Investments
Ordinary American citizens are now familiar with a television ad where an opera chorus dressed as Vikings shared their financial woes and a woman sings, “I have an annuity, but I need cash now!” The rest of the chorus then replied, “Call JG Wentworth!” JG Wentworth is a financial services company that offers cash payments in return for all or a portion of future payments that may come from annuities, legal settlements, or lottery payouts. The company’s tagline is: “It’s your money. Use it when you need it.”
There are lots of instances when doing with a business with the company like JG Wentworth makes a lot of sense. Worst-case scenario would be a medical emergency and there will be no one to turn to. Sometimes, people do so to pay off high-interest credit card debt, buy a new house, or pay for college tuition. Sometimes having an annuity or structured settlements can be a burden too especially for families who are turned out of their homes because they cannot pay its mortgage. Some may argue that keeping the annuities and structured settlements is the best option. Unless they want to spend the money on luxurious trips or useless endeavors, it is truly better to keep it that way.
But for those who want to use the money in a sound financial investment, JG Wentworth is more than willing to extend their help, but they will retain a portion of the payout in return. This is business anyway, and the total amount is called the effective discount rate which will include all its fees, and a total of 9 to 15 percent of the total amount or more. This is still considered lower if the credit card debt to be paid has 30 percent interest rate. The company will also pay you more for an annuity that you could make to cash it out, especially if the insurer charges a steep surrender fee for withdrawal.
For those who are contemplating in selling their settlements and annuities, they can start by first evaluating its total worth. They can look at the agreement and monetary details that they agreed on while signing the deal. Look for the duration as it plays a key role since life-long agreements are higher than those valid only for a year or two. After evaluating the total worth, look at discount rates, additional charges, deduction of taxes, etc. After doing all these things, they may want to speak with a JG Wentworth representative to know the best options for them.
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{How do you know what form of real estate investing is best suited for you~How do you know which real estate investing strategy is best for you~How do you know what approach to real estate investing is really best for you~How do you know what real estate investing approach is best suited for you}?{ Starting many years ago, we learned about the power of foreclosure investing~Many years ago, we learned about the power of foreclosure investing~Many years ago, we learned about the power of foreclosure investing~Several years ago, we learned just how powerful foreclosure investing could be}.{ If you had to try and explain foreclosure investing, you could throw a wide net over everything from a homeowner missing their first mortgage payment all the way to the foreclosure property selling at the courthouse steps~When attempting to explain foreclosure investing, you could cover a wide range of topics from a homeowner missing their first mortgage payment all the way to the house selling at the courthouse steps}.
{Then came along the idea of pre-foreclosure investing~Then came pre-foreclosure investing~Then someone came up with the idea of pre-foreclosure investing}.{ Pre-foreclosures really have everything to do with what happens from the time a notice of default is filled at the local courthouse and whether or not the house ever makes it to the courthouse steps~Pre-foreclosures begin with a notice of default being filed at the local courthouse and leads all the way up to the Sheriff sale or foreclosure auction~Pre-foreclosure begins when a notice of default is filed at the local courthouse and concludes when the house is auctioned off at the Sheriff sale}.
{Reason #1 Sellers Have Compelling Reasons To Sell~Reason 1 – Sellers Have A Very Compelling Reason To Sell~Reason #1 – Sellers Almost Always Have To Sell The Property}
{I don’t know why people who get into this situation do the same thing every time, but they do~I don’t know why homeowners who fall into pre-foreclosure do the same thing every time, but they do~I don’t know why sellers who get into this situation end up doing the same thing virtually every time, they just do}.{ In virtually every case, when you see this situation develop, the homeowner is usually going to fail to make a mortgage payment and the property falls into foreclosure~When you see this situation develop, the homeowner will fail to make the mortgage payment and the property fails into foreclosure~In virtually every case when this situation develops, the property usually falls into pre-foreclosure}.
{Usually when someone falls behind on the mortgage payment, its very difficult for them to catch up and regain that former financial stability~When a homeowner falls behind on the mortgage payment, its very difficult for them to catch up~When a seller falls into pre-foreclosure, its very difficult for them to climb back out~When a homeowner fails to make the mortgage payment, it’s usually very difficult to catch up and regain that former financial stability}.
{The leading causes of pre-foreclosure are~The main causes leading up into pre-foreclosure are:~The leading factors that cause someone to fall into pre-foreclosure are:}
1. Divorce
2. {Loss of job~Job loss~Job termination}
3. {Prolonged illness~Extended or prolonged illness~Prolonged sickness or disease}
4. {Job transfer~Employment transfer~Job or position transfer}
5. {Drug/alcohol abuse~Drug and/or alcohol abuse~Drug and/or alcohol dependency~Drug and/or alcohol addiction}
{Sellers who find themselves in pre-foreclosure have to sell the house in order to avoid having the house auctioned off by the Sheriff~Homeowners who find themselves in pre-foreclosure almost always have to sell in order to avoid having the house sold off at auction~Sellers who find themselves in pre-foreclosure almost always have to sell the house in order to avoid the foreclosure auction~Sellers in pre-foreclosure must sell the house in order to avoid having the Sheriff sell the house at the auction}. Experienced pre-foreclosure investors know that when they help sellers first, they are then rewarded with these steeply discounted investment properties.
{Reason #2 Less Competition For The Serious Real Esate Investor~Reason #2 Less Competition~Reason #2 – Less Competition For The Experienced Real Estate Investor~Reason #2 – Less Competition For The Experienced Pre-Foreclosure Investor}
{Many who consider themselves real estate investors are not trained properly when it comes to searching out and identifying the most profitable investment properties~Many real estate investors don’t know how to evaluate a market and find the most profitable investment properties~The majority of real estate investors do not know how to properly search out and find the most profitable investment properties in a given market~Many who consider themselves pre-foreclosure investors don’t know a good deal when it’s staring them right in the face}.{ These real estate investors typically thumb through classified ads each week and attempt to buy investment property at retail prices~These so called real estate investors search through the classified ads each week and focus on buying investment property at retail prices~These investors focus exclusively on classified ads and buy investment property at retail prices~These real estate investors focus almost exclusively on classified ads and attempt to purchase investment properties at retail prices}.{ Some of these investors may work with a real estate agent and attempt to find invesment property – but these are still listed properites with retail prices~Some investors work with real estate agents and attempt to buy investment property – but these are listed properties with high retail prices~Some of these real estate investors hire real estate agents and attempt to locate investment property – but these properties come with high, retail prices}.
