Volume 5

IMS Proschool - Financial Planning Weekly – Volume 5

Whether one should pick up stocks paying higher or lower dividend yield
in such a volatile market and particularly in a bear phase?

One school of thought
In A volatile market such as one we are in right now, are investors better off betting on high-dividend yield stocks? After all, buying such stocks is traditionally considered a good defensive strategy in turbulent market conditions.
“Remarkably, low-yield stocks reported a higher average earnings growth Y-o-Y (65% in FY07 and 37.5% in FY08) vis-à-vis high-yield stocks (30.5% in FY07 and 14.9% in FY08),”

What is Dividend Yield?
Dividend yield is the annual dividend paid by a stock, divided by the current stock price, expressed in percentage terms. The goal is to give investors an idea of the cash return they can expect from the money they’ve put at risk. Typically, in a bear market, a large number of investors seek out high-dividend yield stocks, spurred by the belief that the latter provide returns similar to that of fixed deposits with banks.
It’s fair to say the dividend yield is one indicator of how risky a stock is. But, it’s just one measure and not 100% certain, say analysts. For companies can start or stop paying a dividend at any time. It’s important not to take false security from the fact that a company pays a dividend.

Second school of thought
Investors tend to overlook capital appreciation, for which equities as an asset class are known for. In other words, the primary objective of equity investments is capital gains, rather than fixed returns. If one was to keep this aspect in mind, low yield stocks, by virtue of belonging to moderate-to high growth sectors, could actually have a higher likelihood of giving better returns.
It ultimately boils down to the risk appetite of an investor. “If you invest in low-yield stocks you are clearly looking for better capital appreciation.” Low-yield stocks that could actually have a higher likelihood of giving better returns, by virtue of belonging to moderate-to high growth sectors. The most popular explanation of a company stock with a low-dividend yield, say 1% or less, is that the company is still in rampant growth mode. Aggressive capex plans, etc, may see the company plough back cash into the company rather than give it to shareholders in the form of a dividend. Does that make the stock riskier, not necessarily.

Expert Comments

1. It’s fair to say the dividend yield is one indicator of how risky a stock is. But, it’s just one measure and not 100% certain. For companies can start or stop paying a dividend at any time. It’s important not to take false security from the fact that a company pays a dividend.

2. If profit growth in high-yield stocks is indeed lagging than in low-yield stocks, can the former really be considered a safe bet?
Slower profit growth may indicate a lower probability of dividend percentage and payout being maintained, going forward the yield could decline due to less profitability, making these stocks ‘less attractive’ than they appear currently.

3. If an investor is retiree and needs more of immediate income than an appreciation should opt for higher dividend yielding but safer stocks

4. Last but not the list the higher dividend yield stocks are used as a popular technique to rebalance the asset allocation by transferring the dividend to safe debt security.
Kindly post your comments on http://imsproschoolfinancialplanningweekly.blogspot.com/

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Volume 4

IMS Proschool - Financial Planning Weekly – Volume 4

IPO book-building may go
No real price discovery seen under book-building process. SEBI may weigh an alternative system for IPO pricing

WHAT IS BOOK BUILDING?
Book building is the process by which a demand for the securities or shares proposed to be issued by a corporate body is elicited and built up and the price for such securities is then assessed for fixing the quantum of such securities to be issued. This can be done through a notice, circular, advertisement, document or information memoranda or offer document. Today, 50% of an equity offering is earmarked for qualified institutional buyers (QIBs), 35% to retail and 15% to non-institutional investors/HNIs. Companies have to offload a minimum of 10% of their equity to go public. Price band for book building to fixed at 20%. For example the price band quoted for X Company IPO will be Rs.100 to Rs.120.

Book Building Process
Book building is a facility given to issuer companies and merchant bankers to ascertain the demand and indicative price before the actual opening of the issue. The companies have now been given a flexibility of indicating a movable price band or a fixed floor price in Red Herring prospectus. Definition of QIBs has been enlarged to include Insurance companies, Provident and Pension funds with minimum corpus of Rs. 25 crores. Gap between the closure of books and listing/ trading of securities is reduced to 6 days.

