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Financial Derivatives

Category : Finance Issues






‌Derivatives Contract:

It’s a contract or agreement for exchange of payments and whose value is derived from the value of its underlying assets.


Therefore,It is a financial Instrument which derives its value/price from the underlying assets.This underlying can be assets,index, or interest rates.
‌It can be used for various purposes including insuring against price fluctuations which is hedging.
‌Derivatives consists of Forward, Options, Futures and Swap.
Derivatives are of two types.

1). Privately traded Over The Counter Derivatives like swap and

2). Exchange traded Derivatives.




Types of Derivatives:

Forward,Futures,Options and Swap.


Forward Contract:
A forward contract is an agreement between two parties – a buyer and a seller to purchase or sell something at a later date at a price agreed upon today.A forward contract is non standardized contract and can be used for hedging or speculation.Forward contract is traded over the counter.

Futures Contract:

A Futures Contract is a standardized Forward contract and a legal agreement between to parties to buy or sell something at a predetermined price at a specified time in the future.Primarily the underlying assets are Commodity and financial instruments.

E.g. Metal,Oil,Gas,Stocks, Bonds,Shares,Currencies.


An option is a contract that offers the buyer a right but not an obligation to buy(call) or sell(put) a security or a financial instrument at an agreed strike price on a specified time based on the form of options.

A call option gives the right to buy the underlying assets but not an obligation.

Likewise a put option gives a right to sell the underlying assets.


A swap is a derivative contract through which two parties exchange financial instruments.Swaps involve cash flows based on notional principal amount that both parties agree to.It is traded over the counter only through banks.Basically swap takes place at a predetermined time as stipulated in the contract.Swap is of two types.One is Interest rate swap and the other one is Currency swap.

‌”Happy Reading”


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“Thumb Rule of Budgeting for personal Finance”

Category : Finance Issues , Home


“Thumb Rule of Budgeting for personal Finance”

Earlier we have discussed about the needs of Personal Finance in our daily lives.The necessity of having a sound personal finance plan in line with our financial goals.I am sharing the (Links for Needs of Financial Planning) links below.




Similarly, today  we are going to discuss about the most obvious and relevant topic of personal finance that is Budgeting.Every action plan is based on a proper budgeting plan and personal finance is also no different.A proper budget helps us in deciding and setting up our financial goals in realistic manner.I have already said that one’s financial goals should always remain in line with his or her earnings.Therefore, a sound budgeting plan always comes handy there.We must not forget that while making our budgets we should differentiate between our needs and greeds.


Thumb Rule of 50/30/20  :

Very often we get confused about what should be the exact expenses ratio be it household exp,be it loan EMIs,other repayments or savings in comparison with our earnings which is take home pay here.So that we can have a clear idea whether we are over spending or over borrowing.

Thumb Rule of 50:(From expenses point of view Maximum 50% of net take home pay after Tax)

*Our mandatory or unavoidable expenses should not exceed 50% of our take home pay after tax.

  • All household expenses—-Such as Utilities,food,entertainment ,education,fuel cost,payment for health policies and etc;
  • Home loan EMIs/House Rent;

Thumb Rule of 30:(From savings point of view Minimum 30% of net take home pay after Tax)

**We must have inculcate the habit of savings for investments towards our long term goals.

  • Such as children’s higher education,foreign tour planning with family,child’s marriage,corpus for retirement ,payment of Term life insurance premiums,and etc.Those who have just started their earning career and have not bought any house yet and planning for it  may consider this rule as 50% instead of 30%;
  • To meet the long term goals i.e. from 5 to 7 years and more with ease one must invest in equities at the outset.Depending upon one’s risk profile he must invest this amount in different Mutual funds of different categories such as Long term,Mid & Small cap and Small cap funds.Also with the help of financial advisors one can invest in stocks of their own risk profile.

