Mutual funds vs hedge funds

Similarities:

Both mutual funds and hedge funds are managed portfolios. This means that a manager (or a group of managers) picks securities that he or she feels will perform well and groups them into a single portfolio. Portions of the fund are then sold to investors who can participate in the gains/losses of the holdings. The main advantage to investors is that they get instant diversification and professional management of their money.

Differences:
Hedge funds are managed much more aggressively than their mutual fund counterparts. They are able to take speculative positions in derivative securities such as options and have the ability to short sellstocks. This will typically increase the leverage- and thus the risk – of the fund. This also means that it’s possible for hedge funds to make money when the market is falling. Mutual funds, on the other hand, are not permitted to take these highly leveraged positions and are typically safer as a result.

Another key difference between these two types of funds is their availability. Hedge funds are only available to a specific group of sophisticated investors with high net worth

A flat interest rate means that the amount of interest paid is fixed and does not reduce as time moves on. In other words, the amount of payable interest does not decrease as the loan gets paid off each month.

if you take a loan of Rs 1, 00,000 with a flat rate of interest of 10% p.a. for 5 years, then you would pay:

Rs 20,000 (principal repayment @ 1, 00,000 / 5) + Rs 10,000 (interest @10% of 1, 00,000) = Rs 30,000 every year or Rs 2,500 per month.

Over the entire period, you would actually be paying Rs. 1, 50,000 (2,500 * 12* 5). Therefore, in this example, the monthly EMI of Rs. 2,500 converts to an Effective Interest Rate of 17.27% p.a.

Advantage
During a regime of credit restriction interest rates rise high, if repo rate is increased. So many borrower prefer flat interest rate to reduce interest liability over the sanction term.

Disadvantage
If there is no credit restriction, interest rates come down due to easy availability of credit. At that time flexible interest rate is preferable as interest burden goes down.

The reducing interest rate on the other hand means that as a payment is made on the principal amount of a loan, the interest payment reduces as well.

if you take a loan of Rs 1, 00,000 with a reducing rate of interest of 10% p.a. for 5 years, then your EMI amount would reduce with every repayment. In the first year, you would pay Rs 10, 000 as interest; in the second year you would pay Rs. 8,000 on a reduced principal of Rs. 80,000 and so on, till the last year, you would pay only Rs. 2,000 as interest. Unlike the fixed rate method, you would end up paying Rs. 1.3 lakh instead of Rs. 1.5 lakh.

Flat interest rates generally range from 1.7 to 1.9 times more when converted into the Effective Interest Rate equivalent.

To convert the Flat to Reducing Interest rate multiply by 1.8.

Why RBI banned Zero EMI

In general, as interest rates are lowered, more people are able to borrow more money. The result is that consumers have more money to spend, causing the economy to grow and inflation to increase. The opposite holds true for rising interest rates.

How could any bank offer any loan at Zero percent when they borrow at a cost from a depositor, pay salaries, rent, admin etc. So they must be charging the customer in some manner to get a return but show zero percent ROI to customer. RBI thought this is not a transparent and fair practice and so stopped it.

certain banks where charging hidden fees from the customers or getting discounts from the manufacturer and not passing it through to the Consumer

Why RBI hikes interest Rates to curb Inflation
Inflation, by definition, is an increase in the price of goods and services within an economy. It’s caused due to an imbalance in the goods and buyer ratio – when the demand of goods or services in an economy is higher than the supply, prices go up. Inflation isn’t necessarily a bad thing. It’s often an indicator of a robust economy and the government usually takes into account a yearly rate of 2% to 3% when it comes to an increase in inflation.

The interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from creditors.

Lower interest rates translate to more money available for borrowing, making consumers spend more. The more consumers spend, the more the economy grows, resulting in a surge in demand for commodities, while there’s no change in supply. An increase in demand which can’t be met by supply results in inflation.

Higher interest rates make people cautious and encourage them to save more and borrow less. As a result, the amount of money circulating in the market reduces. Less money, of course, would mean that consumers find it more difficult to buy goods and services. The demand is less than the supply, the hike in prices stabilise, and sometimes, prices even come down.

A growing economy might sound like music to your ears, but if you think about it, an economy growing at an alarming rate might not really be the best thing.

In a stable and healthy economy, wage and inflation rise in hand in hand.

A cut in the interest rates right now will devalue the Rupee further. Imports will be more expensive. Inflation will go up.

The ‘Rule of 72‘ is a simplified way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to duplicate itself

Years to double investment = 72/compound annual interest rate

Equity financing – from fund raiser point of view
Money without the hassle of repayment or interest.

Advantages to equity financing:

• Its less risky than a loan because you dont have to pay it back, and its a good option if you cant afford to take on debt.You tap into the investors network, which may add more credibility to your business.
• Investors take a long-term view, and most don’t expect a return on their investment immediately.
• You wont have to channel profits into loan repayment.
• You will have more cash on hand for expanding the business.
• There’s no requirement to pay back the investment if the business fails.

