Debit Notes

Debit Notes are Transactions signifying a payment that your Sub-Reseller or Customer Owes

you, just like Invoices. In fact structurally they are very much like Invoices. Though they

have a different meaning. Invoices always depict sales, while Debit Notes on the other hand

are used for deducting money from your Customer's or Sub-Reseller's Account without a sale

being made. This is akin to the definition of a Debit Note in the pure accounting sense. Lets

take a few examples to understand the difference between an Invoice and a Debit Note:

When a Customer buys a Product/Service and you charge him USD 100 for that Product/Service, you would raise an Invoice for the same

When a Customer pays you USD 100 and by mistake you credit the Customer USD 1000 in his account, you have to subtract USD 900 from his account in order to rectify your mistake. In order to subtract this USD 900, you will raise a Debit Note

In short, a Debit Note is used to deduct funds from your Customer's account when the

deduction has no relationship to an Order or any Service rendered.

First lets look at the fields that make up a Debit Note:

Transaction ID: This is a numerical integer value which uniquely identifies every transaction. The system automatically generates serial numbers for you, separately for your Customers and your Sub-Resellers, starting from 1, incrementing upwards for each additional Debit Note created.

Transaction Date: This is the date on which the Debit Note was created.

Description: This is the description of the Debit Note, describing the purpose for which the Debit Note was created.

Debit Note Amount: This is the amount of the Debit Note. This is the amount your Customer or Sub-Reseller needs to pay for that Debit Note. In case your Selling Currency is different from your Accounting Currency, you will see the Debit Note Amount in both the currencies.

Pending Amount: This is the amount pending against this Debit Note. To begin with, this will be same as the Debit Note Amount. For example, if the Debit Note amount is USD 200, the pending amount will also be USD 200. If the Customer now chooses to make a payment of USD 100 against this Debit Note, the Pending Amount will then be USD 100. In case your Selling Currency is different from your Accounting Currency, you will see the Pending amount in both the currencies.

Forex Gain/Loss: If your Accounting Currency is different from your Selling Currency, then the System records your Forex Gain/Loss for every transaction. Each time an Debit Note is paid, the appropriate Forex Gain/Loss for that Payment is calculated and maintained by the system.

Other Details: A Debit Note contains several other details such as Contact Information, Tax information, etc..

It is important to note that none of the above fields can be modified once a Debit Note is

created. A Debit Note can only be balanced. It can never be modified. The amounts, address

information, everything remains as it is. Another important aspect to note is that an Debit

Note contains even your OWN contact details. If you click the Print button in the Debit Note

Details view, it will show your contact details too. These contact details are separately stored

with each Debit Note. These too cannot be modified. Even if you change your company name

after 1 month, it will not affect the Debit Notes already raised under the previous company

name. This change will only affect newer transactions.

In case of an unpaid Debit Note you may see the below additional field:

Reminder Days: This signifies the number of days after which a reminder for Payment of the

Debit Note is sent to your Customer/Sub-Reseller, by the system automatically.

Lets understand the different types of actions that can be performed on a Debit Note. These

actions are accessible from the toolbar in the Debit Note Details view:

Pay: You can pay the Debit Note using funds from your Customer's or Sub-Reseller's account. On clicking Pay, you will be able to directly use funds from your Customer's or Sub-Resellers account to pay for the Debit Note. This action assumes that your Customer or Sub-Reseller has funds in their account. If your customer or Sub-Reseller does not have funds to cover the Debit Note, you can choose to first Add Funds in their account and then subsequently pay the Debit Note.

Cancel: You can cancel the Debit Note using this option. Your Customer/Sub-Reseller will no longer have to pay for this Debit Note.

Cancel as Bad Debt: In the event that you are not able to recover either the entire Debit Note amount or a part of the Debit Note amount, even after sending payment reminders to your Customer/Sub-Reseller, you may write off (cancel) the pending Debit Note as Bad Debt. Clicking this button, would raise a Credit Note of the amount pending in the Debit Note (that is being cancelled).

Print: You can use this option to obtain a Printable Copy of the Debit Note for your reference.

An additional concept which is important to note with respect to Debit Notes is the

maintenance of the Total Receipts figure. A Total Receipts figure is maintained for every

Customer/Sub-Reseller of yours, and appropriately modified for every Debit Note added for

that Customer/Sub-Reseller. This Total Receipts figure is then used to offer discounts to Sub-

Resellers and Customers doing higher volumes of business.

Receipts & Credit Notes

Receipts and Credit Notes depict the money credited to the account of your Customers/Sub-

Resellers. There is not much difference between a Receipt and a Credit Note, except in a

definition sense. From an accounting perspective, a Receipt signifies actual Receipt of

money, while a Credit Note would be used to credit your Customer/Sub-Reseller with funds

without actual Receipt of money. Lets take an example to understand this better:

If your Customer sends you a cheque of USD 200, and you credit it to his account, you would do this as a Receipt.

If you decide to offer your Customer a discount on his previous Registrations, you may choose to pass a Credit Note for that discount, by adding funds to the Customers account using a Credit Note. There is no actual receipt of money, but you still wish to Add Funds to that Customers Account.

Both Receipts and Credit Notes are used to Add Funds to your Customer's/Reseller's account

in that sense. Any Receipt added immediately adds to the available balance of your Customer

or Sub-Reseller.

Lets look at the fields that make up Receipts and Credit Notes:

Transaction ID: This is a numerical integer value which uniquely identifies every transaction. The system automatically generates serial numbers for you, separately for your Customers and your Sub-Resellers, starting from 1, incrementing upwards for each additional Receipt and Credit Note created.

Transaction Date: This is the date on which the Receipt/Credit Note was created.

Description: This is the description of the Receipt/Credit Note.

Receipt/Credit Note Amount: This is the amount of the Receipt/Credit Note. On adding the Receipt/Credit Note, this amount gets added to the total available balance of that Customer/Sub-Reseller. In case your Selling Currency is different from your Accounting Currency, you will see the Receipt/Credit Note Amount in both the currencies.

Pending Amount: This is the amount of unutilised funds of a particular Receipt/Credit Note. To begin with this will be same as the Receipt/Credit Note Amount. For example, if the Receipt amount is USD 200, the pending amount will also be USD 200. If the Customer now chooses to pay an Invoice of USD 100 using this Receipt, the Pending Amount in the Receipt now will be USD 100. Incase your Selling Currency is different from your Accounting Currency, you will see the Pending amount in both the currencies.

Other Details: A Receipt contains several other details such as Contact Information, Tax information, etc..

It is important to note that none of the above fields can be modified once a Receipt/Credit

Note is created. The amounts, address information, everything remains as it is. Another

important aspect to note is that a Receipt/Credit Note contains even your OWN contact

details. If you click the Print button in the Receipt/Credit Note Details view, it will show

your contact details too. These contact details are separately stored with each Receipt/Credit

Note. These too cannot be modified. Even if you change your company name after 1 month,

it will not affect the Receipts/Credit Notes already raised under the previous company name.

This change will only affect newer transactions.

Lets understand the different types of actions that can be performed on a Receipt/Credit Note.

These actions are accessible from the toolbar in the Receipt/Credit Note Details view:

Print: You can use this button to obtain a Printable Copy of the Receipt/Credit Note for your reference.

Chargeback/Refund: In the event that you receive a Chargeback (payment dispute) or wish to Refund a Receipt/Credit Note, you may do so from within the particular Receipt/Credit Note's Details view itself, by selecting the appropriate option in the drop-down and clicking the Go button.

An additional concept which is important to note with respect to Receipts and Credit Notes is the maintenance of the Total Receipts figure. A Total Receipts figure is maintained for every Customer/Sub-Reseller of yours, and appropriately modified for every Receipt or Credit Note added for that Customer/Sub-Reseller. This Total Receipts figure is then used to offer discounts to Sub-Resellers and Customers doing higher volumes of business.

Mutual fund

A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities such as precious metals).[1] The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective. In the U.S., a fund registered with the Securities and Exchange Commission (SEC) under both SEC and Internal Revenue Service (IRS) rules must distribute nearly all of its net income and net realized gains from the sale of securities (if any) to its investors at least annually. Most funds are overseen by a board of directors or trustees (if the U.S. fund is organized as a trust as they commonly are) which is charged with ensuring the fund is managed appropriately by its investment adviser and other service organizations and vendors, all in the best interests of the fund's investors.

Since 1940 in the U.S., with the passage of the Investment Company Act of 1940 (the '40 Act) and the Investment Advisers Act of 1940, there have been three basic types of registered investment companies: open-end funds (or mutual funds), unit investment trusts (UITs); and closed-end funds. Other types of funds that have gained in popularity are exchange traded funds (ETFs) and hedge funds, discussed below. Similar types of funds also operate in Canada, however, in the rest of the world, mutual fund is used as a generic term for various types of collective investment vehicles, such as unit trusts, open-ended investment companies (OEICs), unitized insurance funds, undertakings for collective investments in transferable securities (UCITS, pronounced "YOU-sits") and SICAVs (pronounced "SEE-cavs").

] Usage, investment objectives

Since the Investment Company Act of 1940, a mutual fund is one of three basic types of investment companies available in the United States.[5]

Mutual funds may invest in many kinds of securities (subject to its investment objective as set forth in the fund's prospectus, which is the legal document under SEC laws which offers the funds for sale and contains a wealth of information about the fund). The most common securities purchased are "cash" or money market instruments, stocks, bonds, other mutual fund shares and more exotic instruments such as derivatives like forwards, futures, options and swaps. Some funds' investment objectives (and or its name) define the type of investments in which the fund invests. For example, the fund's objective might state "...the fund will seek capital appreciation by investing primarily in listed equity securities (stocks) of U.S. companies with any market capitalization range." This would be "stock" fund or a "domestic/US stock" fund since it stated U.S. companies. A fund may invest primarily in the shares of a particular industry or market sector, such as technology, utilities or financial services. These are known as specialty or sector funds. Bond funds can vary according to risk (e.g., high-yield junk bonds or investment-grade corporate bonds), type of issuers (e.g., government agencies, corporations, or municipalities), or maturity of the bonds (short- or long-term). Both stock and bond funds can invest in primarily U.S. securities (domestic funds), both U.S. and foreign securities (global funds), or primarily foreign securities (international funds). Since fund names in the past may not have provided a prospective investor a good indication of the type of fund it was, the SEC issued a rule under the '40 Act which aims to better align fund names with the primary types of investments in which the fund invests, commonly called the "name rule". Thus, under this rule, a fund must invest under normal circumstances in at least 80% of the securities referenced in its name. for example, the "ABC New Jersey Tax Free Bond Fund" would generally have to invest, under normal circumstances, at least 80% of its assets in tax-exempt bonds issued by the state of New Jersey and its political subdivisions. Some fund names are not associated with specific securities so the name rule has less relevance in those situations. For example, the "ABC Freedom Fund" is such that its name does not imply a specific investment style or objective. Lastly, an index fund strives to match the performance of a particular market index, such as the S&P 500 Index. In such a fund, the fund would invest in securities and likely specific derivates such as S&P 500 stock index futures in order to most closely match the performance of that index.

Most mutual funds' investment portfolios are continually monitored by one or more employees within the sponsoring investment adviser or management company, typically called a portfolio manager and their assistants, who invest the funds assets in accordance with its investment objective and trade securities in relation to any net inflows or outflows of investor capital (if applicable), as well as the ongoing performance of investments appropriate for the fund. A mutual fund is advised by the investment adviser under an advisory contract which generally is subject to renewal annually.

Mutual funds are subject to a special set of regulatory, accounting, and tax rules. In the U.S., unlike most other types of business entities, they are not taxed on their income as long as they distribute 90% of it to their shareholders and the funds meet certain diversification requirements in the Internal Revenue Code. Also, the type of income they earn is often unchanged as it passes through to the shareholders. Mutual fund distributions of tax-free municipal bond income are tax-free to the shareholder. Taxable distributions can be either

ordinary income or capital gains, depending on how the fund earned those distributions. Net losses are not distributed or passed through to fund investors.