{You can never really get ahead in the real estate investing business if you’re paying retail for investment property~You cannot build lasting wealth through real estate investing if you’re paying too much for investment property~You won’t make it in the real estate investing business if you don’t know how to buy investment property right~You won’t make it in the real estate investing business if you don’t know how to buy investment property~You’ll never make it as a pre-foreclosure investor if you’re paying too much for investment property}.{ You must learn to pay wholesale or even lower – and this is possible~You must learn how to buy investment property at wholesale prices~As an experienced pre-foreclosure investors, you must learn how to buy investment properties at wholesale prices~You must learn to buy at wholesale or even lower}.
{Serious pre-foreclosure investors do not pay retail for investment property and do not work regulary with real estate agents~Experienced pre-foreclosure investors don’t pay “retail prices” for investment property and they normally don’t work with real estate agents~Serious pre-foreclosure investors do not pay too much for investment property and normally do not work well with real estate agents~Experienced pre-foreclosure investors don’t work with real estate agents and certainly don’t pay retail prices for investment property}.{ These investors know how to search out and find the best real estate investing deals on the market~These investors are well trained in locating the best real estate deals in town~These investors know how to sniff out and locate the hottest real estate deals in the market}.{ Pre-foreclosure investors don’t wait for sellers to come to them – they go out and meet these sellers~Pre-foreclosure investors don’t wait for the action to come to them – they go out and find the action~Pre-foreclosure investors don’t wait around for something to happen – they go out and meet these sellers~Pre-foreclosure investors don’t wait around – they take action and meet with these sellers}.
{Now some pre-foreclosure investors mail out postcards and letters and some even make phone calls to homeowners who are in pre-foreclosure~Some pre-foreclosure investors take the time to mail out post cards and make a few phone calls to sellers in pre-foreclosure~Now some pre-foreclosure investors mail out post cards and make phone calls in attempts to contact sellers in pre-foreclosure}.{ But I have found that the most effective way to target pre-foreclosures is by traveling out to each property and physically knocking on the door and discussing the situation with the homeowner~But I have found that the most effective approach to pre-foreclosure investing is to travel out to each property and meet with the seller~But I have found that the best way to buy pre-foreclosures is to travel out to these houses and meet with the sellers~I have found the most effective approach to pre-foreclosure investing is to physically travel out to each house and meet with the homeowner}.
{What’s great about this approach is that it offers the higest return on investment with the least compeition~This approach offers the highest investment return with the least amount of competition~This approach to real estate investing offers the highest return on investment with the least competition~This approach offers the highest return on your investment dollar with the least amount of competition~This approach to real estate investing offers the highest return on your investment along with the least amount of competiton}.{ Pretty good combination if you’re trying to build long term wealth~Very good combination if you’re interested in building long term wealth~Very good combination if your trying to build generational wealth~Pretty good combination if you asked me}.
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A New-Age Investment Philosophy
Potential Return and Volatility
At the most basic level, we’re looking for two things out of our investment portfolios: (1) high returns and (2) low volatility. The goal of any investment strategy is to maximize investment returns while minimizing the fluctuations of the portfolio’s overall value. In an ideal world, our portfolio returns would look something like the chart below:
This straight line increase in the value of our portfolio is created by earning a 10% return every year without fail. This is ideal because we know what the value of our portfolio will be at any point in the future. So, if I want to have 0,000 available at retirement, I’ll now exactly how much I need to invest every year to get to 0,000 at retirement. Unfortunately, this isn’t a reality. Investments fluctuate in value on a daily, weekly, monthly and annual basis. I would argue that no investment, not even government bonds, provides a certainty of real return (more on this later – for now, real return is the return we receive after inflation of the money supply is taken into account). So, we’re left with charts of the value of our investment portfolio looking more like the chart below:
In the real world, we’re not sure what the value of our portfolios will be in 3 months, 1 year, 5 years, etc. This characteristic of our portfolios is magnified by holding more volatile investments and reduced by holding less volatile investments. Generally, investments are more volatile the less certain their future value is. For example, a government bond issued by a G20 nation has a relatively certain future value because the market has a high level of confidence that the government that issued it will pay you the interest and principal payments as outlined in the bond contract until the bond matures. On the other end of the spectrum, the value of a share issued by an upstart biotechnology company whose entire future is based on a new drug that has yet to be approved by the U.S. Federal Drug Administration will be more volatile because the market is unsure of the future value of the Company. There is generally a pretty strong relationship between the potential return provided by an investment and its volatility. So, each one of us has to decide where the appropriate trade-off between return and volatility is for us personally. This is a combination of our time horizon to retirement, our personal tolerance for volatility and our investment preferences (e.g. someone may want to invest in green energy for personal or ethical reasons). This website will outline 5 investor profiles along the return/volatility continuum.
