly as accessible as the stock market.

4. Good Managements Create Real Growth and Value
The best that a bond investor can hope for is to be paid back in full, while gold investors have to wait and hope that some future buyer will pay more for those bars or coins than they did. With stocks, though, investors buy actual ownership in a business entity. Time has shown over and over again that talented managers do create real growth and real increases in value.

A gold bar will always be a gold bar - nothing less and nothing more. A share of Apple, Chipotle Mexican Grill or Alexion, though, is something much different today than it was just five years ago.

5. Fear Is a Contrarian Indicator
One of the best reasons not to fear the market today is that so many other people do. The stock market often offers the best values precisely when investors want nothing to do with it. Those who can control their fear, find the undervalued stocks and not abandon their strategy will often find that they end up paying much less than those who run hot and cold on the market. This is not easy to do - human instinct says that if everybody is fleeing from the same direction, you shouldn't go there - but success in a market of human beings often demands that you be less emotional and more patient than the crowds are capable of being. (Buying at the right price determines profit, but selling at the right price locks it in. See When To Sell Stocks.)

The Bottom Line
One of the fundamental traits of fear is its persistence - there is always something to be afraid of if you want to find it. In terms of investing, it is said that the markets are always in a tug of war between fear and greed, and this recent survey from Prudential suggests that fear is now winning the battle. Patient investors should see this as an opportunity to buy and should remember that the stock market offers numerous valid reasons to continue investing. There will be tough stretches and investors should not blindly throw money at stocks no matter what the valuation, but investing rewards patience and discipline and the stock market still represents one of the best opportunities that regular people have to build wealth.

Read more: http://financialedge.investopedia.com/financial-edge/0611/5-Reasons-Not-To-Fear-The-Stock-Market.aspx?partner=facebook#ixzz1Q2uMTpXO

Taken from Investopedia.com

Collateralized mortgage obligation

A collateralized mortgage obligation (CMO) is a type of financial debt vehicle that was first created in 1983 by the investment banks Salomon Brothers and First Boston for U.S. mortgage lender Freddie Mac. (The Salomon Brothers team was led by Gordon Taylor. The First Boston team was led by Dexter Senft[1]).

Legally, a CMO is a special purpose entity that is wholly separate from the institution(s) that create it. The entity is the legal owner of a set of mortgages, called a pool. Investors in a CMO buy bonds issued by the CMO, and they receive payments according to a defined set of rules. With regard to terminology, the mortgages themselves are termed collateral, the bonds are tranches (also called classes), while the structure is the set of rules that dictates how money received from the collateral will be distributed. The legal entity, collateral, and structure are collectively referred to as the deal.

Investors in CMOs include banks, hedge funds, insurance companies, pension funds, mutual funds, government agencies, and most recently central banks. This article focuses primarily on CMO bonds as traded in the United States of America.

The term collateralized mortgage obligation refers to a specific type of legal entity, but investors also frequently refer to deals issued using other types of entities such as REMICs as CMOs.

Purpose

The most basic way a mortgage loan can be transformed into a bond suitable for purchase by an investor would simply be to "split it". For example, a $300,000 30 year mortgage with an interest rate of 6.5% could be split into 300 1000 dollar bonds. These bonds would have a 30 year amortization, and an interest rate of 6.00% for example (with the remaining .50% going to the servicing company to send out the monthly bills and perform servicing work). However, this format of bond has various problems for various investors

Even though the mortgage is 30 years, the borrower could theoretically pay off the loan earlier than 30 years, and will usually do so when rates have gone down, forcing the investor to have to reinvest his money at lower interest rates, something he may have not planned for. This is known as prepayment risk.

A 30 year time frame is a long time for an investor's money to be locked away. Only a small percentage of investors would be interested in locking away their money for this long. Even if the average home owner refinanced their loan every 10 years, meaning that the average bond would only last 10 years, there is a risk that the borrowers would not refinance, such as during an extending high interest rate period, this is known as extension risk. In addition, the longer time frame of a bond, the more the price moves up and down with the changes of interest rates, causing a greater potential penalty or bonus for an investor selling his bonds early. This is known as interest rate risk.