Net asset value

Main article: Net asset value

The net asset value, or NAV, is the current market value of a fund's holdings, minus the fund's liabilities, that is usually expressed as a per-share amount. For most funds, the NAV is determined daily, after the close of trading on some specified financial exchange, but some funds update their NAV multiple times during the trading day. The public offering price, or POP, is the NAV plus a sales charge. Open-end funds sell shares at the POP and redeem shares at the NAV, and so process orders only after the NAV is determined. Closed-end funds (the shares of which are traded by investors) may trade at a higher or lower price than their NAV; this is known as a premium or discount, respectively. If a fund is divided into multiple classes of shares, each class will typically have its own NAV, reflecting differences in fees and expenses paid by the different classes.

Some mutual funds own securities which are not regularly traded on any formal exchange. These may be shares in very small or bankrupt companies; they may be derivatives; or they may be private investments in unregistered financial instruments (such as stock in a non-public company). In the absence of a public market for these securities, it is the responsibility of the fund manager to form an estimate of their value when computing the NAV. How much of a fund's assets may be invested in such securities is stated in the fund's prospectus.

The price per share, or NAV (net asset value), is calculated by dividing the fund's assets minus liabilities by the number of shares outstanding. This is usually calculated at the end of every trading day.

[edit] Average annual return

US mutual funds use SEC form N-1A to report the average annual compounded rates of return for 1-year, 5-year and 10-year periods as the "average annual total return" for each fund. The following formula is used:[6]

P(1+T)n = ERV

Where:

P = a hypothetical initial payment of $1,000.

T = average annual total return.

n = number of years.

ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of the 1-, 5-, or 10-year periods at the end of the 1-, 5-, or 10-year periods (or fractional portion).

[edit] Turnover

Turnover is a measure of the fund's securities transactions, usually calculated over a year's time, and usually expressed as a percentage of net asset value.

This value is usually calculated as the value of all transactions (buying, selling) divided by 2 divided by the fund's total holdings; i.e., the fund counts one security sold and another one bought as one "turnover". Thus turnover measures the replacement of holdings.

In Canada, under NI 81-106 (required disclosure for investment funds) turnover ratio is calculated based on the lesser of purchases or sales divided by the average size of the portfolio (including cash).

[edit] Expenses and expense ratios

Mutual funds bear expenses similar to other companies. The fee structure of a mutual fund can be divided into two or three main components: management fee, non-management expense, and 12b-1/non-12b-1 fees. All expenses are expressed as a percentage of the average daily net assets of the fund.

[edit] Management fees

The management fee for the fund is usually synonymous with the contractual investment advisory fee charged for the management of a fund's investments. However, as many fund companies include administrative fees in the advisory fee component, when attempting to compare the total management expenses of different funds, it is helpful to define management fee as equal to the contractual advisory fee plus the contractual administrator fee. This "levels the playing field" when comparing management fee components across multiple funds.

Contractual advisory fees may be structured as "flat-rate" fees, i.e., a single fee charged to the fund, regardless of the asset size of the fund. However, many funds have contractual fees which include breakpoints so that as the value of a fund's assets increases, the advisory fee paid decreases. Another way in which the advisory fees remain competitive is by structuring the fee so that it is based on the value of all of the assets of a group or a complex of funds rather than those of a single fund.

[edit] Non-management expenses

Apart from the management fee, there are certain non-management expenses which most funds must pay. Some of the more significant (in terms of amount) non-management expenses are: transfer agent expenses (this is usually the person you get on the other end of the phone line when you want to buy/sell shares of a fund), custodian expense (the fund's assets are kept in custody by a bank which charges a custody fee), legal/audit expense, fund accounting expense, registration expense (the SEC charges a registration fee when funds file registration statements with it), board of directors/trustees expense (the members of the board who oversee the fund are usually paid a fee for their time spent at meetings), and printing and postage expense (incurred when printing and delivering shareholder reports).

[edit] 12b-1/Non-12b-1 service fees

In the United States, 12b-1 service fees/shareholder servicing fees are contractual fees which a fund may charge to cover the marketing expenses of the fund. Non-12b-1 service fees are marketing/shareholder servicing fees which do not fall under SEC rule 12b-1. While funds do not have to charge the full contractual 12b-1 fee, they often do. When investing in a front-end load or no-load fund, the 12b-1 fees for the fund are usually .250% (or 25 basis points). The 12b-1 fees for back-end and level-load share classes are usually between 50 and 75 basis points but may be as much as 100 basis points. While funds are often marketed as "no-load" funds, this does not mean they do not charge a distribution expense through a different

mechanism. It is expected that a fund listed on an online brokerage site will be paying for the "shelf-space" in a different manner even if not directly through a 12b-1 fee.

[edit] Investor fees and expenses

Fees and expenses borne by the investor vary based on the arrangement made with the investor's broker. Sales loads (or contingent deferred sales loads (CDSL)) are included in the fund's total expense ratio (TER) because they pass through the statement of operations for the fund. Additionally, funds may charge early redemption fees to discourage investors from swapping money into and out of the fund quickly, which may force the fund to make bad trades to obtain the necessary liquidity. For example, Fidelity Diversified International Fund (FDIVX) charges a 10 percent fee on money removed from the fund in less than 30 days.

[edit] Brokerage commissions

An additional expense which does not pass through the fund's income statement (statement of operations) and cannot be controlled by the investor is brokerage commissions. Brokerage commissions are incorporated into the price of securities bought and sold and, thus, are a component of the gain or loss on investments. They are a true, real cost of investing though. The amount of commissions incurred by the fund and are reported usually 4 months after the fund's fiscal year end in the "statement of additional information" which is legally part of the prospectus, but is usually available only upon request or by going to the SEC's or fund's website. Brokerage commissions, usually charged when securities are bought and again when sold, are directly related to portfolio turnover which is a measure of trading volume/velocity (portfolio turnover refers to the number of times the fund's assets are bought and sold over the course of a year). Usually, higher rate of portfolio turnover (trading) generates higher brokerage commissions. The advisors of mutual fund companies are required to achieve "best execution" through brokerage arrangements so that the commissions charged to the fund will not be excessive as well as also attaining the best possible price upon buying or selling.

Types of mutual funds

[edit] Open-end fund, forms of organization, other funds

The term mutual fund is the common name for what is classified as an open-end investment company by the SEC. Being open-ended means that, at the end of every day, the fund continually issues new shares to investors buying into the fund and must stand ready to buy back shares from investors redeeming their shares at the then current net asset value per share.

Mutual funds must be structured as corporations or trusts, such as business trusts, and any corporation or trust will be classified by the SEC as an investment company if it issues securities and primarily invests in non-government securities. An investment company will be classified by the SEC as an open-end investment company if they do not issue undivided interests in specified securities (the defining characteristic of unit investment trusts or UITs) and if they issue redeemable securities. Registered investment companies that are not UITs or open-end investment companies are closed-end funds. Closed-end funds are like open end except they are more like a company which sells its shares a single time to the public under an initial public offering or "IPO". Subsequently, the fund's shares trade with buyers and sellers of shares in the secondary market at a market-determined price (which is likely not equal to net asset value) such as on the New York or American Stock Exchange. Except for some special transactions, the fund cannot continue to grow in size by attracting more investor capital like an open-end fund may.

Exchange-traded funds

A relatively recent innovation, the exchange-traded fund or ETF, is often structured as an open-end investment company. ETFs combine characteristics of both mutual funds and closed-end funds. ETFs are traded throughout the day on a stock exchange, just like closed-end funds, but at prices generally approximating the ETF's net asset value. Most ETFs are index funds and track stock market indexes. Shares are issued or redeemed by institutional investors in large blocks (typically of 50,000). Most investors buy and sell shares through brokers in market transactions. Because the institutional investors normally purchase and redeem in in kind transactions, ETFs are more efficient than traditional mutual funds (which are continuously issuing and redeeming securities and, to effect such transactions, continually buying and selling securities and maintaining liquidity positions) and therefore tend to have lower expenses.

Exchange-traded funds are also valuable for foreign investors who are often able to buy and sell securities traded on a stock market, but who, for regulatory reasons, are limited in their ability to participate in traditional U.S. mutual funds.

[edit] Equity funds

Equity funds, which consist mainly of stock investments, are the most common type of mutual fund. Equity funds hold 50 percent of all amounts invested in mutual funds in the United States.[7] Often equity funds focus investments on particular strategies and certain types of issuers.

[edit] Market Cap(italization)

Fund managers and other investment professionals have varying definitions of mid-cap, and large-cap ranges. The following ranges are used by Russell Indexes:[8]

Russell Microcap Index – micro-cap ($54.8 – 539.5 million) Russell 2000 Index – small-cap ($182.6 million – 1.8 billion) Russell Midcap Index – mid-cap ($1.8 – 13.7 billion) Russell 1000 Index – large-cap ($1.8 – 386.9 billion)

[edit] Growth vs. value

Another distinction is made between growth funds, which invest in stocks of companies that have the potential for large capital gains, and value funds, which concentrate on stocks that are undervalued. Value stocks have historically produced higher returns; however, financial theory states this is compensation for their greater risk. Growth funds tend not to pay regular dividends. Income funds tend to be more conservative investments, with a focus on stocks that pay dividends. A balanced fund may use a combination of strategies, typically including some level of investment in bonds, to stay more conservative when it comes to risk, yet aim for some growth.[citation needed]

[edit] Index funds versus active managementMain articles: Index fund and active management

An index fund maintains investments in companies that are part of major stock (or bond) indexes, such as the S&P 500, while an actively managed fund attempts to outperform a relevant index through superior stock-picking techniques. The assets of an index fund are

managed to closely approximate the performance of a particular published index. Since the composition of an index changes infrequently, an index fund manager makes fewer trades, on average, than does an active fund manager. For this reason, index funds generally have lower trading expenses than actively managed funds, and typically incur fewer short-term capital gains which must be passed on to shareholders. Additionally, index funds do not incur expenses to pay for selection of individual stocks (proprietary selection techniques, research, etc.) and deciding when to buy, hold or sell individual holdings. Instead, a fairly simple computer model can identify whatever changes are needed to bring the fund back into agreement with its target index.

Certain empirical evidence seems to illustrate that mutual funds do not beat the market and actively managed mutual funds under-perform other broad-based portfolios with similar characteristics. One study found that nearly 1,500 U.S. mutual funds under-performed the market in approximately half of the years between 1962 and 1992.[9] An analysis of the equity funds returns of the 15 biggest asset management companies worldwide from 2004 to 2009 showed that about 80% of the funds have returned below their respective benchmarks.[citation

needed] Moreover, funds that performed well in the past are not able to beat the market again in the future (shown by Jensen, 1968; Grinblatt and Sheridan Titman, 1989).[10]

[edit] Bond funds

Bond funds account for 18% of mutual fund assets.[7] Types of bond funds include term funds, which have a fixed set of time (short-, medium-, or long-term) before they mature. Municipal bond funds generally have lower returns, but have tax advantages and lower risk. High-yield bond funds invest in corporate bonds, including high-yield or junk bonds. With the potential for high yield, these bonds also come with greater risk.

[edit] Money market funds

Money market funds hold 26% of mutual fund assets in the United States.[11] Money market funds generally entail the least risk, as well as lower rates of return. Unlike certificates of deposit (CDs), open-end money fund shares are generally liquid and redeemable at "any time" (that is, normal business hours during which redemption requests are taken - generally not after 4 PM ET). Money funds in the US are required to advise investors that a money fund is not a bank deposit, not insured and may lose value. Most money fund strive to maintain an NAV of $1.00 per share though that is not guaranteed; if a fund "breaks the buck", its shares could be redeemed for less than $1.00 per share. While this is rare, it has happened in the U.S., due in part to the mortgage crisis affecting related securities.

[edit] Funds of funds

Funds of funds (FoF) are mutual funds which invest in other mutual funds (i.e., they are funds composed of other funds). The funds at the underlying level are often funds which an investor can invest in individually, though they may be 'institutional' class shares that may not be within reach of an individual shareholder). A fund of funds will typically charge a much lower management fee than that of a fund investing in direct securities because it is considered a fee charged for asset allocation services which is presumably less demanding than active direct securities research and management. The fees charged at the underlying fund level are a real cost or drag on performance but do not pass through the FoF's income statement (statement of operations), but are usually disclosed in the fund's annual report, prospectus, or statement of additional information. FoF's will often have a higher overall/combined expense ratio than that of a regular fund. The FoF should be evaluated on

the combination of the fund-level expenses and underlying fund expenses, as these both reduce the return to the investor.

