know debt jargon

Average Maturity:  This the average holding period of all the instrument held in a portfolio.  This measure is calculated as the remaining period for which each instrument is to be held before it falls due.  Each instrument given weights according to the sums invested in them.  Average maturity f fund provides an indication as to whether the fund follows a short term or a long term strategy.  A  low average matuirty is  typically resorted when interest rate is moving up.  That is because shorter term instruments suffer a lower fall during such phases than longer term ones.  Once interest rates are on declining phase, many funds go for instruments with longer maturity.

A short term fund may for instance hold long term debentures but this does not mean it holds the instruments for the long term.  The fund may have entered such instruments in the secondary market at a time when residual maturity is not too high.

Modified Duration:  Modified duration measures how sensitive the fund portfolio is to changes in interest rates.  The price of a bond and yield on the bond are inversely related. When interest rates decline, bond prices rally and vice-versa.  Modified duration captures the extent of price changes for a given change in the interest rates or yield.

If the modified duration of a portfolio with average maturity of five years is four then every one percent move in the yield of a five year bond the portfolio value or price moves 4 percent.  Generally it is prudent to hold longer druation portfolios during a falling interest rate cycle.

Credit Rating:  A credit rating is a opinion on company's ability to repay  loans given to it both the interest payout and principal repayment.  The higher the credit rating, lower the chance of default.  Therefore invetor can look at the credit rating of the instruments in the portfolio  and figure out whether the fund is taking a risky bets to imporve yields or if it is managing reasonable returns actively chruning the portfolio.

Yield to maturity (YTM) This is the annaulised return the fund will get if all the instruments are held until the respective maturity (without selling them before they mature) while the coupon rate is the interest receivable on the face value of each bond, the ytm is based on the current market price of each bond ( or fund)

It is return calculated on the current market price of the bonds in the fund using the interest receipts (coupon rate) and maturity amount as inflows

For investment at face value YTM will be equivalent to the coupon rate.  In products such as fixed matuirty plans (FMP) the YTM of the instruments in which the fund invests provide a broad indication of the returns that can be expected from the fund.  However, in other cases where the fund may sell bonds before matutity, the YTM is not necessarily the return an investor gets on his fund.

Retirement Plannig Step1: Know your Gratuity

Gratuity is lumpsum payment given to any employee when he reitires or leaves service, it is primarily meant to be a retirement benefit to an employee under the provision of the payment of gratuity act 1972, minimum eligibility to get gratuity is atleast 5 years of continuous service with one employer.

 

As per its common and popular meaning gratuity means

1. money given in recoginition of services
2. an extra amount money given for services rendered
3. an award in lieu of long service given without claim or obligation

Payment of Gratuity as per Act

• Minimum employees to be 10 and above, once the organisation is covered under the act even the number of employees goes down below 10 is subsequent years the organisation is remains covered under the gratuity act.
• Minimum 5 years of service with one employer
• The employee leaves the organisation due to death or incapacitation the minimum service criteria is not applicable
• The eligible employee gets gratuity either on retirement or on leaving organisation
• The nominee has to be necessarily one or more member of the family only, in case others the nominee will become null and void
• An employee can't assign the gratuity amount in favour of anyone as security for repayment of loan or otherwise.
• Maximum gratuity payable as per the act is Rs.3,50,000/-

Grautity Formula

               (15/26)* No of completed years of service * Last salary drawn

where

Last salary drawn = Last month Basic Salary + Dearness allowance

Taxation of Gratuity

1. Actual Gratuity Received
2. Maximum Grautity payable as per act Rs.3,00,000/-
3. Calculation of Gratuity by above said formula

The minimum  of the above amount will be exempted from income tax as per section 10(10) of income tax act.

Retirement Planning

Retirement Planning

Retirement planning has become one of the most important investment for yougester who drives the Indian economy due to their good earning which in turn given them a good purchasing power. 

These yougsters will turn old in between 20 and 30 years period, where they need huge corpus which will give them passive income during their golden period. 

Unfortunately a survey shows that people of age 25 after 40 years only 1% can be rich and 4% can be financially free.  Other will be in a financial lurch or died or still working after age 65 years.  This is due to our medical advancement the lonveity of normal Indian is increased.  So have your retirment plan as early as you start your career. 

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