Are Bank FDs indeed safer than other investments?

We have usually heard investors seeking safe investments. Invariably bank fixed deposits are presumed to be safe. On the other hand equity investing is considered risky.

If we further get deeper into the thought process we will realize that fixed deposit is considered safe because under normal circumstances we get back the same principal amount that was initially invested. However, in case of equity we may get either more or less or same amount of initial investment.

Does this mean equity is risky or for that matter is fixed deposit really safe? Answer is No. There are varieties of risks that are associated with investments. Some of the risks are market risk, credit risk, liquidity risk, reinvestment risk, political risk, economic cycles etc. Broadly there are two types of risk systematic risk and unsystematic risk.

Systematic risk is a risk, which exists in the system e.g. inflation, taxes, political situation, economic cycles etc. This form of risk affects all our investments. Our returns from all kinds of investment like equity, debt, gold, real estate etc will get reduced to the extent of inflation. Suppose rate of inflation within economy (READ: System) is 7% and returns from equity, debt, Gold and real estate are 20%, 6%, 13%, 18% then our actual returns will be 13%, -1%, 6%, 11%.

Systematic risk is usually not transparent, e.g. we cannot see impact of inflation on our investment. The principal amount invested in fixed deposit is returned back to us completely. Therefore we feel that investment in fixed deposit is safe. However inflation would have eroded our returns from fixed deposit and hence to that extend fixed deposit is subject to systematic risk.

Another form of risk is unsystematic risk. This form of risk is associated with a particular kind of investment, e.g. if we buy land and if real estate prices crash, our investment will have a negative impact, however if we invest in Gold and if housing prices crash worldwide, the crash will not affect our Gold investment. Similarly, if we have bought stocks of Reliance Industries Limited and if something happens to Bajaj family there will not be any impact on the stock of Reliance Industries Ltd. Unsystematic risk does not exist in system, it only affects a particular investment.

Similarly, in case of fixed deposits, unsystematic risks could be credit risk or reinvestment risk.

Since we do not directly see the movement of fixed deposit prices, it does not mean it is risk free. In case of equity investment, its prices fluctuate based on impact of variety of risks. In case of fixed deposit investment amount remains constant but various risks quietly erode real value of principal. Simply because we cannot see the risk does not mean risk doesn’t exist.

As an investor we should always remember the fundamental of investments and its returns. Investor gets returns on investments because he takes the risk of parting with his/her money. The moment we part with our money, our investment inherits risk.

To conclude:

By all means invest in bank fixed deposit, Govt. bonds or any other investments which will help you reach your financial goals but never ever think that your investment is risk free 100%.

For Corp Bonds contact:

sriram.adviser@gmail.com

phone no : +91-9741598945 (India) 

                   +1-408-250-9952 (USA)

Most Common Roadblocks on the Road to Building Wealth

Many Indias will never reach their dreams of building wealth, being financially secure, and being able to retire in comfort. The reason is most often a combination of these seven biggest money mistakes.

1. Having a Thirty-year Mortgage

Where do you find the money to build wealth? Try looking at your mortgage. Millions of Indians think nothing of paying for their home over 30 years, even though the average homeowner ends up paying two-and-a-half times the purchase price of the home by stretching the payments out this long. Having a 15-year mortgage instead of a 30-year mortgage can save you large sums of money and help you build wealth.


2. Giving Control of Your Money to Someone Else

If you're not involved in your day-to-day family finances, you're putting yourself at risk. If you're married and you let your spouse handle all the financial matters, you're at risk if your spouse dies or becomes seriously ill or if you divorce. Know the details of your family's finances, investments, debts, retirement savings, etc. Don't turn your investments and financial affairs over to a broker or financial consultant without keeping abreast of what is being done with your money and being involved in investment decisions. Never give total control of your money to someone else.

3 Not Controlling Spending Leaks

The reason so many people in India are in so much debt is because they dribble their money away in small, barely noticeable amounts. Like drops of water dribbling through the hole in the dike, the loss is barely noticeable, but over time the hole in the dike gets bigger and bigger. By the time the water is gushing through, the damage is done. The same is true with spending leaks. It's a lot easier to plug a small hole than to ignore the drips and look over your shoulder later and see a huge tidal wave of water coming your way in the form of unmanageable debt. If you're ever going to accumulate wealth, you must control spending leaks.

4 Not Setting Goals

If you don't know where you're headed and how you plan to get there, you'll probably never arrive. To accumulate wealth, you need a plan. To be motivated to save money, you need something specific to save for. To succeed in accumulating wealth, write your goals down and visualize them, whether they're a relaxing retirement, a mortgage-free home, or an unforgettable vacation.