Most FoFs invest in affiliated funds (i.e., mutual funds managed by the same advisor), although some invest in unaffilated funds (those managed by other advisors) or both. The cost associated with investing in an unaffiliated underlying fund may be higher than investing in an affiliated underlying because of the investment management research involved in investing in fund advised by a different advisor. Recently, FoFs have been classified into those that are actively managed (in which the investment advisor reallocates frequently among the underlying funds in order to adjust to changing market conditions) and those that are passively managed (the investment advisor allocates assets on the basis of on an allocation model which is rebalanced on a regular basis).

The design of FoFs is structured in such a way as to provide a ready mix of mutual funds for investors who are unable to or unwilling to determine their own asset allocation model. Fund companies such as TIAA-CREF, American Century Investments, Vanguard, and Fidelity have also entered this market to provide investors with these options and take the "guess work" out of selecting funds. The allocation mixes usually vary by the time the investor would like to retire: 2020, 2030, 2050, etc. The more distant the target retirement date, the more aggressive the asset mix.

[edit] Hedge fundsMain article: Hedge fund

Hedge funds in the United States are pooled investment funds with loose, if any, SEC regulation, unlike mutual funds. Some hedge fund managers are required to register with SEC as investment advisers under the Investment Advisers Act of 1940.[12] The Act does not require an adviser to follow or avoid any particular investment strategies, nor does it require or prohibit specific investments. Hedge funds typically charge a management fee of 1% or more, plus a “performance fee” of 20% of the hedge fund's profit. There may be a "lock-up" period, during which an investor cannot cash in shares. A variation of the hedge strategy is the 130-30 fund for individual investors.

[edit] Mutual funds vs. other investments

Mutual funds offer several advantages over investing in individual stocks. For example, the transaction costs are divided among all the mutual fund shareholders, which allows for cost-effective diversification. Investors may also benefit by having a third party (professional fund managers) apply expertise and dedicate time to manage and research investment options, although there is dispute over whether professional fund managers can, on average, outperform simple index funds that mimic public indexes. Yet, the Wall Street Journal reported that separately managed accounts (SMA or SMAs) performed better than mutual funds in 22 of 25 categories from 2006 to 2008. This included beating mutual funds performance in 2008, a tough year in which the global stock market lost US$21 trillion in value.[13][14] In the story, Morningstar, Inc said SMAs outperformed mutual funds in 25 of 36 stock and bond market categories. Whether actively managed or passively indexed, mutual funds are not immune to risks. They share the same risks associated with the investments made. If the fund invests primarily in stocks, it is usually subject to the same ups and downs and risks as the stock market.

[edit] Share classes

Many mutual funds offer more than one class of shares. For example, you may have seen a fund that offers "Class A" and "Class B" shares. Each class will invest in the same pool (or investment portfolio) of securities and will have the same investment objectives and policies. But each class will have different shareholder services and/or distribution arrangements with different fees and expenses. These differences are supposed to reflect different costs involved in servicing investors in various classes; for example, one class may be sold through brokers with a front-end load, and another class may be sold direct to the public with no load but a "12b-1 fee" included in the class's expenses (sometimes referred to as "Class C" shares). Still a third class might have a minimum investment of $10,000,000 and be available only to financial institutions (a so-called "institutional" share class). In some cases, by aggregating regular investments made by many individuals, a retirement plan (such as a 401(k) plan) may qualify to purchase "institutional" shares (and gain the benefit of their typically lower expense ratios) even though no members of the plan would qualify individually.[15] As a result, each class will likely have different performance results.[16]

A multi-class structure offers investors the ability to select a fee and expense structure that is most appropriate for their investment goals (including the length of time that they expect to remain invested in the fund).[16]

[edit] Load and expensesMain article: Mutual fund fees and expenses

A front-end load or sales charge is a commission paid to a broker by a mutual fund when shares are purchased, taken as a percentage of funds invested. The value of the investment is reduced by the amount of the load. Some funds have a deferred sales charge or back-end load. In this type of fund an investor pays no sales charge when purchasing shares, but will pay a commission out of the proceeds when shares are redeemed depending on how long they are held. Another derivative structure is a level-load fund, in which no sales charge is paid when buying the fund, but a back-end load may be charged if the shares purchased are sold within a year.

Load funds are sold through financial intermediaries such as brokers, financial planners, and other types of registered representatives who charge a commission for their services. Shares of front-end load funds are frequently eligible for breakpoints (i.e., a reduction in the commission paid) based on a number of variables. These include other accounts in the same fund family held by the investor or various family members, or committing to buy more of the fund within a set period of time in return for a lower commission "today".

It is possible to buy many mutual funds without paying a sales charge. These are called no-load funds. In addition to being available from the fund company itself, no-load funds may be sold by some discount brokers for a flat transaction fee or even no fee at all. (This does not necessarily mean that the broker is not compensated for the transaction; in such cases, the fund may pay brokers' commissions out of "distribution and marketing" expenses rather than a specific sales charge. The buyer is therefore paying the fee indirectly through the fund's expenses deducted from profits.)

No-load funds include both index funds and actively managed funds. The largest mutual fund families selling no-load index funds are Vanguard and Fidelity, though there are a number of smaller mutual fund families with no-load funds as well. Expense ratios in some no-load index funds are less than 0.2% per year versus the typical actively managed fund's expense

ratio of about 1.5% per year. Load funds usually have even higher expense ratios when the load is considered. The expense ratio is the anticipated annual cost to the investor of holding shares of the fund. For example, on a $100,000 investment, an expense ratio of 0.2% means $200 of annual expense, while a 1.5% expense ratio would result in $1,500 of annual expense. These expenses are before any sales commissions paid to purchase the mutual fund.

Many fee-only financial advisors strongly suggest no-load funds such as index funds. If the advisor is not of the fee-only type but is instead compensated by commissions, the advisor may have a conflict of interest in selling high-commission load funds.

Venture capital

Venture capital (also known as VC or Venture) is provided as seed funding to early-stage, high-potential, growth companies and more often after the seed funding round as growth funding round (also referred as series A round) in the interest of generating a return through an eventual realization event such as an IPO or trade sale of the company. To put it simply, an investment firm will give money to a growing company. The growing company will then use this money to advertise, do research, build infrastructure, develop products etc. The investment firm is called a venture capital firm, and the money that it gives is called venture capital. The venture capital firm makes money by owning a stake in the firm it invests in. The firms that a venture capital firm will invest in usually have a novel technology or business model. Venture capital investments are generally made in cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries, such as biotechnology and IT (Information Technology).

Venture capital typically comes from institutional investors and high net worth individuals, and is pooled together by dedicated investment firms.

Venture capital firms typically comprise small teams with technology backgrounds (scientists, researchers) or those with business training or deep industry experience.

A core skill within VC is the ability to identify novel technologies that have the potential to generate high commercial returns at an early stage. By definition, VCs also take a role in managing entrepreneurial companies at an early stage, thus adding skills as well as capital (thereby differentiating VC from buy-out private equity, which typically invest in companies with proven revenue), and thereby potentially realizing much higher rates of returns. Inherent in realizing abnormally high rates of returns is the risk of losing all of one's investment in a given startup company. As a consequence, most venture capital investments are done in a pool format, where several investors combine their investments into one large fund that invests in many different startup companies. By investing in the pool format, the investors are spreading out their risk to many different investments versus taking the chance of putting all of their money in one start up firm.

A venture capitalist (also known as a VC) is a person or investment firm that makes venture investments, and these venture capitalists are expected to bring managerial and technical expertise as well as capital to their investments. A venture capital fund refers to a pooled investment vehicle (often an LP or LLC) that primarily invests the financial capital of third-party investors in enterprises that are too risky for the standard capital markets or bank loans.

Venture capital is also associated with job creation, the knowledge economy, and used as a proxy measure of innovation within an economic sector or geography.

In addition to angel investing and other seed funding options, venture capital is attractive for new companies with limited operating history that are too small to raise capital in the public markets and have not reached the point where they are able to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership (and consequently value).

Young companies wishing to raise venture capital require a combination of extremely rare, yet sought after, qualities, such as innovative technology, potential for rapid growth, a well-developed business model, and an impressive management team. VCs typically reject 98% of opportunities presented to them[citation needed], reflecting the rarity of this combination.

[edit] Structure of Venture Capital Firms

Venture capital firms are typically structured as partnerships, the general partners of which serve as the managers of the firm and will serve as investment advisors to the venture capital funds raised. Venture capital firms in the United States may also be structured as limited liability companies, in which case the firm's managers are known as managing members. Investors in venture capital funds are known as limited partners. This constituency comprises both high net worth individuals and institutions with large amounts of available capital, such as state and private pension funds, university financial endowments, foundations, insurance companies, and pooled investment vehicles, called fund of funds or mutual funds.

[edit] Types of Venture Capital Firms

Depending on your business type, the venture capital firm you approach will differ.[17] For instance, if you're a startup internet company, funding requests from a more manufacturing-focused firm will not be effective. Doing some initial research on which firms to approach will save time and effort. When approaching a VC firm, consider their portfolio:

Business Cycle: Do they invest in budding or established businesses? Industry: What is their industry focus? Investment: Is their typical investment sufficient for your needs? Location: Are they regional, national or international? Return: What is their expected return on investment? Involvement: What is their involvement level?

Targeting specific types of firms will yield the best results when seeking VC financing. Wikipedia has a list of venture capital firms that can help you in your initial exploration. The National Venture Capital Association segments dozens of VC firms into ways that might assist you in your search.[18] It is important to note that many VC firms have diverse portfolios with a range of clients. If this is the case, finding gaps in their portfolio is one strategy that might succeed.

[edit] Roles within Venture Capital Firms

Within the venture capital industry, the general partners and other investment professionals of the venture capital firm are often referred to as "venture capitalists" or "VCs". Typical career backgrounds vary, but broadly speaking venture capitalists come from either an operational or a finance background. Venture capitalists with an operational background tend to be former founders or executives of companies similar to those which the partnership finances

or will have served as management consultants. Venture capitalists with finance backgrounds tend to have investment banking or other corporate finance experience.

Although the titles are not entirely uniform from firm to firm, other positions at venture capital firms include:

Venture partners - Venture partners are expected to source potential investment opportunities ("bring in deals") and typically are compensated only for those deals with which they are involved.

Entrepreneur-in-residence (EIR) - EIRs are experts in a particular domain and perform due diligence on potential deals. EIRs are engaged by venture capital firms temporarily (six to 18 months) and are expected to develop and pitch startup ideas to their host firm (although neither party is bound to work with each other). Some EIR's move on to executive positions within a portfolio company.

Principal - This is a mid-level investment professional position, and often considered a "partner-track" position. Principals will have been promoted from a senior associate position or who have commensurate experience in another field such as investment banking or management consulting.

Associate - This is typically the most junior apprentice position within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position and potentially principal and beyond. Associates will often have worked for 1–2 years in another field such as investment banking or management consulting.

[edit] Structure of the funds

Most venture capital funds have a fixed life of 10 years, with the possibility of a few years of extensions to allow for private companies still seeking liquidity. The investing cycle for most funds is generally three to five years, after which the focus is managing and making follow-on investments in an existing portfolio. This model was pioneered by successful funds in Silicon Valley through the 1980s to invest in technological trends broadly but only during their period of ascendance, and to cut exposure to management and marketing risks of any individual firm or its product.

In such a fund, the investors have a fixed commitment to the fund that is initially unfunded and subsequently "called down" by the venture capital fund over time as the fund makes its investments. There are substantial penalties for a Limited Partner (or investor) that fails to participate in a capital call.

It can take anywhere from a month or so to several years for venture capitalists to raise money from limited partners for their fund. At the time when all of the money has been raised, the fund is said to be closed and the 10 year lifetime begins. Some funds have partial closes when one half (or some other amount) of the fund has been raised. "Vintage year" generally refers to the year in which the fund was closed and may serve as a means to stratify VC funds for comparison. This free database of venture capital funds shows the difference between a venture capital fund management company and the venture capital funds managed by them.