Disadvantages to equity financing:

• It may require returns that could be more than the rate you would pay for a bank loan.
• The investor will require some ownership of your company and a percentage of the profits. You may not want to give up this kind of control.
• You will have to consult with investors before making big (or even routine) decisions — and you may disagree with your investors.
• In the case of irreconcilable disagreements with investors, you may need to cash in your portion of the business and allow the investors to run the company without you.
• It takes time and effort to find the right investor for your company.

Debt financing
Advantages to debt financing:

• The bank or lending institution (such as the Small Business Administration) has no say in the way you run your company and does not have any ownership in your business.
• The business relationship ends once the money is paid back.
• The interest on the loan is tax deductible.
• Loans can be short term or long term.
• Principal and interest are known figures you can plan in a budget (provided that you don’t take a variable rate loan).

Disadvantages to debt financing:

• Money must paid back within a fixed amount of time.
• If you rely too much on debt and have cash flow problems, you will have trouble paying the loan back.
• If you carry too much debt you will be seen as “high risk” by potential investors – which will limit your ability to raise capital by equity financing in the future.
• Debt financing can leave the business vulnerable during hard times when sales take a dip.
• Debt can make it difficult for a business to grow because of the high cost of repaying the loan.
• Assets of the business can be held as collateral to the lender. And the owner of the company is often required to personally guarantee repayment of the loan.

Bonds
Businesses often need loans to fund operations, move into new markets, innovate and grow in general. But the amount they need often surpasses what a bank can provide. So another useful way for corporations to raise the necessary funds is to issue bonds to whoever wants to buy them.

When you buy a bond, you’re lending money to the organization that issues it. The company, in return, promises to pay interest payments to you for the length of the loan. How much and how often you get paid interest depends on the terms of the bond. The interest rate, also called the coupon, is typically higher with long-term bonds

F­or you, the lender, a bond is a kind of investment, like a stock. The difference is that stocks aren’t loans. Rather, stocks represent partial ownership in a company, and the returns represent a share in profits. For that reason, stocks are riskier and more volatile — they closely reflect the success of a company. Bonds, on the other hand, often have a fixed interest rate. Some bonds, however, are floating-rate bonds, meaning their interest rates adjust depending on market conditions.Like stocks, bonds can be traded. When someone sells a bond at a price lower than the face value, it’s said to be selling at a discount. If sold at a price higher than the face value, it’s selling at a premium.

Alternative investment
Investments other than Stocks, Bonds and Equity comes under alternative investments.

It includes tangible assets such as precious metals, art, wine, antiques, coins, or stamps and some financial assets such as commodities, private equity, hedge funds, carbon credits, venture capital, forests/timber, film production and financial derivatives.

Difficult to predict the actual cost since it primarily lack a good quality data.They are relatively illiquid. It is very hard to determine its current market value

Dividend
Corporations may pay out part of their earnings as dividends to you and other shareholders as a return on your investment. Share dividends, which are generally paid yearly, are in the form of cash.

Dividend is always calculated on this face value.

Suppose you own 100 shares of XYZ bank. The face value of shares is Rs 10 each. Then the Total face nominal value of your holding is Rs 1000. (This is independent of the purchase value of the shares).

If the dividend declared is 110%, it is calculated on the face value of shares. For example, you will get a dividend of 1100 on your shares. That means, the dividend per share is Rs 11.

Dividend payout ratio
You can calculate a dividend payout ratio by dividing the dividend a company pays per share by the company’s earnings per share.

Dividend yield
If you own dividend-paying shares, you figure the current dividend yield on your investment by dividing the dividend being paid on each share by the share’s current market price. Dividend yield, which increases as the price per share drops and drops as the share price increases, does not tell you what you’re earning based on your original investment or the income you can expect to earn in the future. However, some investors seeking current income or following a particular investment strategy look for high-yielding shares.

How to Calculate Dividend Yield?
Not all of the tools of fundamental analysis work for every investor on every stock. If you are a value investor or looking for dividend income then there are a couple of measurements that are specific to you. For dividend investors, one of the telling metrics is Dividend Yield.

This measurement tells you what percentage return a company pays out to shareholders in the form of dividends. Older, well-established companies tend to payout a higher percentage then do younger companies and their dividend history can be more consistent.

You calculate the Dividend Yield by taking the annual dividend per share and divide by the stock’s price.

Dividend Yield = Annual dividend per share / Stock’s price per share

For example, if a company’s annual dividend is Rs. 1.50 and the stock trades at Rs. 25, the Dividend Yield is 6%. (Rs. 1.50 / Rs. 25 = 0.06)

Dividend usually declared by the companies in % terms to the face value of the share. For Example, Company trading at Rs. 50 with a face value of Rs. 10 per share declares 10% dividend. That means company will pay dividend of Rs. 1 per share to its share holders. Hence in such a case, Dividend Yield is 2% (Rs. 1 / Rs. 50 = 0.02)