***Thumb Rule of 20:(To meet short term i.e. from 2 to 3 years needs)

Usually, this rule may be followed for meeting up short term needs outright.

  • Such as—- local vacations,purchase of electrical appliances of needs,setting up emergency funds for loss of job usually for 4 to 6 months expenses,downpayment for  buying a car, emergency medical needs and etc.
  • To meet these sort of goals one may consider Bank FDs,Liquid Mutual Funds,Balanced Equity Mutual Funds,Debt Mutual Funds and lastly Savings Accounts.



I would conclude here by quoting one great saying of American Finance Guru Warren Buffet. He said that ” If we purchase anything that we don’t need today,there may come a day when we have to sell the things we need today”.

“Happy Reading”



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Insights of National Pension System or New Pension System.

Category : Home , Retirement Planning


 New Pension System or The National Pension System is a

pre defined contribution pension system which is operated by the government of India. Before2004, NPS used the defined benefit plan, wherein the benefits available to the pensioner post retirement were pre-defined.

Apart from offering a range of investment options to employees, the scheme allows individuals to make decisions about where their pension fund is invested, permits limited withdrawal prior to retirement and reduces the total pension liabilities of the Government of India.

NPS has two main categories:
Tier I :-

A Tier I account is a basic retirement pension account available to all citizens from 1 May 2009. Although in case of Premature Withdrawal, one can withdraw only up to 25% after a lock-in period of 10 years and the remaining has to be invested in an Annuity.
It has a minimum contribution of Rs. 6,000 per annum or Rs. 500 per month. Although it has no maximum investment limit, one can get a Tax Exemption of up to Rs. 1.5 Lac per annum as per section 80C and an additional Rs. 50,000 as per section 80CCD (1b).
Post attaining the age of 60, maximum 60% amount can be withdrawn and remaining, 40%, needs to be invested in Annuity.
Tier II :-

A Tier II account is a Prospective Payment System (PPS) account that permits some withdrawal of pension prior to retirement under exceptional circumstances, usually related to the provision of health care.
It has a minimum contribution of Rs. 2,000 per annum and no maximum contribution limit. However one does not get any tax benefit under this category.
There is no locking period given and there are no Tax Benefits as well.

Tax benefits on NPS are available through 3 sections – 80CCD(1), 80CCD(2) and 80CCD(1b).

All the tax benefits, annuity restrictions, exit and withdrawal rules are applicable to NPS Tier-I account only. NPS Tier-II account is like open-ended ended mutual fund. You can take out the money at any time without any hassle and tax burden due to non availability of tax exemption.

Benefits of NPS (Tier I)
NPS has 2 major benefits such as
Tax Benefit upto 1.5 Lac under section 80C and Rs. 50,000 under section 80CCD (1b).

The returns earned from this scheme is better than various other tax saving products in case of Auto Choice. In case of Active Choice, the composition of the portfolio matters.Besides these 2 factors, it instills a practice of regularly saving for retirement.

Risks of NPS (Tier I)
NPS has certain risks involved as well, such as :

Once a person has started investing in an NPS, he has to make the minimum contributions every year and can withdraw only 25% after 10 years for specific purposes including children’s higher education or marriage, construction or purchase of first house and medical treatment of self, spouse, children or dependent parents.
There is a minimum contribution of Rs. 6,000 per annum and only maximum of 50% can be allocated to equities.

As of now NPS is EET (Exempt, Exempt, Taxed) which implies that the investment and returns won’t be taxed but the redemption amount would be taxed as per the eligible tax slab.


In Budget 2016-17, the government rationalized the tax on NPS to make it more attractive. NPS has EET status which means that the investment and returns are not taxable, however a tax will be levy on the redemption amount.Since minimum 40% of the corpus has to be invested to buy an annuity, the taxation on the 40% of the corpus get delayed. In addition, now a person can withdraw up to 40% of the corpus without paying any tax. Therefore, only 20% of the corpus will be taxed.
Let’s take an Example:

Let’s say someone has an NPS corpus of Rs. 1 crore at retirement. The following two this will happen to him:

He has to buy an annuity of the 40% of the corpus i.e. Rs. 40 Lac goes to annuity.