The Principle of Diversification and its Weaknesses
Most investment books and investment advisors base much of their advice on the principle of diversification. Diversification is a simple principle that most people intuitively understand. It`s commonly referred to in popular english as “not putting all of one’s eggs into one basket”. The idea is that you should hold a number of different investments so that you’re investment returns and the future value of your retirement portfolio are not tied to just one or a few investments. For example, if I only held IBM stock in my investment portfolio and a technological revolution came along tomorrow that crushed IBM and led IBM on a quick path to bankruptcy, my stock would fall quickly and my retirement savings would dissapear. So, diversifying into various investments is clearly a smart thing, and in general leads to lower volatility for our portfolios. But, there are two common misunderstandings when it comes to diversification:
Correlations between investment returns are not static and in reality change frequently. The principle of diversification is based on the concept of correlations between investment returns. That is if, based on historical data, IBM stock moves up in price when Wal-Mart stock moves down in price, and I believe this relationship will hold in the future, buying both IBM and Wal-Mart stock will provide diversification to my portfolio because their prices don’t move together (hence the value of my portfolio is less volatile). Now, I don’t want them to move exaclty the opposite in price so that I don’t earn any positive return over time. What I want is for both of them to have a positive expected return and still move in different ways to offset each other so that over time I have a positive return but less volatility. The problem is, the correlation between IBM and Wal-Mart that I established using historical data may not hold in the future, and in fact is unlikely to hold. So, I think I’m getting diversification but I’m not, and when a major market event happens that crushes the price of IBM stock, it may also crush the price of Wal-Mart stock and I’m left exactly where I would have been without Wal-Mart. What’s important to know is that correlations are much more persistent on an asset class level, and to a lesser extent on a sector level, than on an individual stock or bond level. That is, the correlation between the stock and bond markets or the correlation between the general Information Technology (“IT”) sector and the general Retail sector is more stable than the correlation between IBM and Wal-Mart stocks. But, just like we saw in the financial crisis of late 2008, large market events tend to take all sectors of the equity market down in price, not just a few sectors. So, we shouldn’t be overly dependent on the correlation between equity (stock) sectors, and are much better off diversifying by owning various asset classes (i.e. stocks, bonds, commodities, etc.).
Diversification isn’t a function of the number of securities in a porftolio. Too often I’ve seen investment advisors telling their clients the way to obtain more diversification is to purchase more stocks and bonds different from the ones that the investor already owns. While this is generally true, it misses the point and leads to poor investment decisions. For example, a huge company like IBM is already diversified to an extent. That’s because IBM has multiple business units providing different products and services in various geographies around the world. IBM is diversified across product lines, across the Information Technology supply chain (the chain of product or service flows throughout an industry) and across geographies. So, owning IBM is just like owning a collection of mid-sized businesses in the IT sector. The main difference is that IBM’s creditors (banks and bondholders) generally have recourse to the entire entity, so if one business unit performs poorly the other business units have to pay off the debt, but otherwise it’s already diversified. On the other hand, a small business that owns three fashion jeans stores located in Seattle is not diversified. It’s concentrated in one type of product, in one segment of the supply chain and in one geographic location. The point here is to keep in mind that we don’t need to own a bunch of investments to be diversified. What’s important is that we own the right mix of investments.
Correlations Beyond our Investment Porftolios
When you’re managing your wealth for retirement, you need to take more than just the contents of your investment portfolio into account. Since our goal is to manage our total wealth available at retirement, we need to expand our focus beyond our investment portfolios to include our other assets and income streams as well. Let me explain. We discussed the volatility of our portfolios in the first section of this page, and I mentioned how the correlations between investments plays a role in the second section. Well, our other assets and income streams also have correlations with our investment porftolios. So, to reduce the volatility of our total wealth, we need to consider the nature and value of our other assets and income streams when selecting investments for our portfolio. This commonly shows up in two ways for most people:
Your net equity in your real estate holdings. Most people saving for retirement own a house and have a mortgage on that house. The net equity on that house represents an investment in an asset class that’s part of their overall wealth holdings. If your net real estate equity is worth 0,000, your investment portfolio is worth 0,000 and your other net assets (after all debts) are worth ,000, you have a significant portion your total wealth invested in real estate (whether your principle residence or apartments you rent out, etc). So, you’d want to minimize your investments in real estate investment trusts (REITs) and select your RRSP investments to properly round out your total asset holdings. Further, you’d want to consider the correlations between the value of your real estate assets and your investment portfolio. This isn’t an issue for most Canadians, but if prosperity in the neighbourhood, city or region you live in is driven by one or two industries, you’ll want to reduce your exposure to these industries in your investment portfolio so that the value of your total wealth isn’t overly exposed to the one or two industries. A Calgarian should hold a smaller proportion of oil & gas investments in her portfolio than someone in Quebec because the value of her real estate holdings is already highly exposed to the success of the oil & gas industry.
You and your spouse’s income. Picking right back up where we left off with the Calgary oil & gas example, a couple that work in the oil & gas industry, so that their income levels are directly dependent on the success of the industry, should have a smaller proportion of oil & gas investments in their portfolio than a couple that work in the forestry industry. But the income effect goes beyond just industry exposure. Someone with a highly volatile income should offset the effect this has on her total wealth by reducing the volatility in her investment portfolio. Using two extreme cases for an example, on the one hand a business executive in the oil & gas industry that earns 50% of her total annual compensation as variable bonus pay has a volatile income and is dependent on the success of the oil & gas sector. On the other hand, a high-school teacher that lives in Vancouver and earns 0% of her total annual compensation as variable bonus pay and earns a steady income with raises based on increases in the cost of living has a very non-volatile income and very little exposure to the oil & gas sector. Both should adjust the mix of investments in their retirement portfolios to manage the volatility of their overall wealth, not just the volatility of the value of their investment portfolios.