5 Incurring Too Much Debt

If you're spending all your money paying interest on credit cards and installment debt, you won't have enough left for savings. When you buy on credit and don't pay the balance off at the end of the month, you end up paying much more for your purchases. A 25000/- big-screen TV can end up costing you 50000/-, but you'll never know it because the true cost is hidden in your credit card payments. Pay cash and stay away from credit card debt if you want to accumulate wealth.

6 Not Saving Enough for Retirement or Starting Too Late

When you're in your 20s and 30s, it's easy to think you have all the time in the world to accumulate wealth and save for retirement. The truth is, you'll have to save a lot less if you start now and give your earnings time to compound. If you're over 40 and you're behind on your retirement savings, you'll have to save much larger sums to ever catch up to where you should be. Start saving early, and save at least 10 to 15% of your income, and you'll be well on your way to accumulating wealth.

7 Cashing Out Retirement Funds

Half of all Indians end up cashing out their PF balances when they change jobs. Still others take out loans against their PF balances, permanently reducing the amount of earnings they would have accumulated. If you want to accumulate wealth, tax-deferred retirement plans like PF plans are a great way to do it, but resist the urge to tap those funds before retirement.

Avoid these seven money mistakes and increase your chances of successfully accumulating wealth.

Which is safe way to using Credit Card on the internet? or Officeline?

Hi All,
I am VenkataRamana, few days back when i asked one of my friend to book the flight ticket on-line he is worried about using credit card online. I would say that is because of lack of knowledge on the subject. Believe me, using Credit Card on the Internet is safer than using it offline!

What happens when you are buying online?

# You will be entering your credit card information on your computer

# The information is transmitted through telephone line to the credit card payment gateway server

# The gateway server verifies and approves your credit card and withdraws money from your account and credits to the seller

# On successful payment, the gateway server directs you (the browser) to the product download page or order acceptance page

Here you can see, when you enter the credit card information, it goes directly to your credit card server and not the merchant.

The security issue here is, a hacker can hijack the data entered on your computer. But since the data is encrypted using 128 bit SSL code before it is transmitted, the hacker cannot get your credit card details.

If you can't understand what is 128 bits encryption, please read the first article listed below. It has been clearly explained in the laymen's language.

The possiblities of losing your credit card information to hackers:

1) By reaching a wrong website and entering your credit card data on a non-secured server.

For example, if you know http://www.ebay.in/ is a reliable website, and the hackers also know that. So they will launch a website like http://www.ebays.in/ or http://www.ebuy.in/ Usually such minute variations go unnoticed.

Thinking that you are paying to ebay, you will be entering the credit card details at a hacker's site. They simply store the information and misuse it later.

Secondly, the hackers pose as if they are the credit card company (or bank) and email you asking the details. You should keep in mind that no genuine company will ask for such details through email or phone.

The most dangerous places to use your credit card are Porn Sites and Gambling Sites. If you are serious about business, never ever visit such sites. Usually these are the sites where viruses and spyware software originate from (though there are few legal sites avialable, we cannot differentiate).

Don't borrow on your credit card! click to know why

2) Through a spyware (virus) on your computer.

There are many viruses that register your keyboard strokes (whatever you type) and keep sending the details to hackers.

To prevent such spywares, there are lots of utilities available today free-of-cost. You can try installing Yahoo tool bar which includes anti-spyware. I believe Microsoft also offers with free anti-spyware software.

In addition to freeware, it is recommended to have a reliable anti-virus package loaded on your computer.

If you have taken care of the above two reasons, you need not worry about using credit cards online. I am not telling you to blindly listen to me. Just visit the links provided at the end of this article and study for yourself.

What happens when you are paying at a hotel?

# You give your credit card to the waiter

# The waiter takes it to the person at cash counter

# The cashier swipes your card on the swiping machine

# The swiping machine transmits the data through telephone line to the credit card server

# The server verifies and approves your credit card and withdraws money from your account and prints the receipt

# The cashier hands over your credit card along with receipt to the waiter

# The waiter brings it back to you and you acknowledge the receipt

Let me ask you one simple question:
What if the waiter or the cashier writes down your name, credit card number, date of expiry and the 3 digit security code (behind the card) and misuses for his/her own benefit or pleasure. He/she could even use it on the Internet, can you control that?

I hope you understand that using credit card online is safer than offline.

Another information, whenever any transaction occurs online, the ip address of the computer (from where it is transacted) is registered (these days even a normal membership sites use this technology). It is very easy to catch the thief using the ip address.

Secondly, in 2001 the first cyber police station was inaugurated in India. Today we have many police stations functioning for cyber crime. Please check this link to know about cyber law and this link about cyber police stations for more information.

Now you can think your self about the way in which you can use your credit card safely, please write you comments about this...