Here are five key constituents of financial literacy which investors needs to equip with, in order to become financial literate
Financial literacy is the key to the empowerment of investors and helps in developing a healthy financial system. It has been often seen that in absence of financial literacy, many investors often get cheated. This applies to even otherwise educated persons, who are found lacking in financial literacy. So what is financial literacy and what are the key constituents of financial literacy. The President's Advisory Council on Financial Literacy in US defines personal financial literacy as "the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial well-being." This definition gives a clear cut understanding of financial literacy and emphasises the fact that certain types of knowledge and skills are required to become financial literate. While the definition has been used in the context of US, in the context of India, the situation can be different, although the basic tenets of financial literacy remain the same.
What are the key requirements to be financially literate? How can an individual acquire skills and knowledge to make him financial literate? Here are five key constituents of financial literacy which investors need to equip with, in order to become financial literate:
Understanding compounding and discounting
Every investor needs to understand how his investment generates return. In order to understand this, it is important that every investor understands how compounding works. Compounding gives an accumulated value of an investment considering reinvestment periodically. While it is possible for some investors to understand compounding as we read this during school days, discounting is very difficult to understand. Discounting helps in identifying present value of investments which is the key to compare returns like compounding. These days excel functions are available to understand compounding and discounting which every investor needs to familiarize himself with.
Understanding difference between savings and investments
Savings in itself is not enough and investors need to convert savings into investments. Savings are a part of money which an investor has to keep to meet short-term requirements. Savings are liquid funds which are maintained in order to meet some immediate returns while investments have long term horizon. Investments are driven by wealth-building objectives. It is important that investors invest their money in those investments which not only generate long term returns but also help them beat inflation. Inflation adjusted returns (often called as real returns) should be the driver of every investment objective.
Understanding risk and return of investments
Before making investments, an investor should understand the risk and return of investments. This is one of the most important components of financial literacy. Investments like equity carry high risk and have potential to generate high returns. However, it is important to note that taking high risk does not result into high returns essentially. Since risky investments carry potential of capital erosion, investors should understand risk element before making investments. If any entity is ready to offer an investor a very high return, then that investment should be avoided. Anybody offering an extremely high rate of return is generally desperate to borrow. Also, it is important to understand that projected returns in an investment are not the real return.
Understanding financial products
There are various financial products on offer in financial markets. While it is difficult to understand all these financial products, it is critical to understand plain vanilla financial products available in the financial market. Understanding financial products equips an investor to take informed decisions. The key objective of having this understanding is to select products which suit the requirements of investors. One of the key things that financial literacy equips an investor with is that one should never venture into those financial products in which an investor does not invest.
Understanding protectors of financial system
As part of financial literacy, one must understand as to who are the protectors of financial system.. These institutions are often called as regulators. While regulators may not help solve all financial woes of an investor, they are definitely the first step in solving financial grievances.
While there are various other aspects of financial literacy, it is important to equip oneself with bare minimum skills and knowledge necessary to become financially literate. Many investors end up losing their hard-earned wealth in the absence of financial literacy, so it is better that one equips oneself with financial literacy.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
The focus of REIT in India will be on completed revenue generating properties and less exposure to mortgage backed securities. Atleast 75% of the revenues of the REIT shall be from rental, leasing and letting real estate assets at all times. Minimum subscription size shall be Rs2 lakh
A draft paper on Real Estate Investment Trusts (REIT) by the Securities and Exchange Board of India (SEBI) permits real estate funds, which will invest in completed and revenue generating real estate. Find out the details of the new investment opportunity. REIT in India will be different from the US REITs.
On 10 October 2013, SEBI issued a draft Real Estate Investment Trusts (REITs) Regulations, 2013. A REIT is a pooled investment entity registered with SEBI, just like a mutual fund with investment primarily in real estate of completed and revenue-generating properties. The rental received from these properties will be distributed among investors as dividend. Real estate is a big ticket investment with a huge chuck of money getting locked in buying a property. The advantage of REIT is availability of exposure to real estate with a smaller ticket size as well as diversification of investment by REIT.