Natural Forces at Play in the Economy
Almost by definition, it is easier for a small company to grow than it is for a large company. Most of the products and services that will be consumed in the future will be produced by companies that are small and growing today or not yet even established. For example, Google was founded in 1996, went public in 2004, was added to the S&P 500 Index in March 2006 and is now the 15th largest company in the index. Point being, we wouldn’t even have been able to purchase Google stock 10 years ago, but it is now one of the largest companies in the world. Examples like this are abundant. The natural forces at play in the world’s economies mean that small companies collectively are almost assured to grow faster than large companies over the long-term. This is not just due to innovation, but agility, the ability to adapt to change and new, more efficient methods of organization and management. Similarly, large industries tend to grow slower than smaller industries. While oil & gas is a key sector in Canada, it isn’t likely to grow as quickly as other sectors in Canada, such as Consumer Discretionary or Information Technology (see here for S&P’s homepage for the S&P/TSX Composite Index). We have to be careful with this concept though, because a large company and/or large industry can continue to grow quickly for extended periods of time before they do slow. Many people even thought Google’s growth would have slowed much quicker than it has. In any case, the natural forces at play in the economy, combined with my belief in reversion to the mean (discussed as Rule #4 on my home page), form the basis for two of my most basic investment strategies: (1) equal weighting large, mid-size and small companies in a portfolio and rebalancing periodically and (2) equal weighting sectors and rebalancing periodically as opposed to investing according to the market cap and sector weights of the major indices. These natural forces also apply to the global economy as a whole. Emerging and developing economies will naturally experience higher growth rates than developed economies because they have a much more significant potential for development. For example, IT companies serving a country that has yet to roll out IT infrastructure to the extent that North America has will naturally experience faster sales growth than a company serving a country where most IT infrastructure has already been rolled out. Even just the sheer force of a large and fast-growig population entering the labour force of an industrializing nation can be very powerful and create rapid economic growth. Most of the non-developed world is agressively pursuing development to improve their population’s standard of living, as can be seen in the rapid growth of the BRIC countries (Brazil, Russia, India and China). These countries will continue to drive much of the world’s population and economic growth moving forward, and will provide the opportunity for higher investment returns as well.
Unnatural Forces at Play in the Economy
Modern, ‘western’, capitalist economies all operate with a core element of central planning known as a central bank. The central bank’s role is effectively to manage the nation’s supply of money (in its most basic form as dollar bills, but also including various forms of currency not in circulation as well). It does this through various tools it has at its disposal, including the regulation of some key interest rates charged to major banks and the purchase and sale of various govnerment bonds from/to financial institutions. Most central banks state that their aim is to manage their nation’s inflation rate to remain within a target zone, but in reality the cental bank is also there to encourage economic growth and manage the financial system through a crisis such as that which occured globally in late 2008. Before we had central banks, many civilizations used gold as the primary form of currency. However, as economies developed, ‘banks’, or stores of gold, began issuing notes backed by the gold they had in storage. In those times, most of the gold held in the ‘banks’ was owned by the king. When the king owed other people or institutions money for performing a service for him or selling him a good, he’d pay them with the notes issued by the bank that were backed by a stated quantity of gold. Kings soon realized that they could reduce the quantity of gold that backed the note, but still pay people with the same amount of notes, so that they king was effectively paying people less for their goods and services. People didn’t like this, and some historians believe this was a key factor in the decline of royal power and the rise of an aristocratic elite in many countries. There are great historic accounts of the gold standard and management of the money supply around the world, especially in the U.S., but without getting into the details I’ll just say that the U.S. went through many dramatic revisions to the way the money supply was managed before the establishment of the U.S. Federal Reserve Bank in 1914. The gold standard lasted in one form or another until the 1970s and is now completely abolished. With a gold standard in place the way to debase (reduce the value of) the currency was to reduce the quantity of gold that backed a given note. But now, without a gold standard, central banks around the world can effectively just print more money when they want to. This is exactly what happened in late 2008 and throughout 2009 as the U.S. Federal Reserve and other central banks ‘printed’ more money to maintain the liquidity of the major finanical institutions around the world. When central banks increase the supply of money, they reduce the value of money, so that each bill is worth less than it was before. The effects of this reduction in purchasing power aren’t seen immediately, especially during a financial crisis and its aftermath when asset prices are generally still falling or flat and banks are not increasing their lending to businesses and consumers. However, the effects do show up when the economy stabilizes and starts to grow again. We call a reduction in the purchasing power of a dollar ‘inflation’. Inflation may show up in various ways. High income earners and/or those with significant wealth, such as business executives, wall street investment bankers/traders and those with significant investment and business holdings tend to be the first and primary beneficiaries of inflation because they first and foremost experience the impacts of the increased liquidity (i.e. money supply) in the system. For example, from mid 2006 to the end of 2008, the U.S. Federal Reserve Bank dropped one of the key interest rates charged to major banks from 5.25% to 0.0%. During this time, most of the benchmark rates used by banks on personal and commercial loans did not decline by the same amount, so the banks automatically earned a higher ‘spread’ or profit margin on their loans without changing anything. Further, the banks had access to capital at an extremely low interest rate during a time when global stock markets had one of their best years ever. This meant the banks were able to borrow at an extremely low interest rate and invest in stocks and other investments that were rising in price very quickly, so they made a very high profit margin on this activity. This is why many major North American banks reported very high profit levels in the 2nd, 3rd and 4th quarters of 2009. Effectively, the Federal Reserve Bank controls the cost of the banks’ primary input: money. No other industry has the cost of their primary input regulated like this by the government (although some industries have the cost of their products or outputs regulated by the government). In the last economic cycle (2003-2008), inflation didn’t really show up in the consumer price index (“CPI”) basket of goods, which is the primary measure of consumer inflation used by most governments. However, the inflation showed up in various other ways, including the increase in real estate prices around the world, increases in the prices of luxury goods and increases in the prices of commodities. It is difficult to distinguish between a price rise caused by the demand/supply interactions for a good or service and a price rise caused by general inflation in the system, but my belief is that a significant portion of the price rise of the items I mentioned above was caused by inflation. Once inflation is in the sytem, it is virtually impossible to get it out, and it has the effect of continously leading us on boom/bust cycles. Inflation has very important implications for the structure of our porftolios, and will play a role in the investment recommendations I make on my website.
Schiff Report Video Blog August. 23, 2010
Different Investment Plans
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In the financial market the Mutual funds investment assume the secure means of investment,Its also given a good return in the adverse situation. Mutual funds are good one but these investment are not totally risk averse .In the recession period its OK to invest in the Blue chip or the software or AAA rated companies but the core sector and the primary sector perform well in the all situation after the recession. Investment will decided by the requirement of the investor.
There are three broad different plan of investment as per the investment requirement.