He can withdrawal the rest Rs 60 lakh of the corpus, out of which Rs. 40 lakh is tax free while Rs 20 lakh is taxable as per the income slab of the investor.

Backdrops of NPS:

This becomes quite painful for those who would retire with NPS due to taxation on the balance amount to be withdrawn as per normal income tax slab.Also the returns earned from Immediate annuity is quite lower as compared to other fixed nature instruments.

Further, the income generated from annuities is also taxable.

Conclusions:GOI is making no stones unturned to make NPS a great hit by all means and also its continuous approach towards zero pension liabilities. Also they are contemplating to increase the equity exposure upto 75% for active choice options. But the compulsory annuity purchase of minimum 40% and additional tax burden on the @20% of total accumulated balance if not invested in annuities is giving investors a second thought about this.

“Happy Reading”



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Needs of “Financial Planning”

Category : Finance Issues , Home


Studies have shown that people are more comfortable and confident when they manage their finances as per clear financial plan. Financial planning is not about your wealth or investments, it’s about your financial goals in life, how can you achieve it, regular monitoring your walk towards your goals.

Financial Planning helps in knowing:

  •   What are my life goals,
  • How much money I need to achieve my goal,
  •    Can I achieve my goals?
  •   Which goals I need to postpone?
  •    What’s the best possible solution to generate the money,
  •    Am I progressing in right direction and is there any need for corrective action

Some of the benefits of having  financial planning are:

 Clear Financial Goals : First step of financial planning is knowing one’s financial goals and estimating the future amount of Goal. With detailed cash flow analysis, one get to know the goals which one should prioritize, goals which should be dropped as income and assets don’t support it, goals which should be reduced due to less amount available for them. Clarity of overall goals gives confidence to a person and one can work on other important things of passion, rather than always thinking about the requirements.

 Right investment option: One gets right investment portfolio as per individual’s risk profile. There are multiple investment options available, but each one is not suitable for everybody. With proper risk profiling and goal planning, one get to know the right investment product, so that all goals are achieved comfortably, without taking unnecessary risk.

Risk Management:  Investing as per individual risk’s profile helps in managing overall risk. With risk management, one comes to know, what risk should be taken while investing. This helps avoiding taking unnecessary risk.Further with adequate insurance plan, all  risks are properly planned. All these steps help in controlling risk and achievement of goals.

Regular review: Review and rebalancing is an important step of financial planning. In case there is a change in the market, one get to know immediately at the time of reviews and can take action accordingly.

Further, in case there is a change in individual’s needs and requirement, one can rebalance the portfolio.

Optimum returns from investments:  Knowing and taking right risks while investing, gives highest possible returns on the investment. Example-If a person is planning for retirement, he should put more money in equity based instruments rather than fixed deposits, as equity often gives superior returns in long term.

Live Stress Free Life:  One comes in stress when either we take unnecessary risks or we are not able to achieve our important goal, but when one knows the clear priorities of life and how to achieve them, one can live stress free life.

Happy Reading


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Insights of Mid and Small Cap Fund.


When it comes to equity mutual funds, small cap and mid cap mutual funds are termed riskier than their large cap counterparts. However, these small cap and mid cap mutual funds can deliver substantial gains especially when the economy is on the recovery mode.These are the companies that move fast and take quicker advantage of the improved economic conditions. The stock rises faster with even a little bit of influx in investments. No wonder in 2015, when the Nifty 50 and Sensex took a beating, BSE Small Cap and BSE Mid Cap rose by 5.4 and 6.7 percent respectively.

