Contingency Fund
   
A contingency fund is simply a reserve fund set aside to handle unexpected debts or expenses that are outside the range of the usual operating budget. This model of maintaining reserve money as protection against possible loss in the event of an emergency situation can be utilized in a number of situations. Governments, private businesses, and individual households can establish and maintain a contingency fund as part of the overall financial plan of operation. Once this reserve is used, then the immediate priority of any individual should be to refill this back to the original level.
 
 
 
Size of Contingency Fund
   
An ideal fund should be equal to 12 months’ of household expenses. An individual can start with 3 times monthly expenses including all liabilities & gradually increase to 12 times. This set up gives peace of mind and generating return should not be the objective. Keep this in liquid funds of mutual fund houses or sweep-in accounts.
 
 
 
What are bonds ?
   
Just as people need money, so do companies and governments. A company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor).

For example, say you buy a bond with a face value of Rs.1,000, a coupon of 8%, and a maturity of 10 years. This means you'll receive a total of Rs. 80 (Rs.1,000*8% ) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you'll receive two payments of Rs.40 a year for 10 years. When the bond matures after a decade, you'll get your Rs. 1,000 back.
 
 
 
Debt Versus Equity
   
Bonds are debt, whereas stocks are equity. This is the important distinction between the two securities. By purchasing equity (stock) an investor becomes an owner in a corporation. Ownership comes with voting rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a shareholder. However, the bondholder does not share the profits if a company does well - he or she is entitled only to the principal plus interest.

To sum up, there is generally less risk in owning bonds than in owning stocks, but this comes at the cost of a lower return. Bonds are better than fixed deposits or deposits issued by corporates both in terms of credibility and longer term fixed returns.
 
 
 
Why Bother With Bonds?
   
It's an investing axiom that stocks return more than bonds. In the past, this has generally been true for time periods of at least 10 years or more. However, this doesn't mean you shouldn't invest in bonds. Bonds are appropriate any time you cannot tolerate the short-term volatility of the stock market.
  
Bonds are just like IOUs. Buying a bond means you are lending out your money.
Bonds are also called fixed-income securities because the cash flow from them is fixed.
Stocks are equity; bonds are debt.
The key reason to purchase bonds is to diversify your portfolio.
The issuers of bonds are governments and corporations.
A bond is characterized by its face value, coupon rate, maturity and issuer.
Yield is the rate of return you get on a bond.
When price goes up, yield goes down, and vice versa.
When interest rates rise, the price of bonds in the market falls, and vice versa.
Bills, notes and bonds are all fixed-income securities classified by maturity.
Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds.
Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for the borrower to default on the debt payments.
High-risk/high-yield bonds are known as junk bonds.
 
 
Ratio Analysis
 
Financial Ratios determine the health of an individual's Personal Finance. Just as an ECG is used as a tool to study the heart, financial ratios are used to check the status of one's personal finance. The output conveys 'Where do you stand financially today ?' Based on this and various other inputs, an individual's goals and priorities in life could be redefined and a roadmap could be drafted for prosperity
  
 
 
Some Common Ratios used and Optimum levels
 
  RATIO ANALYSIS   RECOMMENED LEVEL
  Liquid Assets to Monthly Expenditure   2 to 6 times ME
  Liquid Assets & Other Financial Assets to Monthly Expenditure   6 times ME
  Liquid Asset to Total Debt   >= 0.1
  Liquid Assets & Other Financial Assets to Total Debt   0.2 to 0.3
  Liquid Asset to Non Mortgage Debt   >= 1
  Liquid assets to One year's payment on debt   >= 0.5
  Total debt to Net worth   < 1
  Non-mortgage debt to Net worth   < 0.4
  Net equity + Net tangible assets to Net worth   1.0 in high inflation period
  Net equity + Net tangible assets minus home to Net worth   0.2
 
 
 
Product of the month
 
Axis Asset Management Company, has launched a product that combines equity participation and relative stability of fixed income. This is the third one in the series that has been launched by this fund house that seems to be specializing in theme based products. The earlier series has delivered a return of close to 11.5% absolute in a month (though this is too early to evaluate a fund of such nature). This is a close ended fund with a 3- year time horizon, suitable for conservative investors. Investors can expect a return of 12 – 15% compounded return out of this product. To know more , visit
http://www.financialplanners.co.in/Documents/AxisHybridFundSeries3OnePager.pdf
 
 
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