Liquid Plan:
Here the investor want to get the investment return in liquid cash the investor want to invest for short period of time and they are risk averse. Liquid plan investment mostly available in the money market.
1.Investment Horizon:
Investor in liquid plan go for the short term investment,hardly from six months to one year.
In the Liquid plan they want to get the money as soon as the depose the investment.
2.Investment Objective:
In the liquid plan the investor get the better return than bank deposit and also the investment converted into the liquid cash as per the investor need .
3.Investment pattern:
In the liquid plan investment 75% -80% of the investment made in the money market and the remaining portion of the investment in the Govt> bonds.
4.Risk Profile:
This type of the investment available for the people who are risk averse they don’t want to take the high risk of the security market.
5.Liquidity:
As the plan name the here the liquidity or the transfer of investment into the liquid cash is very easy in comparison to other menace of the investment. The Net Asset Value of the day when the investment dispose or sale is available in this plan.
6.Tax benefits:
Tax benefits vary from country to country as per the Govt. norms.
Income Plan:
In this plan the investor want to get the better return of there investment there aim not to earn capital profit but they concentrate on the higher income or the income on the interest.
The investor in this category are basically medium term investor.
1.Investment Horizon:
Here the investor are go for the medium term investment avenue they don’t prefer the hard core
risk of the investment in the security market but on the other hand they want to get better return than the generally fixed deposit in the banks.
2.Investment Objective:
Income plan investor are the medium term investor they invest there amount in the debt market or the Govt. bonds.
3.Investment pattern:
In the Income plan , 75% of the investment done in the Corporate and the Govt. bonds and the 25% of the investment made in the money market.
4.Risk Profile:
The type of investment the risk of investment is moderate .
5.Liquidity:
Liquidity of the Income plan investment is comparison to the Liquid plan is less but the investor get the Net Assets Value of the investment when they dispose the investment.
6.Tax Benefits
Tax benefits are also very from country to country as per the Govt. rules and regulation.
Growth Plan;
Here the investor are high risk taker and also the return of the investment is high in comparision to the other way of investment but the maturity period of the investment is high,and also the capital profit are the main motive in this investment.
1.Investment Horizon:
In this investment pattern the period of the investment is long than the other method of the investment. Generally period of the investment is more than one financial year.
2.Investment objective:
Here the main objective of the investment is to get the capital profit or the capital appreciation from the investment.
3.Pattern of the investment:
Here the 90%-95% of the investment made in the equity shares and rest of the investment made in the money market.
4.Risk Profile:
Risk of the investment is higher than other way of the investment on the other hand high risk menace high return.
5.Liquidity:
In this mode, investment not easily transfer to the liquid cash .Investment transfer to liquid asset on the Net Asset Value based on the current market.
6.Tax benefits:
Here also tax befits very with country rules and regulation.
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Equity investment includes private equity (PE) investment and venture capital (VC) investment. In 2009, there were 542 equity investments occurred in China, including 114 PE investments and 428 VC investments; the equity investment valued US.4 billion, average PE investment was US4 million, and average VC investment was US.8 million. The remarkable 19:1 gap between average PE and VC investments mainly resulted from the fact that PE investments are often made in the enterprises that are making profits and need larger amounts of money for mergers and reorganization, while VC investments mostly are financial investments made in the enterprises that are developing or expanding their business and require smaller amounts of money.In 2009, in terms of the number of equity investments made in China, the manufacturing industry got the largest share (19%), followed by the IT, Internet, energy, and healthcare industries; in terms of the amount of equity investments, the financial industry got US.36 billion, followed by the chain operation, energy, manufacturing, food and beverage industries.
From 2009 to 2010, among the equity investment companies in China, PE investment companies are mainly foreign-funded companies, while VC investment companies are generally Chinese-funded companies. The reason for foreign-funded companies holding a leading position in the PE sector is: PE investments often involve larger amounts of money, and compared with domestic companies, foreign companies have more solid financial strength. Famous PE investment companies include The Carlyle Group, The Goldman Sachs Group, Inc., and CDH Investments. The reason for Chinese-funded companies holding a leading position in the VC sector is: domestic equity funds were encouraged by the launch of GEM, while foreign companies were relatively cautious in venture capital activities due to the financial crisis. Active VC investment companies in 2009 included Shenzhen Capital Group, Legend Capital and Shenzhen Fortune Venture Capital Company Limited.
Shenzhen Fortune Venture Capital (Fortune VC) was established on April 19, 2000. Now, it manages seven funds, and is entrusted to manage the fund of nearly RMB3 billion. By June 3, 2010, Fortune VC had invested in over 70 SMEs , 11 of which went public successfully, including COSHIP Electronics, Talkweb Information System, Joint-Wit Medical & Pharmaceutical, Fujian Sunner Development, EVE Energy, Aier Eye Hospital Group, ChinaNetCenter, BlueFocus Communication , Sumavision Technologies, H&T Intelligent Control, and Kingold Jewelry (NASDAQ-listed). The eleven enterprises plus the Xi’an Dagang Road Machinery that was approved the listing by China Securities Regulatory Commission on May 28, 2010, are expected to deliver at least a 15× ROI on average.