[edit] CompensationMain article: Carried interest

Venture capitalists are compensated through a combination of management fees and carried interest (often referred to as a "two and 20" arrangement):

Management fees – an annual payment made by the investors in the fund to the fund's manager to pay for the private equity firm's investment operations.[19] In a typical venture capital fund, the general partners receive an annual management fee equal to up to 2% of the committed capital.

Carried interest - a share of the profits of the fund (typically 20%), paid to the private equity fund’s management company as a performance incentive. The remaining 80% of the profits are paid to the fund's investors[19] Strong Limited Partner interest in top-tier venture firms has led to a general trend toward terms more favorable to the venture partnership, and certain groups are able to command carried interest of 25-30% on their funds.

Because a fund may run out of capital prior to the end of its life, larger venture capital firms usually have several overlapping funds at the same time; this lets the larger firm keep specialists in all stages of the development of firms almost constantly engaged. Smaller firms tend to thrive or fail with their initial industry contacts; by the time the fund cashes out, an entirely-new generation of technologies and people is ascending, whom the general partners may not know well, and so it is prudent to reassess and shift industries or personnel rather than attempt to simply invest more in the industry or people the partners already know.

[edit] Venture capital funding

Venture capitalists are typically very selective in deciding what to invest in; as a rule of thumb, a fund may invest in one in four hundred opportunities presented to it. Funds are most interested in ventures with exceptionally high growth potential, as only such opportunities are likely capable of providing the financial returns and successful exit event within the required timeframe (typically 3–7 years) that venture capitalists expect.

Because investments are illiquid and require 3–7 years to harvest, venture capitalists are expected to carry out detailed due diligence prior to investment. Venture capitalists also are expected to nurture the companies in which they invest, in order to increase the likelihood of reaching an IPO stage when valuations are favourable. Venture capitalists typically assist at four stages in the company's development:[20]

Idea generation ; Start-up ; Ramp up ; and Exit

There are typically six stages of financing offered in Venture Capital, that roughly correspond to these stages of a company's development.[21]

Seed Money: Low level financing needed to prove a new idea (Often provided by "angel investors")

Start-up: Early stage firms that need funding for expenses associated with marketing and product development

First-Round: Early sales and manufacturing funds Second-Round: Working capital for early stage companies that are selling product,

but not yet turning a profit Third-Round: Also called Mezzanine financing, this is expansion money for a newly

profitable company Fourth-Round: Also called bridge financing, 4th round is intended to finance the

"going public" process

Because there are no public exchanges listing their securities, private companies meet venture capital firms and other private equity investors in several ways, including warm referrals from the investors' trusted sources and other business contacts; investor conferences and symposia; and summits where companies pitch directly to investor groups in face-to-face meetings, including a variant know as "Speed Venturing", which is akin to speed-dating for capital, where the investor decides within 10 minutes whether s/he wants a follow-up meeting. In addition there are some new private online networks that are emerging to provide additional opportunities to meet investors. [22]

This need for high returns makes venture funding an expensive capital source for companies, and most suitable for businesses having large up-front capital requirements which cannot be financed by cheaper alternatives such as debt. That is most commonly the case for intangible assets such as software, and other intellectual property, whose value is unproven. In turn this explains why venture capital is most prevalent in the fast-growing technology and life sciences or biotechnology fields.

If a company does have the qualities venture capitalists seek including a solid business plan, a good management team, investment and passion from the founders, a good potential to exit the investment before the end of their funding cycle, and target minimum returns in excess of 40% per year, it will find it easier to raise venture capital.

[edit] Main alternatives to venture capital

Because of the strict requirements venture capitalists have for potential investments, many entrepreneurs seek seed funding from angel investors, who may be more willing to invest in highly speculative opportunities, or may have a prior relationship with the entrepreneur.

Furthermore, many venture capital firms will only seriously evaluate an investment in a start-up company otherwise unknown to them if the company can prove at least some of its claims about the technology and/or market potential for its product or services. To achieve this, or even just to avoid the dilutive effects of receiving funding before such claims are proven, many start-ups seek to self-finance sweat equity until they reach a point where they can credibly approach outside capital providers such as venture capitalists or angel investors. This practice is called "bootstrapping".

There has been some debate since the dot com boom that a "funding gap" has developed between the friends and family investments typically in the $0 to $250,000 range and the amounts that most Venture Capital Funds prefer to invest between $1 to $2M. This funding gap may be accentuated by the fact that some successful Venture Capital funds have been drawn to raise ever-larger funds, requiring them to search for correspondingly larger investment opportunities. This 'gap' is often filled by sweat equity and seed funding via angel investors as well as equity investment companies who specialize in investments in startup

companies from the range of $250,000 to $1M. The National Venture Capital Association estimates that the latter now invest more than $30 billion a year in the USA in contrast to the $20 billion a year invested by organized Venture Capital funds.[citation needed]

Crowd funding is emerging as an alternative to traditional venture capital. Crowd funding is an approach to raising the capital required for a new project or enterprise by appealing to large numbers of ordinary people for small donations. While such an approach has long precedents in the sphere of charity, it is receiving renewed attention from entrepreneurs such as independent film makers, now that social media and online communities make it possible to reach out to a group of potentially interested supporters at very low cost. Some crowd funding models are also being applied for startup funding. [23] [24]

In industries where assets can be securitized effectively because they reliably generate future revenue streams or have a good potential for resale in case of foreclosure, businesses may more cheaply be able to raise debt to finance their growth. Good examples would include asset-intensive extractive industries such as mining, or manufacturing industries. Offshore funding is provided via specialist venture capital trusts which seek to utilise securitization in structuring hybrid multi market transactions via an SPV (special purpose vehicle): a corporate entity that is designed solely for the purpose of the financing.

In addition to traditional venture capital and angel networks, groups have emerged which allow groups of small investors or entrepreneurs themselves to compete in a privatized business plan competition where the group itself serves as the investor through a democratic process. [25]

Law firms are also increasingly acting as an intermediary between clients that seek venture capital and the firms that provide it. [26]

[edit] Geographical differences

( V.C ) Venture capital, as an industry, originated in the United States and American firms have traditionally been the largest participants in venture deals and the bulk of venture capital has been deployed in American companies. However, increasingly, non-US venture investment is growing and the number and size of non-US venture capitalists have been expanding.

Venture capital has been used as a tool for economic development in a variety of developing regions. In many of these regions, with less developed financial sectors, venture capital plays a role in facilitating access to finance for small and medium enterprises (SMEs), which in most cases would not qualify for receiving bank loans.

In the year of 2008, while the Venture Capital fundings are still majorly dominated by U.S. (USD 28.8 B invested in over 2550 deals in 2008), compared to International fund investments (USD 13.4 B invested in everywhere else), there have been an average 5% growth in the Venture capital deals outside of the U.S- mainly in China, Europe and Israel [8] . Geographical differences can be significant. For instance, in the U.K., 4% of British investment goes to venture capital, compared to about 33% in the U.S.[27]

[edit] United States

Venture capitalists invested some $6.6 billion in 797 deals in U.S. during the third quarter of 2006, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data by Thomson Financial.

A National Venture Capital Association survey found that a majority (69%) of venture capitalists predicted that venture investments in the U.S. would have leveled between $20–29 billion in 2007.[citation needed]

[edit] Canada

Canadian technology companies have attracted interest from the global venture capital community as a result, in part, of generous tax incentive through the Scientific Research and Experimental Development (SR&ED) investment tax credit program. The basic incentive available to any Canadian corporation performing R&D is a non-refundable tax credit that is equal to 20% of "qualifying" R&D expenditures (labour, material, R&D contracts, and R&D equipment). An enhanced 35% refundable tax credit of available to certain (i.e. small) Canadian-controlled private corporations (CCPCs). Because the CCPC rules require a minimum of 50% Canadian ownership in the company performing R&D, foreign investors who would like to benefit from the larger 35% tax credit must accept minority position in the company - which might not be desirable. The SR&ED program does not restrict the export of any technology or intellectual property that may have been developed with the benefit of SR&ED tax incentives.

Canada also has a fairly unique form of venture capital generation in its Labour Sponsored Venture Capital Corporations (LSVCC). These funds, also known as Retail Venture Capital or Labour Sponsored Investment Funds (LSIF), are generally sponsored by labor unions and offer tax breaks from government to encourage retail investors to purchase the funds. Generally, these Retail Venture Capital funds only invest in companies where the majority of employees are in Canada. However, innovative structures have been developed to permit LSVCCs to direct in Canadian subsidiaries of corporations incorporated in jurisdictions outside of Canada.

[edit] Europe

Europe has a large and growing number of active venture firms. Capital raised in the region in 2005, including buy-out funds, exceeded €60bn, of which €12.6bn was specifically for venture investment. The European Venture Capital Association includes a list of active firms and other statistics. In 2006 the top three countries receiving the most venture capital investments were the United Kingdom (515 minority stakes sold for €1.78bn), France (195 deals worth €875m), and Germany (207 deals worth €428m) according to data gathered by Library House.[28]

European venture capital investment in the second quarter of 2007 rose 5% to 1.14 billion Euros from the first quarter. However, due to bigger sized deals in early stage investments, the number of deals was down 20% to 213. The second quarter venture capital investment results were significant in terms of early-round investment, where as much as 600 million Euros (about 42.8% of the total capital) were invested in 126 early round deals (which comprised more than half of the total number of deals).[29] Private equity in Italy was 4.2 billion Euros in 2007.

[edit] ChinaSee also: China Venture Capital Association

[edit] Confidential information

Unlike public companies, information regarding an entrepreneur's business is typically confidential and proprietary. As part of the due diligence process, most venture capitalists

will require significant detail with respect to a company's business plan. Entrepreneurs must remain vigilant about sharing information with venture capitalists that are investors in their competitors. Most venture capitalists treat information confidentially, however, as a matter of business practice, do not typically enter into Non Disclosure Agreements because of the potential liability issues those agreements entail. Entrepreneurs are typically well-advised to protect truly proprietary intellectual property.

Limited partners of venture capital firms typically have access only to limited amounts of information with respect to the individual portfolio companies in which they are invested and are typically bound by confidentiality provisions in the fund's limited partnership agreement.

[edit] Popular culture

Robert von Goeben and Kathryn Siegler produced a comic strip called The VC between the years 1997-2000 that parodied the industry, often by showing humorous exchanges between venture capitalists and entrepreneurs.[30] Von Goeben was a partner in Redleaf Venture Management when he began writing the strip.[31]

Mark Coggins' 2002 novel Vulture Capital features a venture capitalist protagonist who investigates the disappearance of the chief scientist in a biotech firm in which he has invested. Coggins also worked in the industry and was co-founder of a dot-com startup.[32]

In the Dilbert comic strip, a character named 'Vijay, the World's Most Desperate Venture Capitalist' frequently makes appearances, offering bags of cash to anyone with even a hint of potential. In one strip, he offers two small children with good math grades money based on the fact that if they marry and produce an engineer baby he can invest in the infant's first idea. The children respond that they are already looking for mezzanine funding.

Drawing on his experience as reporter covering technology for the New York Times, Matt Richtel produced the 2007 novel Hooked, in which the actions of the main character's deceased girlfriend, a Silicon Valley venture capitalist, play a key role in the plot.[33]

In the TV series Dragons' Den, various startup companies pitch their business plans to a panel of venture capitalists.

In the 2005 movie, Wedding Crashers, Jeremy Grey (Vince Vaughn) and John Beckwith (Owen Wilson) are two bachelors who create appearances to play at different weddings of complete strangers, and a large part of the movie follows them posing as venture capitalists from New Hampshire.

[edit] See also

What Does Accounting Cycle Mean?The name given to the collective process of recording and processing the accounting events of a company. The series of steps begin when a transaction occurs and end with its inclusion in the financial statements. The nine steps of the accounting cycle are: 

1. Collecting and analyzing data from transactions and events. 2. Putting transactions into the general journal. 3. Posting entries to the general ledger.