What is GREEN SHOE OPTION?
"Green Shoe option" means an option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilizing mechanism, which is granted to a company to be exercised through a Stabilising Agent. A company desirous of availing the option granted by this Chapter, shall in the resolution of the general meeting authorizing the public issue, seek authorization also for the possibility of allotment of further shares to the ‘stabilizing agent’ (SA) at the end of the stabilization period in terms of clause The company shall appoint one of the Lead book runners as the "stabilizing agent" (SA), who will be responsible for the price stabilization process, if required. The SA shall enter into an agreement with the issuer company. The SA shall also enter into an agreement with the promoters who will lend their shares Maximum number of shares that may be borrowed from the promoters shall not be in excess of 15% of the total issue size.

The basic purpose of ‘green shoe option’ is not to make available additional share capital to company, but to act as stabilizing force, if issue is over subscribed. The shares held by promoters are lent to Stabilising Agent (SA) and returned by SA to them after the purpose is over. Promoters do not get any profit in this transaction. The green shoe option is available only in case of IPO and not for subsequent issues.Do post your comments on the following:
1. Almost all the IPO's get subscribed at the highest price band.. Does it mean that Indian
IPO's are under priced?
2. Can we allow IPO's without indicative price bands? Will it really benefit retail investor?
3. Do you feel the current Book Building process has certain shortfalls and if yes what are they?
4. What is your suggestion to overcome these shortfalls?
5. Do you subscribe to IPOs? If yes How do you take your decision? Is it impulsive or based on the tips given in the various financial dailys or do you really apply some valuation technique? Let's discuss

Kindly post your comments on http://imsproschoolfinancialplanningweekly.blogspot.com

Important Information on CFP Certification
Financial Planning is considered to be the most rewarding and satisfactory career in Financial Services Sector. If you haven't become a Financial Planner Yet – Click here -http://proschool.imsindia.com or Call - +91- 9967365585
Take a Free CFP Challenge Test with us – check your Financial Planning Aptitude
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Module 5 Special Classroom Program introduced by IMS Proschool – Kindly email for more information Click Final Module Information

Volume 3

IMS Proschool - Financial Planning Weekly – Volume 3

News of this week

In its quarterly review of monetary policy, the central bank marked up Repo — the rate at which the RBI lends funds to banks — by 50 basis points to 9 per cent, the highest in seven years, and the Cash Reserve Ratio by 25 basis points to 9 per cent by keeping the Reverse repo, bank rate unchanged at 6%.
While the hike in repo will be with immediate effect, the increase in CRR, which is expected to suck out about Rs 9,000 crore from the system, will be effective from the fortnight beginning August 30, 2008.

What is Repo?
Repo is the repurchase agreement executed by Banks with RBI (by depositing their Govt. securities) towards the short term borrowings. Banks willing to borrow short-term money (through repo) from the Reserve Bank of India will have to pay 9 per cent interest by paying interest to RBI.(9%)

What is Reverse Repo?
Reverse Repo is exactly opposite of Repo where in Banks park their excess cash with RBI for getting some returns on it. (6%).

What is CRR?
CRR (Cash Reserve Ratio) is a cash equivalent to the % of time and demand deposits which every bank is supposed to deposit with RBI towards it’s liquidity.
According to Central Bank this measure was taken to tame the galloping inflation (which is at 11.98% for week ending 31st July). This is the third hike in CRR as well as repo in the current fiscal. With this hawkish measure, the RBI hopes to bring down inflation to 7 % by March 2009 from around 12 % at present.

How does it help contain Inflation?
1) Borrowings for banks become costlier, and hence they have to make lending to public as well as Industries dearer. The expected rate of PLR (Public Lending Rate) is around 15%. This will reduce the borrowings and hence curtail the money supply in the system.
2) Other effects are less spending hence reduction in demand side.
3) Increase in CRR sucks out Rs. 9,000 crores from the system leaving less money with the banks for lending

General Effects:
a. Increase in Home and Car Loan rates by about 50 to 100 basis point Will have direct effect on CAR & Real estate property sale.
b. Increase in cost of goods and services which shall result in reduced consumption
c. All the industries depending upon heavy loan structure to face more interest burden & hence face pressures on profitability, postponement in new investment plans & hence slow down in employment and overall GDP growth
d. As estimated by RBI the GDP growth rate to come down to 7.5 to 8%
e. This shall have direct effect on the valuation of companies and hence on share market.