Table of Contents
1. Equity Investment Overview
1.1 Definition
1.2 Classification
1.2.1 Private Equity
1.2.2 Venture Capital
1.2.3 Difference between Private Equity and Venture Capital
1.3 Equity Investment in China
1.3.1 Private Equity
1.3.2 Venture Capital
2. Equity Investment Policies in China
2.1 National Policies
2.2 Regional Policies
3. Equity Investment in China, 2009
3.1 Scale
3.1.1 Private Equity
3.1.2 Venture Capital
3.2 Industries
3.2.1 Comparison of PE and VC by Number of Investments
3.2.2 Comparison of VC and PE by Amount of Investments
3.3 Stages
3.4 Regions
3.4.1 PE
3.4.2 VC
3.5 Chinese and Foreign Investors
3.5.1 PE
3.5.2 VC
4. Equity Investment in China, 2010
4.1 Scale
4.2 Industries
4.3 Stages
4.4 Regions
4.5 Chinese and Foreign Investors
5. Equity Investment in Key Chinese Industries
5.1 Healthcare Industry
5.1.1PE
5.1.2 VC
5.2 IT Industry
5.2.1 PE
5.2.2 VC
5.3 Energy Industry
5.3.1 PE
5.3.2 VC
5.4 Internet Industry
5.4.1 PE
5.4.2 VC
5.5 Media & Entertainment Industry
5.5.1 PE
5.5.2 VC
6. Key Private Equity Investment Companies
6.1 Carlyle
6.1.1 Investments
6.1.2 Carlyle Asia Partners III
6.2 Goldman Sachs
6.2.1 Profile
6.2.2 Investments and Exits
6.2.3 Preference for China after the Financial Crisis
6.3 CDH
6.3.1 Profile
6.3.2 Investments
6.4 Warburg Pincus
6.4.1 Profile
6.4.2 Investments and Exits
6.5 New Horizon Capital
6.5.1 Profile
6.5.2 Investments
6.6 Baring Private Equity Asia
6.6.1 Profile
6.6.2 Investments and Exits
6.7 CCB International
6.7.1 Profile
6.7.2 Investments
6.7.3 New Funds
6.8 TPG
6.9 Prax Capital
6.9.1 Profile
6.9.2 Investments
6.10 Beijing Hony Future Investment Advisor Limited
6.11 Hopu Investments Management Company Limited
6.12 Bain Capital
6.13 CITIC Capital Holdings Limited
6.14 Trustbridge Partners
6.15 Temasek Holdings
7. Key Venture Capital Investment Companies
7.1 Shenzhen Capital Group
7.1.1 Profile
7.1.2 Investments and Exits
7.2 Legend Capital
7.2.1 Profile
7.2.2 Investments
7.3 Shenzhen Fortune Venture Capital Company Limited
7.3.1 Profile
7.3.2 Investments
7.4 Kunwu Jiuding Capital Company Limited
7.4.1 Profile
7.4.2 Investments
7.5 Orchid Asia Group Management Limited
7.5.1 Profile
7.5.2 Investments
7.6 SAIF Partners
7.6.1 Profile
7.6.2 Investments
7.6.3 Mass PRIM Investment in SAIF Partners IV LP
7.7 China Science and Merchants Capital Management Company Limited
7.7.1 Profile
7.7.2 Investments
7.7.3 RMB20 Billion of Liaoning Coastal Economic Zone Development Fund
7.8 IDG Capital Partners
7.8.1 Profile
7.8.2 Investments
7.9 Intel Capital
7.10 Sequoia Capital China
7.11 Green Pine Capital Partners
7.12 Tiantu Capital
7.13 Cowin Capital
7.14 iD TechVentures
7.15 SB China Venture Capital
7.16 DFJ
8. Development Trends of Equity Investment in China
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10 Questions to ask before investing online or elsewhere
We are faced with so many investment choices today, it Is sometimes difficult to decide which investment will best serve our purpose; as well as which investments are the safest, while giving us the best bang for our buck. While not specifically indicating particular investments, I want to
give you the appropriate guidelines in determining which investment is best suited for you.
Are you happy with the current 1% – 2% a year that most financial institutions are offering? Or does a higher rate of return appeal to you? There are investment opportunities that do offer a higher rate of return with limited risk. However, there are certain guidelines you must follow to determine which of these investments are best suited for your pocketbook and your personality.
As technology has advanced today, so have new investment opportunities, with higher returns; some, obviously safer than others. While the Forex market is now available to the average investor, it is truly a high risk arena and not appropriate for most. Other avenues of investing, which have not previously been available to the average investor, offer a handsome return, with a low risk. How do you find these investments? By doing your due diligence and following these guidelines I’ve outlined below.
10 Frequently asked questions:
1. How much money do I need to start investing online or elsewhere?
2. What are the costs or fees associated with the particular investment?
3. Once I’ve earned money, how fast can my funds be withdrawn?
4. What regulations are involved with the particular investment?
5. How do I assess the risks of a particular investment?
6. What are some of the highest return investments that the average investor can participate in?
7. Do I need to participate in the particular investment?
8. What are the minimums needed to fund the investment account?
9. Is there a guaranteed return on investment funds?
10. Over what period of time are funds held in order to produce a return?
How much money do I need to start investing online or elsewhere?
With the advent of online investing, it has become very easy to open various accounts with as little as a few hundred dollars. For instance, online investing has made it easier to invest in the stock market, including equity and derivatives, along with areas that up until a few years ago, could not be accessed or utilized by the average investor – Forex (Foreign Exchange) trading for one. Now, if there a market out there, it is possible that market can be traded online. So, the prudent advice would be to start with what you are comfortable in investing.
What are the costs or fees associated with the particular investment?
Many investments do charge fees or subscriptions as part of their service. The question to ask yourself would be, “Is this fee or charge too detrimental to the potential profit? In other words, am I investing enough to offset the fees or charges that are going to erode my earnings? You will need to look at your potential profit and subtract the account charges from your profit to determine your actual percentage of profit.
Once I’ve earned money, how fast can my funds be withdrawn?
This question falls under the term “liquidity”. With some investments, like equity stock, it is possible to buy the stock one-day and sell the next or even within hours or minutes of the purchase. This is typically referred to as “Day Trading”. Keep in mind that there is also a settlement period of 3-5 days before the funds are realized. Other investments may want you to commit your funds for a period of time before the principal and profit can be extracted. If it is possible to extract funds earlier, you may be charged a penalty for doing so. For instance, if you buy a CD (Certificate of Deposit), the bank usually wants you to keep that for a specified period of time and you are rewarded with the appropriate interest depending on the length of term that you have committed to, typically, the longer the term, the greater the reward, but remember, you have diminished your liquidity. Shorter-term commitments increase your liquidity and this is something to keep in mind, particularly if you might find yourself in need of these funds at some point in the future.