4. Preparing an unadjusted trial balance. 5. Adjusting entries appropriately. 6. Preparing an adjusted trial balance. 7. Organizing the accounts into the financial statements. 8. Closing the books. 9. Preparing a post-closing trial balance to check the accounts.

Also known as “bookkeeping cycle”.

Time value of money

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.

For example, 100 dollars of today's money invested for one year and earning 5 percent interest will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars.[1] This notion dates at least to Martín de Azpilcueta (1491-1586) of the School of Salamanca.

The method also allows the valuation of a likely stream of income in the future, in such a way that the annual incomes are discounted and then added together, thus providing a lump-sum "present value" of the entire income stream.

All of the standard calculations for time value of money derive from the most basic algebraic expression for the present value of a future sum, "discounted" to the present by an amount equal to the time value of money. For example, a sum of FV to be received in one year is discounted (at the rate of interest r) to give a sum of PV at present: PV = FV − r·PV = FV/(1+r).

Some standard calculations based on the time value of money are:

Present value The current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations[2].

Present value of an annuity An annuity is a series of equal payments or receipts that occur at evenly spaced intervals. Leases and rental payments are examples. The payments or receipts occur at the end of each period for an ordinary annuity while they occur at the beginning of each period for an annuity due[3].

Present value of a perpetuity is an infinite and constant stream of identical cash flows[4].

Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today[5].

Future value of an annuity (FVA) is the future value of a stream of payments (annuity), assuming the payments are invested at a given rate of interest.

[edit] Calculations

There are several basic equations that represent the equalities listed above. The solutions may be found using (in most cases) the formulas, a financial calculator or a spreadsheet. The formulas are programmed into most financial calculators and several spreadsheet functions (such as PV, FV, RATE, NPER, and PMT)[6].

For any of the equations below, the formula may also be rearranged to determine one of the other unknowns. In the case of the standard annuity formula, however, there is no closed-form algebraic solution for the interest rate (although financial calculators and spreadsheet programs can readily determine solutions through rapid trial and error algorithms).

These equations are frequently combined for particular uses. For example, bonds can be readily priced using these equations. A typical coupon bond is composed of two types of payments: a stream of coupon payments similar to an annuity, and a lump-sum return of capital at the end of the bond's maturity - that is, a future payment. The two formulas can be combined to determine the present value of the bond.

An important note is that the interest rate i is the interest rate for the relevant period. For an annuity that makes one payment per year, i will be the annual interest rate. For an income or payment stream with a different payment schedule, the interest rate must be converted into the relevant periodic interest rate. For example, a monthly rate for a mortgage with monthly payments requires that the interest rate be divided by 12 (see the example below). See compound interest for details on converting between different periodic interest rates.

The rate of return in the calculations can be either the variable solved for, or a predefined variable that measures a discount rate, interest, inflation, rate of return, cost of equity, cost of debt or any number of other analogous concepts. The choice of the appropriate rate is critical to the exercise, and the use of an incorrect discount rate will make the results meaningless.

For calculations involving annuities, you must decide whether the payments are made at the end of each period (known as an ordinary annuity), or at the beginning of each period (known as an annuity due). If you are using a financial calculator or a spreadsheet, you can usually set it for either calculation. The following formulas are for an ordinary annuity. If you want the answer for the Present Value of an annuity due simply multiply the PV of an ordinary annuity by (1 + i).

[edit] Formula

[edit] Present value of a future sum

The present value formula is the core formula for the time value of money; each of the other formulae is derived from this formula. For example, the annuity formula is the sum of a series of present value calculations.

The present value (PV) formula has four variables, each of which can be solved for:

1. PV is the value at time=0 2. FV is the value at time=n 3. i is the rate at which the amount will be compounded each period 4. n is the number of periods (not necessarily an integer)

The cumulative present value of future cash flows can be calculated by summing the contributions of FVt, the value of cash flow at time=t

Note that this series can be summed for a given value of n, or when n is .[7] This is a very general formula, which leads to several important special cases given below.

[edit] Present value of an annuity for n payment periods

In this case the cash flow values remain the same throughout the n periods. The present value of an annuity (PVA) formula has four variables, each of which can be solved for:

1. PV(A) is the value of the annuity at time=0 2. A is the value of the individual payments in each compounding period 3. i equals the interest rate that would be compounded for each period of time 4. n is the number of payment periods.

To get the PV of an annuity due, multiply the above equation by (1 + i).

[edit] Present value of a growing annuity

In this case each cash flow grows by a factor of (1+g). Similar to the formula for an annuity, the present value of a growing annuity (PVGA) uses the same variables with the addition of g as the rate of growth of the annuity (A is the annuity payment in the first period). This is a calculation that is rarely provided for on financial calculators.

Where i ≠ g :

To get the PV of a growing annuity due, multiply the above equation by (1 + i).

Where i = g :

[edit] Present value of a perpetuity

When , the PV of a perpetuity (a perpetual annuity) formula becomes simple division.

[edit] Present value of a growing perpetuity

When the perpetual annuity payment grows at a fixed rate (g) the value is theoretically determined according to the following formula. In practice, there are few securities with precise characteristics, and the application of this valuation approach is subject to various qualifications and modifications. Most importantly, it is rare to find a growing perpetual annuity with fixed rates of growth and true perpetual cash flow generation. Despite these qualifications, the general approach may be used in valuations of real estate, equities, and other assets.

This is the well known Gordon Growth model used for stock valuation.

[edit] Future value of a present sum

The future value (FV) formula is similar and uses the same variables.

[edit] Future value of an annuity

The future value of an annuity (FVA) formula has four variables, each of which can be solved for:

1. FV(A) is the value of the annuity at time = n 2. A is the value of the individual payments in each compounding period 3. i is the interest rate that would be compounded for each period of time 4. n is the number of payment periods

[edit] Future value of a growing annuity

The future value of a growing annuity (FVA) formula has five variables, each of which can be solved for:

Where i ≠ g :

Where i = g :

1. FV(A) is the value of the annuity at time = n 2. A is the value of initial payment paid at time 1 3. i is the interest rate that would be compounded for each period of time 4. g is the growing rate that would be compounded for each period of time 5. n is the number of payment periods

[edit] Derivations

[edit] Annuity derivation

The formula for the present value of a regular stream of future payments (an annuity) is derived from a sum of the formula for future value of a single future payment, as below, where C is the payment amount and n the period.

A single payment C at future time m has the following future value at future time n:

Summing over all payments from time 1 to time n, then reversing the order of terms and substituting k = n − m:

Note that this is a geometric series, with the initial value being a = C, the multiplicative factor being 1 + i, with n terms. Applying the formula for geometric series, we get

The present value of the annuity (PVA) is obtained by simply dividing by (1 + i)n:

Another simple and intuitive way to derive the future value of an annuity is to consider an endowment, whose interest is paid as the annuity, and whose principal remains constant. The principal of this hypothetical endowment can be computed as that whose interest equals the annuity payment amount:

Principal = C / i + goal

Note that no money enters or leaves the combined system of endowment principal + accumulated annuity payments, and thus the future value of this system can be computed simply via the future value formula:

FV = PV(1 + i)n

Initially, before any payments, the present value of the system is just the endowment principal (PV = C / i). At the end, the future value is the endowment principal (which is the same) plus the future value of the total annuity payments (FV = C / i + FVA). Plugging this back into the equation:

[edit] Perpetuity derivation

Without showing the formal derivation here, the perpetuity formula is derived from the annuity formula. Specifically, the term:

can be seen to approach the value of 1 as n grows larger. At infinity, it is equal to 1, leaving

as the only term remaining.

[edit] Examples

[edit] Example 1: Present value

One hundred euros to be paid 1 year from now, where the expected rate of return is 5% per year, is worth in today's money:

So the present value of €100 one year from now at 5% is €95.24.

[edit] Example 2: Present value of an annuity — solving for the payment amount

Consider a 10 year mortgage where the principal amount P is $200,000 and the annual interest rate is 6%.

The number of monthly payments is

and the monthly interest rate is

The annuity formula for (A/P) calculates the monthly payment:

This is considering an interest rate compounding monthly. If the interest were only to compound yearly at 6%, the monthly payment would be significantly different.

[edit] Example 3: Solving for the period needed to double money

Consider a deposit of $100 placed at 10% (annual). How many years are needed for the value of the deposit to double to $200?

Using the algrebraic identity that if:

then

The present value formula can be rearranged such that:

(years)

This same method can be used to determine the length of time needed to increase a deposit to any particular sum, as long as the interest rate is known. For the period of time needed to double an investment, the Rule of 72 is a useful shortcut that gives a reasonable approximation of the period needed.

[edit] Example 4: What return is needed to double money?

Similarly, the present value formula can be rearranged to determine what rate of return is needed to accumulate a given amount from an investment. For example, $100 is invested today and $200 return is expected in five years; what rate of return (interest rate) does this represent?

The present value formula restated in terms of the interest rate is:

see also Rule of 72

[edit] Example 5: Calculate the value of a regular savings deposit in the future.

To calculate the future value of a stream of savings deposit in the future requires two steps, or, alternatively, combining the two steps into one large formula. First, calculate the present value of a stream of deposits of $1,000 every year for 20 years earning 7% interest:

This does not sound like very much, but remember - this is future money discounted back to its value today; it is understandably lower. To calculate the future value (at the end of the twenty-year period):

These steps can be combined into a single formula:

[edit] Example 6: Price/earnings (P/E) ratio

It is often mentioned that perpetuities, or securities with an indefinitely long maturity, are rare or unrealistic, and particularly those with a growing payment. In fact, many types of assets have characteristics that are similar to perpetuities. Examples might include income-oriented real estate, preferred shares, and even most forms of publicly-traded stocks. Frequently, the terminology may be slightly different, but are based on the fundamentals of time value of money calculations. The application of this methodology is subject to various qualifications or modifications, such as the Gordon growth model.

For example, stocks are commonly noted as trading at a certain P/E ratio. The P/E ratio is easily recognized as a variation on the perpetuity or growing perpetuity formulae - save that the P/E ratio is usually cited as the inverse of the "rate" in the perpetuity formula.

If we substitute for the time being: the price of the stock for the present value; the earnings per share of the stock for the cash annuity; and, the discount rate of the stock for the interest rate, we can see that:

And in fact, the P/E ratio is analogous to the inverse of the interest rate (or discount rate).

Of course, stocks may have increasing earnings. The formulation above does not allow for growth in earnings, but to incorporate growth, the formula can be restated as follows:

If we wish to determine the implied rate of growth (if we are given the discount rate), we may solve for g:

[edit] Continuous compounding

Rates are sometimes converted into the continuous compound interest rate equivalent because the continuous equivalent is more convenient (for example, more easily differentiated). Each of the formulæ above may be restated in their continuous equivalents. For example, the present value at time 0 of a future payment at time t can be restated in the following way, where e is the base of the natural logarithm and r is the continuously compounded rate:

This can be generalized to discount rates that vary over time: instead of a constant discount rate r, one uses a function of time r(t). In that case the discount factor, and thus the present value, of a cash flow at time T is given by the integral of the continuously compounded rate r(t):

Indeed, a key reason for using continuous compounding is to simplify the analysis of varying discount rates and to allow one to use the tools of calculus. Further, for interest accrued and capitalized overnight (hence compounded daily), continuous compounding is a close approximation for the actual daily compounding. More sophisticated analysis includes the use of differential equations, as detailed below.

[edit] Examples

Using continuous compounding yields the following formulas for various instruments:

Annuity

Perpetuity

Growing annuity

Growing perpetuity

Annuity with continuous payments

[edit] Differential equations

Ordinary and partial differential equations (ODEs and PDEs) – equations involving derivatives and one (respectively, multiple) variables are ubiquitous in more advanced treatments of financial mathematics. While time value of money can be understood without using the framework of differential equations, the added sophistication sheds additional light on time value, and provides a simple introduction before considering more complicated and less familiar situations. This exposition follows (Carr & Flesaker 2006, pp. 6–7).

The fundamental change that the differential equation perspective brings is that, rather than computing a number (the present value now), one computes a function (the present value now or at any point in future). This function may then be analyzed – how does its value change over time – or compared with other functions.

