Karvy Private Wealth

What is Carry Trade In Currency?

2010-12-02T06:20:00.000-08:00

It is a strategy whereby an investor sells a certain currency with a relatively low interest rate and uses the receipts to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.

For example, in a rupee-carry trade, a trader borrows $10 million from an American bank, converts the funds into Indian rupees and buys a bond for the equivalent amount. Let’s assume that the bond pays 8% and the American interest rate is set at 2%. The trader stands to make a profit of 6% as long as the exchange rate between the countries do not change. Many professional traders use this trade because the gains can become very large, if leveraged.

The big risk in a carry trade is the uncertainty of exchange rates. These transactions are generally done with a lot of leverage, so a small movement in exchange rates can result in huge losses unless the position is hedged appropriately.

Source:

Economic Times

Some money management tips for your child

2010-12-02T06:16:00.000-08:00

All parents want to provide the best of everything to their kids and will do everything possible to ensure that their every wish is fulfilled. But parents will definitely not want their kids to be spoilt brats with disregard for their hard-earned money! If you’re wondering how you can provide your kids the best possible money management lessons, which will eventually help them in adulthood, read on.

The basics
The basic step in teaching kids to save and manage money on their own is by giving them an allowance. Very young kids can be introduced to the concept of saving through a piggy-bank. You can, by way of stories and real life examples, explain how daddy and mommy earn, spend, and save money.

To save or to spend
We all learn from our mistakes and know that experience is the best teacher. So let your kids learn from their spending mistakes too. Make them accountable for their spending and be firm on the allowance terms – no advances or extra allowances!

The ‘want’ list
Your kids’ endless ‘want’ lists are excellent teaching tools. Show them how to prioritize their ‘wants’ on the basis of ‘necessity’ and ‘luxury’. Teaching kids how to compare prices and choose the best economical product will help them spend wisely.

Debt and interest
When your kids borrow from you, make it clear that you have ‘loaned’ the amount and expect to be paid back from their next allowance. Kids learn quickly this way – when they feel the pinch! Similarly, applaud them when they save regularly or resist temptations.

Source:

Economic Times

How to use Mental Accounting to your advantage

2010-12-02T06:11:00.000-08:00

Recently we witnessed a Kaun Banega Crorepati (KBC) episode where the participant who had won 1 crore went for the 5-crore question. He had a lifeline and had already become a crorepati, yet decided to go for the kill. Sadly, he got the answer wrong and went home with just 3.2 lakh. It is disappointing to see a person who made 1 crore losing it the next moment because of the decision that he took. Not just this gentleman, there are many others on the show who fell prey to the phenomenon of ‘mental accounting’.

Mental accounting is nothing but the way we decide to treat money differently because of its source. Mental accounting can be good sometimes when we earmark a certain portion of our income towards savings or create a savings budget; but more often than not, it leads to self-destructive financial habits or poor financial decisions. According to traditional textbook theory of economics and finance, mental accounting should not exist as money is fungible, which means that a rupee in hand will have the same value and utility as that in a bank account.

However, real life is different and our mind creates different mental buckets, where it’s difficult to pay off a loan with the money one plans to buy an LCD. Thus, mental accounting is a powerful phenomenon and must be worked to one’s advantage to gain from it and avoid costly mistakes. Here is how to do it.

Train your mind to believe that all money is equal and you will not treat money differently depending on its source. As soon as you receive money from a bonus or a windfall, do not make any financial decisions. Let two or three days pass and let the euphoria settle a little. Take stock of your overall balance sheet and think about your important financial needs. Once you have understood your requirements, do the numbers and take a decision. If you have the itch to spend, gamble or do anything else with that money, set aside 50% of it as savings and spend the rest.

Investors can use mental accounting to their advantage by deciding to set a savings budget every month, creating a goal-oriented asset allocation and reviewing it regularly like a semi-annual ritual.

Source:

Economic Times

Make quick money with short term investments…

2010-12-02T06:06:00.000-08:00

Have an appetite for risk and ready for some quick investments? With rising interest rates, investors with surplus money have a plethora of opportunities to invest for short periods. Here’s a look at some of them.

Debt Instruments
The return of capital is certain in debt instruments, making them a good option to invest in. Low risk investors can always avoid the volatility in the stock market and park money here. Currently, such schemes provide up to 10.5 percent returns before tax deduction.

Mutual Funds
Generally, all the funds have an investment horizon of more than a year with few exceptions. Entry and exit loads act as barriers. Certain MFs which invest in securities have a maturity of one day to three months. Over the past financial year, these liquid MFs have given an annualized return of 8–10 percent.

Fixed Maturity Plans
As compared to fixed deposits, only a dividend distribution tax is applicable on these. They are predominantly close-ended products (investment in debt instruments).

Fixed Deposits
This well known option of investment is offered by public and private sector banks with 9.5–10 percent rates (for senior citizens) on FDs with different tenures.

Equities/Derivatives/Commodities
High risk investors with some financial acumen will be able to earn handsome returns in a short time. Almost all the segments like blue chip, textile, and infrastructure have been doing well with a booming economy. Derivatives and commodity trading have also become features of short term investments as deals can be squared soon.

All the above options are on the table keeping in mind a short investment cycle (6 months–1 year). Do not forget that the majority of short-term investments like equities have short-term capital gains tax associated with them.

Source:
Economic Times

Tips: Why You Must Invest in Art

2010-12-02T04:24:00.000-08:00

You’ve probably invested in stocks, property, gold and much more back home. But did you ever imagine that the piece of art you looked over in the exhibition during your visit home could be an asset in your investment portfolio? The answer is yes. Surprising but true! The Indian art market has matured to the extent that it is offering good long-term investment options!

According to art experts, art is the only form of investment where prices don’t come down. The advantages of investing in art don’t end right here, though. Art is not likely to be affected by the whims of the economy. Also, you get the aesthetic benefit of having bought something that you enjoy. These advantages have led to the growing popularity of the idea of art as a long-term investment option. A majority of buyers of contemporary Indian art have always been foreign nationals or Indians settled outside India.
So you’ve finally decide to go ahead and invest in art. Well, there are a couple of investment options that you may want to consider if you believe that investment in Indian art can fetch you better returns.

Art Funds
You need not buy art in its physical form. You have the option of electronically investing in units of art funds. The rise in demand for Indian art has prompted some art houses to launch mutual funds to ease investments in the Indian art market. The money collected through these art funds is used to buy actual art by renowned artists. Paintings and serigraphs are then held with the art house that launches these funds.

Paintings and Serigraphs
If you believe in investing in art in its physical form, you can contact several art houses which have branches in many cities across countries.
A word of caution before you take the plunge: you should always keep in mind that art is an illiquid asset. Also, not all pieces done by a renowned artist are masterpieces. You must be a connoisseur to recognize a masterpiece.