Most normal bonds can be thought of as "interest only loans", where the borrower borrows a fixed amount and then pays interest only before returning the principal at the end of a period. On a normal mortgage, interest and principal are paid each month, causing the amount of interest earned to decrease. This is undesirable to many investors because they are forced to reinvest the principal. This is known as reinvestment risk.

On loans not guaranteed by the quasi-governmental agencies Fannie Mae or Freddie Mac, certain investors may not agree with the risk reward tradeoff of the interest rate earned versus the potential loss of principal due to the borrower not paying. The latter event is known as default risk.

this content is picked from wikipedia and I do not have any copyright of it.

to read more on it click here

The Basics Of Municipal Bonds

If your primary investing objective is to preserve your capital while generating a tax-free income stream, municipal bonds are worth considering. Municipal bonds (munis) are debt obligations issued by government entities. When you buy a municipal bond, you are loaning money to the issuer in exchange for a set number of interest payments over a predetermined period. At the end of that period, the bond reaches its maturity date, and the full amount of your original investment is returned to you.

While municipal bonds are available in both taxable and tax-exempt formats, the tax-exempt bonds tend to get the most attention because the income they generate is for most investors exempt from federal and, in many cases, state and local income taxes. Investors subject to the alternative minimum tax (AMT) must include interest income from certain munis when calculating the tax, and should consult a tax professional prior to investing (For more, see Weighing The Tax Benefits of Municipal Bonds).

Two Varieties

Municipal bonds come in the following two varieties:

•general obligation bonds (GO)

•revenue bonds

General obligation bonds, issued to raise immediate capital to cover expenses, are supported by the taxing power of the issuer. Revenue bonds, which are issued to fund infrastructure projects, are supported by the income generated by those projects. Both types of bonds are tax exempt and particularly attractive to risk-averse investors due to the high likelihood that the issuers will repay their debts.

Risk Factors : While buying municipals bonds is viewed as a conservative investment strategy, it is not risk-free. The following are the risk factors:

Credit Risk: If the issuer is unable to meets its financial obligations, it may fail to make scheduled interest payments and/or be unable to repay the principal upon maturity. To assist in the evaluation of an issuer's creditworthiness, ratings agencies, such as Moody's Investors Service and Standard & Poor's analyze a bond issuer's ability to meet its debt obligations, and issue ratings from 'Aaa' or 'AAA' for the most creditworthy issuers to 'Ca', 'C', 'D', 'DDD', 'DD' or 'D' for those in default. Bonds rated 'BBB', 'Baa' or better are generally considered appropriate investments when capital preservation is the primary objective. To reduce investor concern, many municipal bonds are backed by insurance policies guaranteeing repayment in the event of default.

Interest-Rate Risk: The interest rate of most municipal bonds is paid at a fixed rate. The rate does not change over the life of the bond. If interest rates in the marketplace rise, the bond you own will be paying a lower yield relative to the yield offered by newly issued bonds.

Tax-Bracket Changes: Municipal bonds generate tax-free income, and therefore pay lower interest rates than taxable bonds. Investors who anticipate a significant drop in their marginal income-tax rate may be better served by the higher yield available from taxable bonds. (To learn more, see Weighing the Tax Benefits of Municipal Securities.)

Call Risk: Many bonds allow the issuer to repay all or a portion of the bond prior to the maturity date. The investor's capital is returned with a premium added in exchange for the early debt retirement. While you get your entire initial investment plus some back if the bond is called, your income stream ends earlier than you were expecting it to.

Market Risk: The underlying price of a particular bond changes in response to market conditions. When interest rates fall, newly issued bonds will pay a lower yield than existing issues, which makes the older bonds more attractive. Investors who want the higher yield may be willing to pay a premium to get it. Likewise, if interest rates rise, newly issued bonds will pay a higher yield than existing issues. Investors who buy the older issues are likely to do so only if they get it at a discount. If you buy a bond and hold it until maturity, market risk is not a factor because your principal investment will be returned in full at maturity. Should you choose to sell prior to the maturity date, your gain or loss will be dictated by market conditions, and the appropriate tax consequences for capital gains or losses will apply.