Global uncertainties prove to be a blessing in disguise for small and mid-cap companies. This is because large companies or large caps depend on global markets for a major share of their earnings. So when foreign investors exit emerging markets due to panic over rate increase in the US, there is pressure on large caps. Also in 2015, China found its currency devalued, resulting in rise in production costs and low consumption. Indian small and mid cap companies witnessed an increase in revenue because the ones that invested in textiles, chemicals and capital goods bolstered their exports.

Top performing small cap and mid cap mutual funds reflect the ability of companies to deliver superior growth in difficult economic conditions. One of the best performing mid cap mutual funds in the past five years is Mirae Asset Emerging Bluechip Fund. It has delivered 24.54 percent return over a 5-year period. It avoids companies that have weak cash flow like public sector banks, construction projects and companies that generate less than Rs.100 crore cash per annum. Small cap mutual funds have even outperformed their mid cap peers. DSP Micro Cap Fund has delivered 40 percent in 3 years, followed by Franklin India Smaller Companies Fund that has given 35 percent returns.

Should you invest in mid cap and small cap mutual funds?
Depressed prices of commodities, continuing slowdown in China and falling interest rates are likely to contribute to the growth of small and mid-cap mutual funds at least for the next two or three years. Efforts by the government to push investments can lead to faster growth for small and medium-sized companies. Sectors like capital goods, textiles, consumer goods and chemicals are perceived to be good sectors by most fund managers.

A long-term investor with a 5-year horizon can opt for small and mid cap mutual funds. If you have a high risk appetite, you can allocate 25 to 30 percent of your investment in these mutual funds; if want to take moderate risk, you can invest 15 to 20 percent in them. While choosing a fund, check how it has performed along the years and in different market cycles.

In the past five years, small cap and mid cap mutual funds have delivered an average of 30 percent and 25 percent. So, if you had invested Rs. 1 lakh five years ago in both these funds, it would have earned you around Rs.3.5 lakh and Rs.3 lakh respectively. As we mentioned, this is just an average, the best ones have given 20 percent returns in the past five years, there are three-year returns that have pushed 30 percent returns, too. Compare this to the Sensex that gave just 7 percent during the 5-year period!

Conclusion: Investment in Small and Mid Cap Mutual Funds can deliver superior returns as we have seen in the past considering a long term investment cycle say  5 to 7 years and more.Also you should have patience to take the big dip as well when market falls without worrying much about the market and just keep your investment going.This the main mantra of secret wealth hiding behind Small and Mid Cap Mutual Funds.

Happy Investing


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Best Small Cap Mutual Fund for 2018.


  Reliance Small Cap Fund:

Reliance Small Cap Fund(Growth) has been a consistent out performer since its inception.It has beaten the benchmark return every year from its inception since 2010.This fund has been ranked 2 in “Small & Mid cap” category by Crisil for quarter ended September 2017.You may consider investing in this fund keeping in mind your risk profile.Remember that this fund is highly volatile since providing a superior return and if you can digest the market downturn as well then you may go for this fund.

Fund Performance:

Period Return(%)
1 mth 3.7
3 mth 12.1
6 mth 13.1
1 year 50.8
2 year 27.1
3 year 22.7
5 year 32.1
7 year(31.10.2010) 31.14

 Therefore, you can see from above that the return of this fund for last 5 & 7 years have been tremendous. If one can bear the high risk for a longer horizon say 7 to 10 years he may have the probability of earning a good inflation adjusted return.However, one should keep in mind one thing as well that past performance must not be the only criterion for any fund selection.Other factors such as financial goals,one’s risk profile, income level ,time horizon and etc.

Now, let’s see this fund’s  XIRR for last seven years on monthly SIP basis.