Some thoughts for the week?
1) What are the other measures you think RBI and or Govt. to deploy to contain the Inflation?
2) How does people at large can contribute to tame the inflation?
3) With wide gap between Repo & Reverse Repo should Banks park their surpluses via Reverse Repo route or follow some other route?
4) What’s a role of call money rates in this situation?
5) What is the roll of a financial planner to preserve capital and offer reasonable post tax and
inflation adjusted returns?

Kindly post your comments here

Volume 2

IMS Proschool - Financial Planning Weekly – Volume 2


Are we going to see the end of Insurance Selling?

Mutual Funds have started offering Life Insurance Cover as additional gesture for the investors who adopt the route of SIP investments. This move by the Mutual Funds houses will put the ULIP players under stiff competition due to higher initial charges and mortality charges. In fact Reliance Mutual Fund and Birla Mutual Fund have already come out with their products in the market.

- Will this mean the end of Insurance Marketing ?

On 27th June inflation has moved to 11.4%, the highest in last 13 years due to crude oil prices crossing over to $142 per barrel from $100 in just 115 days.
- What does it mean to the common man / investor?

 The prices of petrol / diesel will have to be increased further making transportation costs ( be it driving your own car or traveling by air) more costly,

· Due to increase in freight charges all the consumables / vegetables / day to day items / all industrial raw materials etc. are likely to be dearer.

· Due to overall hike in prices the overall effect on economy shall result in retarding the economic growth

So Should we blame only Oil Prices for the current inflation ?

Statistics indicate that the Consumption pattern in India has undergone dramatic changes particularly in the last two years. Today, we do not hesitate to pay Rs 200/= for a movie ticket viz a viz Rs 50 a few years back. The mall culture has today penetrated even Tier IIII cities making people consume goods which they may not even need. The spending habits of people has undergone a change in the past few years.


Should the base year for calculating Inflation be changed to 2007 ?

On 24th June 2007, RBI declared a hike in CRR to 8.5%, then on 05 July 2007 it was hiked to 8.75% on 19th July 2007. RBI also increased the REPO rates(Rate at which banks borrows from RBI) to 8.5% in order to control the liquidity in the system as one of the measures to contain the inflation.
So what was the impact of this?

The loan rates were increased by all the financial institutions by 50 bps (0.5%) making home loans and personal loans costlier and out of the reach of the common man. Floating rate on home loans declared by the largest Public Sector Bank of the country i.e. State Bank of India is between 10.5% to 11.00% and the PLR (Public Lending Rate) is hiked to 12.75%. In other words home loans to go up by Rs. 35 per lakh.

The common investor has to invest his funds into proper classes of assets (say equity, debt, Gold etc.) which shall fetch him the returns to overcome the decrease in purchasing power of money due to such inflation.

Post your comments here

Volume 1

IMS Proschool - Financial Planning Weekly – Volume 1



To Create Wealth, what matters is the rate of return on your investments!

Save Tax and Avail Benefits of Indexation

Rs. 8500 becomes Rs.20000 in 10 years. This advertisement further declares that Post Tax rate of return as 12.18% (simple interest)

Now where is the catch in this advertisement?

The catch is what is the return an investor should look for which will help him to become Wealthier.

The return is to look for is post tax CAGR
Post Tax CAGR for the above deal is 20000 1/10
8500 - 1 = 8.92%

Adjusting this for tax, we get = 8.04% p.a.

Now how did you and your customers got taken by 12.18% rate of return, because the ad was calculated for simple return = 20000 – 8500 = 13.53%
85000

and post tax was shown as 12.18% p.a.

If you were a CFP, you would have immediately got the idea and helped yourself and your client, else you would buy a product and get a return which is lower than the inflation rate.


Important Information on CFP Certification


Financial Planning is considered to be the most rewarding and satisfactory career in Financial Services Sector.
If you haven't become a Financial Planner Yet – Click here -http://proschool.imsindia.com/ or Call - +91- 9967365585

Take a Free CFP Challenge Test with us – check your Financial Planning Aptitude
Click here to Go.. CFP Challenge Test

FPSB India Student Registration fee will be revised from August 1st 2008 to Rs.7500 from Rs.5000 per annum, Avail the benefit of lower registration fee by completing your registration process before 30th July 2008

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