What regulations are involved with the particular investment?
When talking about regulations, we must first decide in what arena the particular investment falls public or private. For our discussion in this book, we have limited our focus to areas outside of the real estate market and have primarily been referring to investments of money into equities, bonds, CDs, commodities and the like.
On the public side of things, the largest regulatory agency is the SEC (Securities and Exchange Commission). With the Security Exchange Act of 1934, Congress created the SEC and empowered the SEC with authority over all aspects of the securities industry including oversight of brokerage firms, transfer agents, clearing agencies as well as the self-regulatory organizations (SROs). SROs are such entities as the New York Stock Exchange, the American Stock Exchange and the National Association of Securities Dealers (NASDAQ). The SEC has the power to administer disciplinary action and will prohibit certain types of conduct.
On the private side of investment are those investments not required by law to register with the SEC, which can include private companies, trusts, corporations or LLCs, but who may wish to post their financial and significant information regarding their business as a show of “good faith” to their investors. This gives the company legitimacy, more transparency and validity for any investor they may wish to attract. In private transactions, as much information as can be gleaned before investing, including knowing the principals, the track record and seeking out satisfied investors, would be a prudent move. The more disclosure, the better it will be for your peace of mind.
How do I assess the risks of a particular investment?
As we discussed in the previous question, doing your due diligence is always advisable and educating yourself on the particular industry and investment vehicle, may turn up other areas of concern. Move forward only when you feel comfortable and confident with who and what you are dealing with. Seek out other advice from professionals as well as talking with other investors particularly those who have specific experience with the type of investment you are considering, but remember, don’t let “one bad apple spoil the whole bunch” when it comes to soliciting investor advice. Get a broad range of facts and opinions in order to formulate the most prudent and judicial analysis.
What are some of the highest return investments that the average investor can participate in?
In trying to answer this question, one must look at the relationship between risk and reward. Typically, the higher the risk, the greater the reward and vice versa. It is not uncommon for an individual equity stock to post tremendous gains on an annualized basis many times over 100%! One small cap stock that I am familiar with grew 1600% over the past decade. Sounds too good to be true, doesn’t it, but it’s not. Please keep in mind that this particular stock is an exception, not the norm. In fact, most stockholders recently have been happy to see a profit at the end of the year and are happy just to avoid a loss.
With that said, there are plenty of other offerings that provide huge upside potential with limited risk. One of these is in the physical commodities buy/sell contract arena. This particular area of commodities has been highly mischaracterized because most people and investors tend to lump these types of investments in with futures or exchange traded funds, and nothing could be further from the truth. Physical commodities buy/sell contracts are pre-arranged cash contracts that typically range anywhere from 2 weeks to a month or two in length, thus offering greater liquidity and at the same time, offering lucrative returns with limited risk. This is a relatively new arena for the average investor because it has been the arena of the very wealthy, although, now there are companies emerging that offer the average investor participation at smaller amounts than what previously required.
Do I need to “qualify” to participate in the particular investment?
Depending on the type of investment vehicle and the amount of money required to invest along with the level of risk, will dictate whether or not a person needs to be considered as an “accredited” investor. In terms of individual investors, this type of classification refers to the individual or couple gross annual revenue or net worth. Typically, net worth is considered “accredited” at or above ,000,000 or an individual who has an income in excess of 0,000 in each of the 2 previous years or a joint income with that person’s spouse in excess of 0,000 per year. Outside of that, the basic rule is whether or not an individual has sufficient liquidity to invest without harm and has the appetite for the given risk.
What are the minimums needed to fund the investment account?
This will vary from investment to investment. You may have a mutual fund that requires a minimum investment of 00, whereas you may be able to participate in an equity stock with as little as a few hundred dollars – it all depends.
Is there a guaranteed return on investment funds?
Outside of a CD, loan or bond, there is no guarantee of return. Anyone telling you that the return is guaranteed is, more than likely, misrepresenting the risk associated with the typical investment. With most investments, you should hear that “past performance is no guarantee of future results”.
Over what period of time are funds held in order to produce a return?
I covered this somewhat in a previous question, but the answer to this depends on the particular investment vehicle. For instance, a CD may hold funds for months or years depending on the rate of return being offered. With equity stocks, you can buy one minute and sell the next. Every investment stands on its own rules and how the vehicle works in producing a return for the investor. Certain investments with a specified time period and a projected rate of return help to minimize risk especially long term risk, and improve liquidity. Depending on your investment objectives, a diversification of an investment portfolio is also very much advised by most in the investment arena in an effort to hedge against one area or another producing a devastating loss. It is also a good idea to rank your priorities in terms of liquidity, risk and reward. What’s most important to you will ultimately dictate the type of investment you may wish to seek.
For additional information go to: http://www.siteproweb.com/20-questions-lead-page
www.megatrendspreciousmetals.com
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Excellent,Guaranteed,Insured,Green Investment in 2000 m2 to 1 ha Plots of Timber Producing Land with 18.7% Guaranteed Returns
Author Admin
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Be wise,think GREEN,invest in renewable & sustainable resources and save our planet!!!
Would you like 93,5% returns on your capital invested paid directly into your bank account in USD’s every 5 years?
If you purchase a 1 ha plot, your capital and 18,7% returns per annum are guaranteed as your money and title deed are managed in a FSA regulated trust fund, Citadel Trustees Limited in the UK. If you purchase a 2000 m2 plot your capital and 17,1% returns per annum are guaranteed.
Alternative Investments,Green Investments & Timber Investments with guaranteed returns are excellent low risk opportunities in sustainable
& renewable resources with massive environmental & humanitarian benefits in the current volatile world economy!!!
Silva Tree is a fully incorporated Central American company specializing in environmental development. Our Directors have 17 years
of forestry experience as well as strong business and financial backgrounds. The Silva Tree group currently has offices in Costa Rica,
Panama, Spain and the United Kingdom and are involved in programs dealing with conservation, reforestation and renewable energy.