Formally, the statement that "value decreases over time" is given by defining the linear differential operator as:

This states that values decreases (−) over time ( ) at the discount rate (r(t)). Applied to a function it yields:

For an instrument whose payment stream is described by f(t), the value V(t) satisfies the inhomogeneous first-order ODE ("inhomogeneous" is because one has f rather than 0, and "first-order" is because one has first derivatives but no higher derivatives) – this encodes the fact that when any cash flow occurs, the value of the instrument changes by the value of the cash flow (if you receive a $10 coupon, the remaining value decreases by exactly $10).

The standard technique tool in the analysis of ODEs is the use of Green's functions, from which other solutions can be built. In terms of time value of money, the Green's function (for the time value ODE) is the value of a bond paying $1 at a single point in time u – the value of any other stream of cash flows can then be obtained by taking combinations of this basic cash flow. In mathematical terms, this instantaneous cash flow is modeled as a delta function δu(t): = δ(t − u).

The Green's function for the value at time t of a $1 cash flow at time u is

where H is the Heaviside step function – the notation ";u" is to emphasize that u is a parameter (fixed in any instance – the time when the cash flow will occur), while t is a variable (time). In other words, future cash flows are exponentially discounted (exp) by the

sum (integral, ) of the future discount rates ( for future, r(v) for discount rates), while past cash flows are worth 0 (H(u − t) = 1 if t < u,0 if t > u), because they have already occurred. Note that the value at the moment of a cash flow is not well-defined – there is a discontinuity at that point, and one can use a convention (assume cash flows have already occurred, or not already occurred), or simply not define the value at that point.

In case the discount rate is constant, this simplifies to

where (u − t) is "time remaining until cash flow".

Thus for a stream of cash flows f(u) ending by time T (which can be set to for no time horizon) the value at time t, V(t;T) is given by combining the values of these individual cash flows:

This formalizes time value of money to future values of cash flows with varying discount rates, and is the basis of many formulas in financial mathematics, such as the Black–Scholes formula with varying interest rates.

Bonds And Debentures In IndiaA Bond is a loan given by the buyer to the issuer of the instrument. Bonds can be issued by companies, financial institutions, or even the government. Over and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date.

Bonds can be broadly classified into

a. Tax-Saving Bonds b. Regular Income Bonds

Tax-Saving Bonds offer tax exemption up to a specified amount of investment. Examples are:

a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 b. NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961 c. RBI Tax Relief Bonds

Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals. Examples are:

a. Double Your Money Bond

b. Step-Up Interest Bond c. Retirement Bond d. Encash Bond e. Education Bonds f. Money Multiplier Bonds/Deep Discount Bond

Similar instruments issued by companies are called debentures.

Features:

Bonds are usually not suitable for an increase in your investment. However, in the rare situation where an investor buys bonds at a lower price just before a decline in interest rates, the resultant drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your investment. This is called capital appreciation.

Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may receive interest semi-annually or even monthly, as is the case with monthly-income bonds. Depending on one's capacity to bear risk, one can opt for bonds issued by top-ranking corporates, or that of companies with lower credit ratings. Usually, bonds of top-rated corporates provide lower yield as compared to those issued by companies that are lower in the ratings.

In times of falling inflation, the real rate of return remains high, but bonds do not offer any protection if prices are rising. This is because they offer a pre-determined rate of interest.

One can borrow against bonds by pledging the same with a bank. However, borrowings depend on the credit rating of the instrument. For instance, it is easier to borrow against government bonds than against bonds issued by a company with a low credit rating.

There are specific tax saving bonds in the market that offer various concessions and tax-breaks. Tax-free bonds offer tax relief under Section 88 of the Income Tax Act, 1961. Interest income from bonds, upto a limit of Rs 9,000, is exempt under section 80L of the Income tax Act, plus Rs 3,000 exclusively for interest from government securities. However, if you sell bonds in the secondary market, any capital appreciation is subject to the Capital Gains Tax.

bonds are rated by specialised credit rating agencies. Credit rating agencies include CARE, CRISIL, ICRA and Fitch. An AAA rating indicates highest level of safety while D or FD indicates the least. The yield on a bond varies inversely with its credit (safety) rating. As mentioned earlier, the safer the instrument, the lower is the rate of interest offered.

Assurance In Bonds:This depends on the nature of the bonds that have been purchased by the investor. Bonds may be secured or unsecured. Firstly, always check up the credit rating of the issuing company. Not only does this give you a working knowledge of the company's financial health, it also gives you an idea about the risk considerations of the instrument itself.

This knowledge makes for a better understanding of the available choices, and helps you take informed decisions. In secured instruments, you have a right to the assets of the firm in case of default in payment. The principal depends on the company's credit rating and the financial strength.

Selling in the secondary market has its own pitfalls. First, there is the liquidity problem which means that it is a tough job to find a buyer. Second even if you find a buyer, the prices may be at a steep discount to its intrinsic value. Third, you are subject to market forces and, hence, market risk. If interest rates are running high, bond prices will be down and you may well end up incurring losses. On the other hand, Debentures are always secured.

Interest payments depend on the health and credit rating of the issuer. Therefore, it is crucial to check the credit rating and financial health of the issuer before loosening up your purse strings.

If you do invest in bonds issued by the top-rated corporates, rest assured that you will receive your payments on time.

Risks In Bonds:In certain cases, the issuer has a call option mentioned in the prospectus. This means that after a certain period, the issuer has the option of redeeming the bonds before their maturity. In that case, while you will receive your principal and the interest accrued till that date, you might lose out on the interest that would have accrued on your sum in the future had the bond not been redeemed. Inflation and interest rate fluctuation affect buy, hold, and sell decisions in case of Bonds. Always remember that if interest rates go up, bond prices go down and vice-versa.

Buying, Selling, And Holding Of Bonds:Investors can subscribe to primary issues of Corporates and Financial Institutions (FIs). It is common practice for FIs and corporates to raise funds for asset financing or capital expenditure through primary bond issues. Some bonds are also available in the secondary market.

The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. However, this amount varies from issue to issue. There is no prescribed upper limit to your investment-you can invest as little or as much as you desire, depending upon your risk perception. Bonds offer a fixed rate of interest.

The duration of a bond issue usually varies between 5 and 7 years.

Liquidity Of A Bond:Selling in the debt market is an obvious option. Some issues also offer what is known as 'Put and Call option.' Under the Put option, the investor has the option to approach the issuing entity after a specified period (say, three years), and sell back the bond to the issuer.

In the Call option, the company has the right to recall its debt obligation after a particular time frame.

For instance, a company issues a bond at an interest rate of 12 per cent. After 2 years, it finds it can raise the same amount at 10 per cent. The company can now exercise the Call option and recall its debt obligation provided it has declared so in the offer document. Similarly, an investor can exercise his Put option if interest rates have moved up and there are better options available in the market.

Market Value Of A Bond:Market value of a bond depends on a host of factors such as its yield at maturity, prevailing

interest rates, and rating of the issuing entity. Price of a bond will fall if interest rates rise and vice-versa. A change in the credit rating of the issuer can lead to a change in the market price.

Mode Of Holding Bonds:Bonds are most commonly held in form of physical certificates. Of late, some bond issues provide the option of holding the instrument in demat form; interest payment may also be automatically credited to your bank account.

INTRADAY TRADING

Intraday Trading is trading for that one day only.  Whereas some day traders hold positions

overnight intraday traders maintain no overnight positions.  Scalp trading is a form of

intraday trading.

Click here

WHAT IS CRR,REPO RATE,SLR & HOW IT EFFECTS ECONOMY,INFLATION

BANK RATE.

>> FRIDAY 29 JANUARY 2010

3

votes Buzz up!

Reserve Bank Of India has reviewed the monetary policy and to squeeze money from the

system CRR(cash reserve ratio has been increased to 5.75 % from 5 %)Full policy can be

downloaded from here

Download third quarter review by RBI on monetary Policy

Dear Friends,

In last month or so every body have read the words "CRR" "repo rate" & SLR in News paper

and wanted to know about it and interested in its effect on various things like Inflation,bank

Interest rate and stock price of Bank and other Interest rate sensitive stocks .so we have

divided this story in three parts.

(A) Meaning of terms

(B) Impact on Inflation & interest rates

(C) other measure which can be taken

(A) Meaning of terms

CRR(Cash Reserve Ratio):Cash reserve Ratio (CRR) is the amount of Cash(liquid cash like

gold) that the banks have to keep with RBI. This Ratio is basically to secure solvency of the

bank and to drain out the excessive money from the banks. If RBI decides to increase the

percent of this, the available amount with the banks comes down and if RBI reduce the CRR

then available amount with Banks increased and they are able to lend more.Present rate is

(5.75% today 29.01.10) announced

Repo Rate:Repo rate is the rate at which our banks borrow rupees from RBI. This facility is

for short term measure and to fill gaps between demand and supply of money in a bank .when

a bank is short of funds they they borrow from bank at repo rate and if bank has a surplus

fund then the deposit the funds with RBI and earn at Reverse repo rate .present rate is 4.75 as

on 29.01.2010)

Reverse Repo rate is the rate which is paid by RBI to banks on Deposit of funds with RBI.A

reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate

increases borrowing from RBI becomes more expensive.To borrow from RBi bank have to

submit liquid bonds /Govt Bonds as collateral security ,so this facility is a short term gap

filling facility and bank does not use this facility to Lend more to their customers.       present

rate is 3.25 as on 29.01.2010)      

SLR((Statutory Liquidity Ratio) is the amount a commercial bank needs to maintain in the

form of cash, or gold or govt. approved securities (Bonds) before providing credit to its

customers. SLR rate is determined and maintained by the RBI (Reserve Bank of India) in

order to control the expansion of bank credit.Generally this mandatory ration is complied by

investing in Govt bonds.present rate of SLR is 25 %.(as on 29.01.2010)But Banks average is

27.5 % ,the reason behind it is that in deficit Budgeting ,Govt landing is more so they borrow

money from banks by selling their bonds to banks.so banks have invested more than required

percentage and use these excess bonds as collateral security ( over and above SLR )to avail

short term Funds from the RBI at Repo rate.

File online ITR-1 or ITR-2 FY 09-10 @Rs 119/-

Impact on Inflation and Interest rates:

As we all have read the famous line "if all thing remain the same ......".so In all my below

paragraphs please note that there are many assumption in fixing the relation between this

ratio and interest rates .

SLR and Cash reserve ratio is maintained for bank solvency and Higher ratio of SLR and

CRR makes bank relatively safe as higher ratio means they have more of their funds

deposited in liquid securities and can fulfill the demand on redemption of deposit from the

Bank.lets take an example :suppose a Bank has taken a deposit of 100 from public and CRR

is 9 and SLR is 25 then available funds to lend from deposits with the bank will be 100-9-

25=66 so their is direct relation between CRR ,SLR and Funds available with bank to lend to

public out of deposit received from public .

Impact on Interest rates of this ratios:

Now take point what will be the impact on Interest rates of this ratios:Interest rate are fixed

on the Demand supply situation of the amount available with person who want to lend and

and person who want to borrow and interest rate is fixed on demand supply of the funds if

demand is more and supply is less then interest rate rises up and if demand is less and supply

is excessive then interest rate comes down .this relation is based on many assumption as said

above.

So RBI is controlling the supply side of the Funds and by changes in CRR and SLR, Bank

control the supply side of the money.so when RBI increase these ratio then available funds

with the banks will go down and as demand remain the same then people will have to pay

more as interest and interest rate will go up.On the reverse if RBI reduce these rates ,then

amount available with bank for lending will be increased and they have to reduce rates to

lend more.In these situation bank also reduce the rate of short term deposit from public as

they have surplus money already to lend.so these rates have double impact the first direct

effect is ,bank reduce rate of lending so more money is available with people and second is

interest on Deposit will be reduced so more money will be available with the people.

But other side of interest rate i.e demand/off take of loan is also important to set the interest

rate .This may be some time region wise and seasonal or other factor also effect the decision

of Interest rate .

Impact on inflation

As from the above para we have understood that how these ratio reduce or increase the

money supply in the system and we know if more person is demanding few goods then price

of goods tends to increase and its called inflation so when RBI reduce these ratios then

money supply in market increases and inflation is rises further but in present case this is not

the correct and right relation.The Increase in CRR will squeeze 36000 crore from market ,so

less money will chase few things means less demand so it will reduce Inflation.

