@Leisure - Vol-2 | srei
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@Leisure - Vol-2

Newsletter
 

Railway Mania

Have you heard of the railway mania?

Have you heard of the Tulip mania (in Netherlands in the early 17th century) and the Tech mania (world-over in the last decade of the 20th century)? These are popular events. But do you know of the “Railway mania”? You must be wondering how can there be a mania with something as ordinary as the railways. Yes, you are quite justified. But it is only now that the railway is common. There was once a time in the 1840s when the railways were a new concept in the United Kingdom and caught the imagination of their people just as technology did the world over in the late 1990s. The railway mania was the result of excitement about the latest invention in mass transport.

The Liverpool & Manchester was the world’s first modern intercity railway in 1830 and was successful in transporting goods and passengers. This then led to the start of the mania. The pattern of the mania was common - investors poured money into the railway company stocks on the news of expecting high returns until the bubble finally burst in 1846. Here is how the mania worked. Companies just needed to submit an application to the parliament to acquire land for their railway lines. These permissions were granted without any difficulty. The parliament granted permissions for thousands of miles of railway lines to be constructed. Almost a third of these were never constructed; the companies either closed down due to poor management or as outright fraud. The railway industry was very poorly regulated then and this led to a lot of bad blood for the investors.

These bubbles clearly show that history tends to repeat itself in various forms at different points of time. And almost always, these manias and bubbles are identified only in hindsight. It is therefore pertinent for investors to study and research investments to avoid making losses due to frauds.

 
 

Debentures or Bank Fixed deposits


Fixed income investments which pay out a fixed steady flow of income are the most popular financial savings for Indians. The normally risk averse population loves the predictability and steady returns that these investments generate for them. Among these, fixed deposits are more prominent among investors simply because they are offered by the neighbourhood bank and hence are more familiar. There is a better investment instrument that provides similar and more benefits to investors. It is the Non-Convertible Debenture (NCD). NCDs too are issued for a fixed period of time and pay out a fixed coupon rate similar to a bank fixed deposit. Here is an analysis of how these two instruments compare with each other.

  • Security: Bank deposits are insured only up to Rs 1 lakh by Deposit insurance and Credit Guarantee Corporation (DICGC). However NCDs are fully secured by the assets of the issuer. That is, in case the issuer defaults on payment of principal or interest, the assets of the issuer could be sold off to repay the NCD holder.
  • Liquidity: While bank deposits (other than the tax saving deposits) can be surrendered at any time by incurring a penalty, NCDs are normally listed on a stock exchange to provide easy liquidity to holders.
  • Capital Gain: While interest receipts are the only source of return in a fixed deposit, NCDs have the potential to generate profits (capital gains) depending on the interest rate movement after the issue date.
  • Tax Deducted at Source (TDS): Banks deduct TDS from the interest if the amount payable in a financial year is more than Rs 10,000. NCDs bought through DEMAT mode do not attract TDS. Tax on interest is paid while declaring one's income.
  Fixed Deposits Non-Convertible Debentures
Security Upto Rs.1 lakh Fully secured
Liquidity Can be surrendered with penalty May be sold in the market at prevailing market price
Source of return Interest income only Possibility of earning a capital gain
TDS Applicable on interest When invested through DEMAT mode

Srei Infrastructure Finance Ltd. has consistently earned credit ratings from various prominent agencies and offers various choices in NCDs. The company's focus in priority sectors like infrastructure lending with interests in equipment finance and project advisory, and over 25 years of experience, give its offering high credibility.

 
 

Bonds help you rebalance

your risk / return equation

The main reason of saving and investing is to grow one’s wealth. While investing in equity is the best method to create wealth over the long term, it is also more risky. The possibility of wealth erosion is more in equity. Even though gold and real estate do not face too many ups and downs in prices, these investments also face risk.

Debt investing helps you balance out the risk in other investments, especially equities. When debt is combined with equity and other investmentsin the right balance (depending on your risk profile and investment period), yourinvestment portfolio becomes more stable. This is like having both an attacking and defensive batsman in a cricket team. Having only attacking batsmen could produce very good results sometimes but the risk of losing is also very high. Defensive batsmen provide a steady support and let the attacking batsmen make runs at the other end. Debt investments are similar to defensive batsmen. They provide steady returns just like the ones and twos taken by the defensive batsmen.

Bonds help you rebalance your risk / return equation

While equity, real estate or gold are risky, debt investments tend to smooth out the risk by their steady flow of returns and low price movements (in case they are sold in the market before they mature). Bonds therefore help to manage the risk / return equation of your investment portfolio to suit your risk profile and investment period. After all, building up your defence too is an important part of your winning strategy, right?

 

Buddy Jokes

An accountant was unable to sleep at nights; he visited his doctor. Doctor suggested to him to start counting sheep. The accountant replied, “Yes I did. But I always make a mistake and spend the next few hours trying to find it!”

Every problem has a solution to it, which is usually simple, neat and wrong.

During an interview-
Manager: With no work experience you are asking for a very high salary.
Applicant: Well, Sir, the work is harder when you don’t know what you are doing!

Quote of the day written by a Trader:
“I’ve lost half my net worth and but still have a wife. This is even worse than a divorce.”

There are primarily 3 different types of investors:
First are those who don't know anything about investing;
Second are those who know very little about investing;
And, Third are those who don't realize they don't know anything.