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.

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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.

A new approach to problem-solving

Franchise consulting is a specialised category of professional assistance for investors, entrepreneurs and enterprises. Such consultants are hired by both franchisors and prospective franchisee. For a prospective franchisee, the consultant assists in exploring opportunities and selecting the most appropriate franchise to invest in. For franchisors, consultants provide their experience in developing franchise networks.

They are involved, right from the start-up to the sale of the whole network, to assisting the prospective franchisors in making decisions on the strategy, structure, economics, commercial policies and recruitment, and screening and selection methods of the franchisee.

INDUSTRY STATUS

With the end of the first quarter ending April, the industry has seen a growth of 25-30% in the number of brands expanding through franchising in all the major categories over the same period last year. The market size of franchising industry of the country is currently estimated at US$ 16 billion (roughly Rs 80,000 crore) and is expected to reach US$ 20 billion by 2013.

The franchising industry has witnessed a surge in the past decade and the role of consultants is diversifying. From developing franchise networks, the scope of services offered has also started to incorporate diagnostics of the business.

With a number of brands entering the maturity stage of the franchise life cycle, a new analytical approach to problem-solving has been noticed. The consultants no longer assist only new entrants into franchising, but also guide the mature players by suggesting formal methodologies or frameworks to identify problems and solutions.

GROWTH AREAS

As the industry matures, one would also see franchise consulting become more specialised where consultants would take on niche roles rather than collective end-to-end roles like those of a franchise field-consultant, whose role is to assist a franchisor with new store openings for his franchisee. In the days to come, we will witness a change in the role as consultants would begin

holding specialised group counselling and training sessions for the franchisee.

SKILL-SETS REQUIRED

The skills required to excel in this area include a logical approach, analytical thinking, zeal, persistence and confidence. Though not a requirement, a student can enrich his or her chances in the profession with a background in disciplines like business management, economics and psychology.

The consultant often works in-sync with the senior management of companies besides employees at all levels. Newly hired graduates usually work on gathering and collating data, process figures for the client’s senior management, take briefs from clients and other key individuals, and research external sources.

Consulting professionals are responsible for assembling and analysing data to make growth forecasts, create an understanding of the nature of the problem, layout potential options and develop objective conclusions and specific recommendations for the client.

REMUNERATION

Depending on the role and function, salaries may vary. A new entrant can fetch a CTC of anything between Rs 2.5 and 3 lakh per-annum. For an individual with an experience of three to five years, the salary can vary between Rs five and 10 lakh per-annum.

Letter of Credit

What Does Letter Of Credit Mean?

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

Letter Of Credit

Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.