At the time of depression  the reduction of these ratio is to maintain liquidity without

disturbing inflation much.while marked is falling and each and every commodity rate going

downwards.In these situation after increasing of money supply inflation rate does not goes up

as the demand is slow and reduction in commodity prices will nullify the impact of increase

in money supply and have less inflationary effects.

But some times in few cases Inflation is due to supply side ,like in case of pulses and sugar

the demand is some what the same but production has been reduced and rate has been

doubled .In these types of cases Ever Increase in CRR will not have much impact as the

problem is from supply side .

Impact of crises on exchange rate:

please note that this explanation is based on many assumptions,

Dollar rate is fixed by demand and supply position of dollar so if there is less supply and

more demand of dollar then dollar-rupee exchange rate will go up means dollar value will

increase.In present senerio dollar has risen up not the rupee has gone down means the issue is

related to more to dollar and less to rupee.more over dollar exchange rates has risen up with

all major currencies of the world so as ruppe. 

Dollar($) v/s rupee

Dollar Main Inflow:(supply)

1. through export

2. through FII investment in share and Dept market

3. repatriation fund sent back to India by NRI

4. Capital receipt Loan.

As the Financial position of FII in their country is not good so they are not investing or

waiting and in their own states they need funds or the rates of stock s in their home countries

are also attractive so inflow to India has been reduced ,and net balance has gone negative as

they are investing less than selling of their investments to save their parent companies in the

home countries .

Due to financial crunch demand in USA has reduced so less dollar inflow against Export.

Repatriation by NRI has increased as exchange rate is favorable and now they can send more

rupee to their relative with same dollar outflow so they are en cashing it.But their capacity to

send more dollar has also been affected due to less income in USA.

Capital receipt has also reduced as the financial company are not willing to lend funds.

Dollar main Out flow(demand)

1. paid for Import

2. withdrawal of funds by FII

3. Capital loan repayment

effects of point 2 has increase the demand of dollar

so from the above dollar demand /supply situation the exchange rates has been increased so

fast.

Measure which may be taken in this Crises:(this is based on measures taken by other

countries )

1. Share market:Govt should create a Fund which may be called as Market stabilization

fund ,which should me managed by professional agency and should buy good reputed stock

from the Market when share are available at throw away prices and sell them when they

seems to be overvalued.and the purpose of the fund should be stabilization of the market and

welfare of the Investor and not to earn a profit from the market and buying and selling should

be on the basis of Long term period.By doing this sentiment will improve ,volatility will be

reduced and selling from large FII can be absorbed and in my point of view there is no

chance of loss in these venture.To start with 5000-10000 cr fund is enough.Russian govt has

adopted this system.

2. Buying of stocks of private sector Banks:if govt By symbolically purchase shares of some

major private banks then it will improve the sentiment and increase the confidence of public

in private sector bank .This measures Indicate that banks are sound and govt is also investing

in them .More over money received from selling of shares also improve the liquidity position

of the banks

3. To control prices of Sugar,pluses and other eatable ,Govt must have strict policy against all

stockist and speculator and should import material from outside as one time relief and should

prepare a suitable plan to increase supplies of such things buy giving incentives to farmers

and proper rate of their produce and should reduce middlemen out of the system .

Difference Between FDI and FII

Both FDI and FII is related to investment in a foreign country. FDI or Foreign Direct Investment is an investment that a parent company makes in a foreign country. On the contrary, FII or Foreign Institutional Investor is an investment made by an investor in the markets of a foreign nation.

In FII, the companies only need to get registered in the stock exchange to make investments. But FDI is quite different from it as they invest in a foreign nation.

The Foreign Institutional Investor is also known as hot money as the investors have the liberty to sell it and take it back. But in Foreign Direct Investment, this is not possible. In simple words, FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily. This difference is what makes nations to choose FDI’s more than then FIIs.

FDI is more preferred to the FII as they are considered to be the most beneficial kind of foreign investment for the whole economy.

Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise.

The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practises and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI.

While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDI’s are long term.

Summary1. FDI is an investment that a parent company makes in a foreign country. On the contrary, FII is an investment made by an investor in the markets of a foreign nation.2. FII can enter the stock market easily and also withdraw from it easily. But FDI cannot enter and exit that easily.3. Foreign Direct Investment targets a specific enterprise. The FII increasing capital availability in general.4. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor

interim dividend

Definition

A dividend which is declared and distributed before the company's annual earnings have been calculated; often distributed quarterly.

Leveraged buyoutFrom Wikipedia, the free encyclopedia

A leveraged buyout (or LBO, or highly-leveraged transaction (HLT), or "bootstrap" transaction) occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage (borrowing). The assets of the acquired company are used as collateral for the borrowed capital, sometimes with assets of the acquiring company. Typically, leveraged buyout uses a combination of various debt instruments from bank and debt capital markets. The bonds or other paper issued for leveraged buyouts are commonly considered not to be investment grade because of the significant risks involved.[1]

What Does Portfolio Management Mean?The art and science of making decisions about investment mix and policy, matching investments to objectives, asset allocation for individuals and institutions, and balancing risk against. performance.

Portfolio management is all about strengths, weaknesses, opportunities and threats in the choice of debt vs. equity, domestic vs. international, growth vs. safety, and many other tradeoffs encountered in the attempt to maximize return at a given appetite for risk.

Investopedia explains Portfolio ManagementIn the case of mutual and exchange-traded funds (ETFs), there are two forms of portfolio management: passive and active. Passive management simply tracks a market index, commonly referred to as indexing or index investing. Active management involves a single manager, co-managers, or a team of managers who attempt to beat the market return by

actively managing a fund's portfolio through investment decisions based on research and decisions on individual holdings. Closed-end funds are generally actively managed.

Here are some words that you should understand

 

The Balance Sheet Words

Accounting Equation

Is a useful rule which helps when assembling the balance sheet figures. The rule which is always true is that:

Assets - Liabilities =Capital

Fixed Assets + Current Assets

-Current Liabilities - Long term Liabilities = Capital + profit - drawings

This means that when preparing a balance sheet there will always be two figures which are the same and we refer to this state as the the balance sheet balancing

Accounting ratios

Used to help make sense of the figures and include the following categories:

Profitability ratios , used to compare the profitability of one company with another or of one company over time.

Liquidity ratios, used to compare the liquidity of one company with another or of one company over time.

Investment ratios, used by potential investors when making investment decisions.

Efficiency ratios, used to compare company efficiency with others or with itself from one year to another.

Accounting ratios are only useful when used to compare:

o one company's results over a period of time. o one company's results with another company. It is best to compare

with the best ,such as a world class company, or to compare with the industry standard for that type of business.

o the company's results with those expected. It is useful to use budgets for this purpose.

 Accrual

An amount unaccounted for, yet still owed at the year end. The amount needs to be estimated     and then added to the expenses deducted from the profit in the Profit and Loss   account .  The same amount also needs to be added to Trade Creditors in the Current  Liabilities  section of the Balance sheet Learn more about this

Asset

An item of value owned by the business

Balance Sheet

A financial statement that shows what the business is worth. This is a very simple definition as the valuation of a business is a very complex topic. It shows the business assets and liabilities at one point in time and is sometimes referred to as the "snap shot".  

Bank & Cash

Amounts held in the bank and in cash. Found in the Current Assets section of the Balance Sheet.

If  the amounts are in deficit, then  the bank account is said to be an overdraft and will not appear in  current assets but will be found in the Current Liabilities section of the balance sheet.

Capital

Items, usually cash or other assets introduced into the business by the owners. Sometimes referred to as Capital Introduced. For companies this is referred to as share capital and Capital Employed is the term given to the total of:

Share Capital (which comes in two varieties ordinary and preference) Loan capital (which is simply a grand name for long term loans) Reserves

 

Cash Money. Can be in the petty cash tin in the office or at the bank.  

Current Asset

Assets which are expected to be used up and replaced within one year. Sometimes referred to as short term assets.They can be :

stocks of finished goods or raw materials or partially finished good known as work in progress. This amount is also referred to as closing stock and can be found in the Trading account section of the Profit and loss Account. It is important to remember that   Closing stock appears both in the Balance sheet and in the Profit and Loss Account.

amounts owed to the business from its customers and known as Debtors. Customers come in two varieties:

o Cash customers which pay for goods at the time of sale o Credit customers which pay for goods at a later date. It is from these

sales that debtors arises i.e. amounts owed from customers.

This amount is usually shown net of Doubtful debts(which means having the amount of doubtful debts deducted from the total figure for debtors) The deduction for Doubtful debts is usually an estimate and is known as a Provision (meaning estimate) for doubtful debts. It represents amounts under dispute with customers or amounts which customers are having difficulty in paying because of cash flow problems. Income arising from these amounts is therefore considered doubtful.

amounts paid in advance (at the end of the accounting year) of goods and services received and referred to as Prepayments Prepayments are shown as added to debtors.

cash and bank

 Current Liability

Amounts owed (within one year) for goods and services purchased on credit terms. This means payment for goods and services is due at a date later than the date of sale. Current liabilities can be:

Trade creditors, which is the name we give to amounts owed to suppliers. Accruals, which is the name we give to amounts still owed at the year end and

not yet recorded in the books of account. Proposed items such as Dividends proposed, which means amounts the

business promises to pay in the coming year. Payable items such as Tax payable which is payable within the coming year.

Overdraft, which is amounts owed to the bank. Short term loans

 Depreciation

Is the measure of wearing out of a fixed asset. All fixed assets are expected to wear out, become less efficient and to get "tired". Depreciation is calculated as the estimate of this measure of wearing out and is a charge in the Profit and loss Account. Accumulated Depreciation is the total depreciation charges to date deducted from the cost of the fixed assets to show Net Book Value in the Balance Sheet learn more about depreciation  Watch a car becoming more worn out over time  When you have finished you need to press escape and return.

Drawings

Assets withdrawn from the business by the owners. These assets are usually cash but can be any asset withdrawn. In company accounts the withdrawal of assets by the owners is either called :

salaries if it is payment for work done by the owner or dividendsif it is for a share of the profits

 Fixed Assets

Assets used within the business and not acquired for the purposes of resale. Examples include:

Land and buildings

Plant and machinery, such as knitting machines and cup making machinery

Fixtures and fittings, such as light fittings and shelving

Motor vehicles, such as vans and cars. Fixed assets must be shown at original cost(purchase price) or valuation. Valuation is preferred in the case of assets which have changed significantly in value since original purchase. For example the current value of land and buildings can be quite different from the original cost. Accumulated Depreciation must also be shown, which is deducted from cost (or valuation) to give  net book value

Goodwill

comes in two flavours:

Inherent goodwill, which is supposed to reflect the reputation and other positive characteristics of the business which are all difficult to put a value on. This type of goodwill should not appear on the Balance Sheet

Purchased goodwill, which is the excess of purchase price over fair value of the net assets of the business acquired by the purchaser. learn more about goodwill

 Legal framework

The law controls what kinds of books, records and systems of internal controls that must be maintained by companies which are subject to an annual examination by external auditors. You will learn much more about these in your studies.

Long term Liability

Amounts owed to someone else which are payable after one year. Examples include:

Long term loans Debentures , which are long term loans secured on the business assets. This

means if the business fails to repay back the loan on time the business assets are at risk.

  Net current assets

Sometimes referred to as working capital, this is the difference between total current assets and total current liabilities and is what finances the business on a day to basis.

Net Assets

Is the difference between the total assets and total liabilities.

Profit

There are many types of profit:

Cash surplus, which is the difference between receipts and payments. Taxable profit, which is the business profit adjusted for tax purposes. Accounting profit, which is the difference between:

o Income received or receivable and o Expenditure paid or payable

within an accounting period Often referred to as NET Profit

Accounting profit is calculated using the accruals or matching concept . Which means that the total income includes not only cash received but also amounts owed by credit customers (debtors) for sales made within the accounting period. The total costs incurred to achieve these sales include not just actual

payments made , but also amounts still owing to suppliers. Accounting profit is normally referred to as Net Profit which is Gross profit less Expenses.