There are many differences in the REIT that will be offered in India when compared to already available REIT in US.
Where will REIT invest?
India: It has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. In order to provide flexibility, it has been allowed to invest the remaining 10% in other assets as specified in the proposed Regulations. E.g. developmental properties, listed or unlisted debt of companies, mortgage backed securities, equity shares of companies deriving not less than 75% revenue from real estate activities, government securities, money market or cash.
US: Invest at least 75% of its total assets in real estate assets and cash; Have no more than 25% of its assets consist of non-qualifying securities or stock in taxable REIT subsidiaries.
India: It has been specified that the size of the assets under the REIT shall not be less than Rs1,000 crore. Minimum initial offer size of Rs250 crore and minimum public float of 25% is specified to ensure adequate public participation and float the units. The REIT may raise funds from any investors, resident or foreign. Only for HNI - Minimum subscription size shall be Rs2 lakh and the unit size shall be Rs1 lakh.
US: Minimum of 100 shareholders after its first year as a REIT; No more than 50% of its shares held by five or fewer individuals during the last half of the taxable year.
Type of REITs
India: It has been mandated that at least 90% of the value of the REIT assets shall be in completed revenue generating properties. No REIT will be allowed to invest in vacant or agricultural land or mortgages other than mortgage-backed securities. Further, a REIT can invest its entire corpus in one project only if the size of the asset is at least Rs1,000 crore.
US: REITs generally fall into three categories: equity REITs, mortgage REITs, and hybrid REITs. Most REITs are equity REITs. Equity REITs typically own and operate income-producing real estate. Mortgage REITs, on the other hand, provide money to real estate owners and operators either directly in the form of mortgages or other types of real estate loans, or indirectly through the acquisition of mortgage-backed securities. Mortgage REITs tend to be more leveraged (that is, they use a lot of borrowed capital) than equity REITs.
India: Not less than 75% of the revenues of the REIT other than gains arising from disposal of properties shall be from rental, leasing and letting real estate assets at all times.
US: Derive at least 75% of gross income from rents or mortgage interest.
Distribution of REIT Income
India: To ensure regular income to the investors, it has been mandated to distribute at least 90% of the net distributable income after tax of the REIT to the investors.
US: Must distribute at least 90% of its taxable income to shareholders annually in the form of dividends.
REITs Coming: Is it the right product for you?
HSBC/Markit PMI for India’s services industry inched up to 47.1 in October from 44.6 in September, the fourth successive monthly contraction of services sector output across the country
India’s services sector activity witnessed a moderate improvement in October from a four-and-a-half year low of 44.6 in September, even while indicating a fourth successive monthly contraction amid economic uncertainty, an HSBC survey said today.
The HSBC/Markit Purchasing Managers Index (PMI) for the services industry inched up to 47.1 in October from 44.6 in September, the fourth successive monthly contraction of services sector output across India.
An index value of below 50 indicates contraction.
HSBC said, business activity fell in five of the six categories monitored by the survey, with the sharpest decline noted in hotels and restaurants.
“The continued contraction in services sector activity is testament to the dampening effects of the heightened macroeconomic uncertainty, which is making businesses and consumers more cautious about spending,” HSBC Chief Economist for India and ASEAN, Leif Eskesen, said.
The country’s economic growth slowed to 5% during fiscal ended March 2013 from an average of 8% over the past decade.
Earlier this week, the HSBC/Markit manufacturing PMI showed that India’s manufacturing sector activity contracted for the third straight month in October and stood at 49.6, unchanged since September, indicating a third, albeit marginal, successive deterioration of business conditions across the country.
Accordingly, the HSBC India Composite Output Index, which maps both services and manufacturing activity, rose from 46.1 in September to 47.5 in October, signalling a moderate and slower drop in private sector business activity.
“While activity readings may be stabilising, a notable recovery is not in the cards for a while still,” Eskesen said, adding that “despite the weak growth backdrop, RBI has to keep its inflation guards up to address the lingering inflation pressures.”
The Reserve Bank of India (RBI) in its second quarter policy review last week hiked key lending rate by 25 basis points to contain inflation in continuation of its hard-line stance.