Investment Period
Nov 01, 2010 to Oct 01, 2017
No of Investments 84
Monthly SIP ₹2,000.00
Total Amount Invested (Rs) 168,000.00
Total Units Purchased 11,888.12
Investment Value as on Oct 01, 2017 464,180.96
Latest NAV
42.86000 (as on Nov 17, 2017)
The return or XIRR ( XIRR for series of investments) of this Fund for the period 01.11.2010 to 01.10.2017 XIRR =29.14%


The XIRR of this SIP is coming out to be 29.14%.So, you can see that this fund has really outperformed its peers in terms of returns. Also, the return generation (29.14%) is quite attractive as compared to other funds.

Let’s have a look at this fund’s portfolio composition.

The top 10 holdings are shown below.

Top sector wise allocation is given below.

This fund contains high risk due to its inherent investment nature.Investors who are risk averse should not invest in this fund.On the other hand those investors who can bear the pinch of volatility may invest in this fund and they might get a hefty return in the long term.

” Happy Investing”




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Bharat 22 ETF

As of now all the Mutual Fund investors must have known or be informed that The Govt. Of India’s dream divestment(conferring its stake to others) project of Central PSEs in the form of ” BHARAT 22 ETF ” has come to an end on 17.11.2017. Which was available for Non Individual investors only for 14th November 2017  and 15th to 17th November 2017 for retail investors only. This NFO is expected to be oversubscribed for 2-5  times than its initial offer for  8500 Cr.

Now, we must know what is ETF or Exchange Traded Fund. As the term itself suggests that unlike a Mutual Fund an ETF is traded in Stock exchanges. Exchange Traded Funds (ETF) is defined as a security that tracks an index, a commodity or a basket of assets like an index fund but trades like a stock on an exchange and the  price of the fund changes throughout the day as it is bought and sold.

The great benefit of ETF is that it is very transparent regarding its underlying assets and is very low cost even compared to Mutual Funds since it is not required to be actively managed like other instruments due to its inherent nature of tracking a particular index only or underlying basket of assets,which is S&P BSE BHARAT 22 index for this case.

Salient Features of ” BHARAT 22 ETF ” :

First of all this ETF is being offered at 3% discount by G.O.I for NFO only. Which enriches its attractiveness in return perspectives.

It will primarily invest in 22 Blue chip stocks of Central Public Sector Enterprises(CPSEs) and out of which 16 stocks belong to the categories of Maharatna, Miniratna and Navaratna .This ETF  has a large-cap oriented composition (nearly 92 per cent), while the remaining are in quality mid-cap companies.The ETF is well diversified across six sectors — industrials, energy, utilities, finance, fast-moving consumer goods and basic materials. Also there are 3 private sector companies like Axis Bank,L&T and ITC, which the GOI holds a stake due to its legacy system of UTI. The maximum investment in a particular stock is restricted to 15% and for a particular sector is 20%.Every year in march there will be a portfolio re balancing and might be a scope of profit booking if so needed.  The portfolio composition is given below .



Now the big question is should you invest in this ETF. Many experts have said a “YES” on the other hand many experts said a “NO”. The reasons they provided for not investing is that they feel that this ETF would function like a Thematic fund and there is limited scope of out performance. But with my understanding and preference I would personally go for investing in this ETF considering key factors like very low expense ration of 0.0095% for first 3 years ,3% discount for initial offering  or NFO subscription,diversification across various 6 sectors, best blue chip companies of the country and also last but not the least Govt. of India’s recent initiatives towards rapid sustainable growth within 2020 or mission 2020.Also, I would suggest here that don’t invest here keeping in front of your emotions only.If you are comfortable in remaining invested for say more than 5-10 years, then only there is a probability that you may earn a superior returns and be a part of this long term growth opportunity.

Caution:No one can guarantee that this ETF would definitely fetch a greater return in future but the underlying stocks of the companies of this ETF and their continuous growth scenario indicate that this fund also have the potential to deliver a superior returns at a very very lower expense ratio as compared to Mutual Funds.

“Happy Investing”


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Top Mutual Funds for investment in 2018


Best Performing Large Cap Mutual Funds :

The following funds have performed extremely well in the past and is expected to deliver superlative returns in future as well.