 

Reserves

amounts retained in the business and not distributed to owners. Reserves can be:

Profits made and not passed on to owners. These are some times known as retained earnings.

Capital reserves which can not be passed on to owners and represent the perceived increase in valuation of some fixed assets.

  Shares

Amounts invested in a company by its owners. Owners of companies are called shareholders

The profit and loss account words

Accounting Period

Is the period under examination and usually refers to a year. We therefore refer to a Profit and loss Account for the year ended so and so or a Balance Sheet as at so and so.

Accruals or Matching concept

Is the reason why net profit made is not the same as the cash surplus generated. This is a critical concept for you to understand. It is a fundamental concept upon which the accounts are prepared. You will learn in your studies that profit is not cash for a number of reasons:

because of applying the accruals concept to preparation of accounts. This is where we deduct from sales the amounts we have incurred to achieve those sales - WHETHER WE HAVE PAID FOR THEM OR STILL OWE FOR THEM is irrelevant. In other words we count all costs incurred including those still owing to trade creditors at the end of the year. The costs deducted in the accounts will therefore be greater than the actual cash payments made where amounts are still owed at the end of the year. Similarly the sales figure is not made up of cash received from customers but is made up of cash received together with that still to be received.

because of accounting for depreciation which is a deduction against profits for the measure of wearing out of a fixed asset and therefore does not involve a cash payment

because of the way we value closing stock which can be by using average unit costs, the last unit costs or the earliest unit costs. None of these methods reflect the actual flow of cash because they are all estimates only. You will learn that this is where we consider FIFO (first in first out) and LIFO (last in first out) valuations of closing stock.  learn more about the matching concept  learn more about stock valuation

 Expenses

Referred to as expenditure and including examples such as:

advertising

rent and rates

wages and salaries

travelling expenses

light and heat

Office Expenses

Miscellaneous Expenses

bank interest

loan interest

depreciation

Provision for doubtful debts . This represents an estimate of amounts customers have difficulty paying due to their cash flow problems. This figure will be deducted from the profit in the Profit and loss Account and will also be deducted from the Debtors figure in the Balance Sheet.

bad debts written off Amounts owed by customers that cannot afford to pay because they have gone into liquidation. These amounts need to be deducted from the profit in the Profit and Loss Account and also from the Debtors figure which is found in the Current Assets section of   the Balance Sheet.

accruals and prepayments. Accruals are amounts unaccounted for yet still owing at the year end . Estimates need to be made and then added to the expenses deducted in the Profit and Loss account. This amount also needs to be added to Trade Creditors in the Current liabilities section of the Balance Sheet . Prepayments are amounts paid for by the business in

advance of goods and services received. These amounts need to be deducted from expenses in the Profit and Loss account and will also appear in the Current Asset section of the Balance Sheet along with Debtors.

 

Gross Profit

Is calculated by deducting Cost of Sales(sometimes referred to as Cost of goods sold) from sales. Cost Of Sales is calculated by taking:

Opening stock, which is the value of stock which exists at the beginning of the accounting period

Plus Purchases of goods for resale, made during the accounting period. One common mistake made by students is to confuse purchases with stocks. Purchases of stocks are dealt with through the purchases account and not through the  Opening and closing stocks.

o Less Closing stock, which is the value of stock which exists at the end of the accounting period  In other words, it is the value of goods purchased during the year and in stock at the beginning of the year, less those items sold during the year. This is the  figure which also appears in the balance sheet as stocks and can be found in the current   assets section. learn more about cost of sales

 Historic cost

The method used for preparing accounts which estimates the actual purchase price of all items purchased. This is as opposed to the alternatives which could be to use instead the:

cost of replacing items when they are sold or disposed of .Known as the Replacement cost or net realizable value

income expected if items were sold. Known as the Realization cost

 Net Profit Sales less cost of sales less expenses = net profit.

Sales less cost of sales = gross profit.

Therefore Net Profit = gross profit less expenses.

In other words Net Profit represents the surplus of sales made over expenditure during the accounting period. If a deficit is made(i.e if expenditure is greater than sales) then this results in a net loss and not a net profit.

 

Profit and Loss Account

Shows what net profit or loss the business has made within an accounting period after deducting all expenditure from the income. A net profit is earned if total expenditure is less than the sales figure. A net loss is made if it is greater. Comes underneath the Trading Account

Sales

Income received or receivable for the accounting period. Sometimes referred to as Turnover.It represents the sales value of goods and services made to customers during the year.

Trading account

Shows what Gross Profit the business has made within an accounting period It comes on top of the Profit and Loss Account

 Authorised capital

From Wikipedia, the free encyclopedia

The authorised capital of a company (sometimes referred to as the authorised share capital or the nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its constitutional documents to issue to shareholders. Part of the authorised capital can (and frequently does) remain unissued.

The part of the authorised capital which has been issued to shareholders is referred to as the issued share capital of the company.

THE DIFFERENCE BETWEEN CAPITAL MARKETS AND MONEY MARKETS

In order to understand what the differences between things are you first need to understand what each of the

items is. In this case before you can understand the difference between capital markets and money markets

you are going to need to understand what capital markets are and what money markets are. Once you

understand the two items are it will be easier to see what the difference or differences are between the two

markets.

What is capital market?

Basically the capital market is a type of financial market, it includes the stocks and bonds market as well. But

in general the capital market is the market for securities where either companies or the government can raise

long term funds. One way that the companies or the government raise these long term funds is through

issuing bonds, which is where a person buys the bond for a set price and allows the government or company

to borrow their money for a certain time period but they are promised a higher return for allowing them to

borrow the money, the higher return is paid through interest that accrues on the money that the government

or company borrows.

Another way that the companies or government can raise money in the capital market is through the stock

market, most of the time you don't see the government as a part of the stock market, but it can actually happen

so we need to include them. But how the stock market works is that the companies decide to sell shares of

their stock, which is basically ownership in the company, to ordinary people and other companies, as a way to

raise money. The people who buy the stock are usually given dividends each year, if the company has agreed

to pay out dividends, so that is another possible return on their investment.

The capital market actually consists of two markets. The first market is the primary market and it is where

new issues are distributed to investors, and the secondary market where existing securities are traded. Both of

these markets are regulated so that fraud does not occur and in the United States the U.S. Securities and

Exchange Commission is in charge of regulating the capital market.

What is the money market?

Basically the money market is the global financial market for short-term borrowing and lending and provides

short term liquid funding for the global financial system. The average amount of time that companies borrow

money in a money market is about thirteen months or lower. Some of the more common types of things used

in the money market are certificates of deposits, bankers' acceptance, repurchase agreements and commercial

paper to name a few.

Basically what the money market consists of is banks that borrow and lend to each other, but other types

of finance companies are involved in the money market. What usually happens is the finance companies fund

themselves by issuing large amounts of asset backed commercial paper that is secured by the promise of

eligible assets into an asset backed commercial paper conduit. Your most common examples of these are

auto loans, mortgage loans, and credit card receivables.

What is the difference?

Basically the difference between the capital markets and money markets is that capital markets are for long

term investments, companies are selling stocks and bonds in order to borrow money from their investors to

improve their company or to purchase assets. Whereas money markets are more of a short term borrowing or

lending market where banks borrow and lend between each other, as well as finance companies and

everything that is borrowed is usually paid back within thirteen months.

Another difference between the two markets is what is being used to do the borrowing or lending. In the

capital markets the most common thing used is stocks and bonds, whereas with the money markets the most

common things used are commercial paper and certificates of deposits.

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Underwriting FeeThe compensation that an underwriter receives for placing a new issue with investors. It is calculated as a discount from the price of the new issue. For example, an issuer may sell the underwriter a bond at $990 per bond. The underwriter will then place the issue at $1,000, allowing it to make a $10 profit. This profit is the underwriting fee. It is also called a concession

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CopyrightFrom Wikipedia, the free encyclopedia

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"Copyrighting" redirects here. For the use of words to promote or advertise something, see Copywriting.

"Copyrights" redirects here. For Wikipedia policy about copyright issues, see Wikipedia:Copyrights.

Intellectual property law

Primary rights

Copyright • Patent • Trademark • Industrial design right • Utility

model  • Geographical indication • Trade secret • Authors' rights • Related

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Copyright is a set of exclusive rights granted to the author or creator of an original work, including the right to copy, distribute and adapt the work. Copyright does not protect ideas, only their expression or fixation. In most jurisdictions copyright arises upon fixation and does not need to be registered. Copyright owners have the exclusive statutory right to exercise control over copying and other exploitation of the works for a specific period of time, after which the work is said to enter the public domain. Uses which are covered under limitations and exceptions to copyright, such as fair use, do not require permission from the copyright owner. All other uses require permission and copyright owners can license or permanently transfer or assign their exclusive rights to others.

Initially copyright law only applied to the copying of books. Over time other uses such as translations and derivative works were made subject to copyright and copyright now covers a wide range of works, including maps, dramatic works, paintings, photographs, sound recordings, motion pictures and computer programs. The British Statute of Anne 1709, full title "An Act for the Encouragement of Learning, by vesting the Copies of Printed Books in

the Authors or purchasers of such Copies, during the Times therein mentioned", was the first copyright statute.

Today copyright laws have been standardized to some extent through international and regional agreements such as the Berne Convention and the European copyright directives. Although there are consistencies among nations' copyright laws, each jurisdiction has separate and distinct laws and regulations about copyright. National copyright laws on licensing, transfer and assignment of copyright still vary greatly between countries and copyrighted works are licensed on territorial basis. Some jurisdictions also recognize moral rights of creators, such as the right to be credited for the work.

A patent (pronounced /ˈpætənt/ or /ˈpeɪtənt/) is a set of exclusive rights granted by a state (national government) to an inventor or their assignee for a limited period of time in exchange for a public disclosure of an invention.

The procedure for granting patents, the requirements placed on the patentee, and the extent of the exclusive rights vary widely between countries according to national laws and international agreements. Typically, however, a patent application must include one or more claims defining the invention which must be new, non-obvious, and useful or industrially applicable. In many countries, certain subject areas are excluded from patents, such as business methods and mental acts. The exclusive right granted to a patentee in most countries is the right to prevent others from making, using, selling, or distributing the patented invention without permission.[1]

Under the World Trade Organization's (WTO) Agreement on Trade-Related Aspects of Intellectual Property Rights, patents should be available in WTO member states for any inventions, in all fields of technology,[2] and the term of protection available should be the minimum twenty years.[3] Different types of patents may have varying patent terms (i.e., durations

TrademarkFrom Wikipedia, the free encyclopedia

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For other uses, see Trademark (disambiguation).

For guidelines on using trademarks within Wikipedia, see Wikipedia:Manual of Style (trademarks).

Intellectual property law

Primary rights

Copyright • Patent • Trademark •

Industrial design right • Utility model  •

Geographical indication • Trade secret • Authors' rights • Related

rights • Moral rights

Sui generis rights

Database right • Mask work  • Plant breeders'

rights  • Supplementary

protection certificate  • Indigenous intellectual

property

Related topics

Criticism • Orphan works • Public domain

• more

A trademark or trade mark[1] is a distinctive sign or indicator used by an individual, business organization, or other legal entity to identify that the products or services to consumers with which the trademark appears originate from a unique source, and to distinguish its products or services from those of other entities.

A trademark is designated by the following symbols:

™ (for an unregistered trade mark, that is, a mark used to promote or brand goods) ℠ (for an unregistered service mark, that is, a mark used to promote or brand services) ® (for a registered trademark)

A trademark is typically a name, word, phrase, logo, symbol, design, image, or a combination of these elements.[2] There is also a range of non-conventional trademarks comprising marks which do not fall into these standard categories, such as those based on color, smell, or sound.

The owner of a registered trademark may commence legal proceedings for trademark infringement to prevent unauthorized use of that trademark. However, registration is not required. The owner of a common law trademark may also file suit, but an unregistered mark may be protectable only within the geographical area within which it has been used or in geographical areas into which it may be reasonably expected to expand.

The term trademark is also used informally to refer to any distinguishing attribute by which an individual is readily identified, such as the well known characteristics of celebrities. When a trademark is used in relation to services rather