Top 10 Holdings for above schemes:

#1. Aditya Birla Sunlife Frontline Equity:

HDFC Bank,ICIC Bank,Infosys,ITC, Maruti Suzuki,Bajaj Finance,IndusInd Bank,Hindalco,Kotak Mahindra,Yes Bank.

#2. SBI Bluechip Fund:

HDFC Bank, L&T,HPCL,ITC,  Nestle India,Mahindra & Mahindra,IndusInd Bank,SBI,Bharat Electronics,Kotak Mahindra Bank.

#3. Kotak Select Focus Fund Regular Plan:

HDFC Bank,Reliance Industries,HDFC, Hero Moto Corp,ITC, Maruti Suzuki,IndusInd Bank,SBI,ICIC Bank,L&T.

#4. Motilal Oswal MOSt Focused Multicap 35

HDFC,HDFC Bank,Maruti Suzuki,HPCL, IndusInd Bank,BPCL,Bajaj Finance,PNB Housing Finance,Eicher Motors,Max Financial Services.

NB:Mutual Fund investments are subject to market risks. Please read the scheme documents carefully before investing. Also the returns as mentioned above does not guarantee that the funds would perform the same in future as well.They are only just depiction of past actual performance.

You may choose any of the four funds shown above. Though most of the stock picking for each funds are kind of same especially for financial sectors.We don’t recommend to go for all four schemes together otherwise this will lead to portfolio overlapping.You may choose any one or two for investments.Diversification does not mean investments in too many funds of the same category. Though Large cap funds are  supposed to be on the safer bets , it is seen from the above tabulation that if  investment is done on regular basis in Mutual Funds irrespective of the category ,it has potential to meet your financial goals with ease by providing superlative returns.



” Happy Investing”


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Personal Finance – Let’s start with Mutual Fund


The success stories of all the wealthy people have one thing in common and that is perseverance and discipline.If we invest for longer tenure in any equity instrument it will definitely beat the little monster inflation  and bring us back a hefty amount which is also tax free.The most crucial part of mutual fund is that any earning from equity mutual fund is completely tax free if the investment is held for more than 12 months.
This means if we can afford a little amount every month and put it into a safety net of mutual funds over the period of at least 8 to 10 years believe me friends it will certainly give us a post tax return of 12 to 15% which is better than any fixed nature of securities.That does not mean Mutual Fund investment provides a guaranteed return or it does not have any investment risk associated with it,Of course it has investment risk associated with it.But we can  beat this by staying invested for a longer time horizon.

I would also like to add one thing here that mutual fund is not any investment tool,rather it’s a medium of indirect investment in equities and debts.
This is really a great tool for those who don’t have any or want to have direct exposure to stock markets.There comes the safety hands of Fund managers who on behalf of investors push the money to stock market.
One important thing everyone must know that the market as previously the statistics shows if  starts with a bull phase then it would certainly end with a bear phase within a span of 5 to 7 years.That means during this period we need to consolidate our investment portfolio and wait for the money to grow to reach our financial needs with ease.Also to keep in mind that nothing is permanent in Equity market.Not necessarily the market would follow the past trends.It might not follow the trend and start a new trend itself.
In today’s scenario for the lower middle class people Mutual Fund has become the only medium to save a hefty amount for their future and sunset times.I personally feel that Mutual Fund should be everyone’s first priority if one can spare even if a very small amount even 100 Rupees monthly and start an SIP from the very beginning of earning period. SIP helps in reducing average cost of investment by investing your money at different market or index level.

Here I would end up with quoting a great saying of market Guru Warren Buffet “Spend what is left after investment”. That is Income – Savings=Spending.
Only this discipline approach will take you closer to your financial dreams more than your expectation.

Quick Tip: Never try to time the market, rather spend more time in the market.There is no perfect time for investment in Equity market.Investment in equity market at any index level is embraced by the market itself.




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