Silva Tree design and develop environmental projects around the world, working with a team of lawyers, accountants and trustees to create a
safe and practical investment structure for each ethical investment opportunity offered. By selling small parts of our own projects, Silva
Tree facilitate greater environmental benefits than we would achieve on our own, as well as offering ethical, safe and diverse investment
products with unrivaled returns. .
Our funds are operated by an Citadel Trustees Limited, an FSA-
regulated trustee and offer highly regulated investments with
excellent returns.
Citadel Trustees Limited
Citadel’s highly experienced team has been providing trustee and stakeholder services to the leisure and real estate industries for
more than 25 years, handling in excess of £65 million/0 million of client funds annually.
Citadel Trustees Limited, was formed to provide specialized trustee services in a variety of areas such as stakeholder activities,
conveyancing services, shared ownership, private residence clubs and probate administration.
Citadel’s Head Office is based in Camberley, Surrey, United Kingdom and the company has branch offices, or associated companies in Spain,
India, Thailand and China from which it services its international client base.
Princess Project
The Princess Project is a pioneering reforestation venture in central Panama. 1,500 hectares of land, currently used for cattle grazing, are
being reforested with the fast growing tree Paulownia Elongata (also known as Princess Tree or Empress Tree). Paulownia is a fascinating
species; believed to be the fastest growing hardwood in the world, it can be harvested 4-5 times in the space of just one Teak harvest and
it provides an array of environmental benefits, from soil regeneration to an extraordinary rate of carbon dioxide uptake.
The Princess Project is a commercial timber plantation which is also being developed as a Carbon Offset Project, following CDM guidelines
developed for the Kyoto Protocol and verified to meet VCS and CCB standards, with environmental and socioeconomic benefits at the core
of the project. The trees will be harvested after their fifth year of growth and sold as a sustainable timber product. New trees will
regenerate from the roots to create three more cycles of growth and harvest over the 20 year project term. The investment opportunity is
based on the sale of the project’s timber to a commercial wood trader.
Timber Investment
All Silva Tree investment opportunities are genuine environmental projects that happen to be open to investment, not the other way
around. We develop programs that we believe are important, and expand them by offering private individuals to participate. We make our money
the same way you do; from our projects’ yields.
After oil, timber is the most intensively traded raw material in the world. The (FAO) expects that this demand will experience a further
rise of 50%. The present supply of hardwoods from managed plantations cannot meet this need.
In the current property and financial climate, sustainable forestry projects offer a low-risk investment opportunity with additional
environmental benefits. The Princess project is the only timber investment to offer guaranteed returns* payable in just 5 short years.
The Princess Tree, officially known as Paulownia, is recognized as the fastest growing hardwood in the world. The timber it produces is
durable and strong, lightweight and fire resistant. Unlike other Tropical timbers, the demand for Paulownia is not being met by
abundance of plantations and, as a carbon reducing facility; it absorbs more CO2 than any other Tropical plantation tree. The world
market price, supply and demand, speed of growth and quick return on investment make Paulownia an ideal commercial plantation tree.
Moreover, a buyer for the timber has already been found with an insured purchase guarantee in place, ensuring your investment return
is completely guaranteed.
Private investors are invited to join in this project by purchasing individual plots of land providing net returns of 18.7% per annum over a total investment period of twenty years (applicable to investments made before the 1st January 2010). Not just an exceptional financial
investment, buyers can enjoy a variety of tax breaks, assurance of security and enjoy the environmental benefits and community
initiatives facilitated by the project.
Key points
Low investment amount from just ,000 USD per unit
Gross return of 5,200 USD over 20 years Guaranteed returns of 18.7% p.a. for 20 years Returns paid every 5 years
Tax advantages
SIPP qualified
CO2 climate change mitigation
Benefits to local communities
Land held in trust
Timber buyer with insured guarantee
Based on introductory purchase price of 35,000 USD applicable to all purchases made before 30.06.2010.
Investment returns
The investor will receive 660 trees per hectare of land purchased
A lease will be registered in his/her name for 21 years, which will produce 4 timber harvests
A purchase price of USD 275 per m3 of timber is guaranteed by World
Paulownia LLC, if the investor wishes to take this option
A 5-year old Paulownia tree produces at least 0.2m3 of processed wood
The total m3 produced per plot over the 4 harvests is 528 m3 Based on a ,000 USD investment (available until Jul 2010), this will provide a return of 5,200 USD per plot
The harvesting, processing and transportation will be carried out by a management company of your choice (unless you wish to organise it
yourself) which is likely to charge 10% of the value of your timber sales This produces a net return of 18.7% per annum over 20 years, after the initial investment amount has been deducted
Community projects
In order to qualify for high quality Carbon offset credits, our project has to deliver a wide array of socioeconomic benefits. The
Princess Project is designed according to the CCB Standard with emphasis on reducing poverty in developing countries.
Aside from the community projects regularly organized by Silva Tree such as the sponsorship of local schools and providing research
opportunities to educational institutions, the Princess Project itself will benefit local communities. Local staff will be employed to work the land belonging to Silva Tree, and farmers will be invited to inter plant crops on the project land. This will give people the
opportunity to grow food for themselves and their families, or sell their produce to generate an income for themselves.
Minimum Investment: 000.00 USD/Approximately £22,682.25 GBP/
Approximately R260,255.11 ZAR (Depending on Currency Rate) For 1 ha Plots
Special Offer Now Available For a Limited Time Only…
Upon client request, Silva Tree have reduced their minimum investment amount from 000.00 USD to just ,500 USD/ Approximately £4,995 GBP/
Approximately R54,385.79 ZAR for a limited time only. This is a unique opportunity to invest in the Princess Project Panama at a lower level,
ensuring that everyone has an opportunity to take part in this ethical timber investment.
Starting in the summer of 2010(Winter in South Africa), Silva Tree have created a unique investment opportunity with land units for sale
at less than 5000 Pounds (depending on exchange rates). For less than a quarter of the normal minimum investment amount, you can now take
part in the Princess Project Panama, an ethical timber investment using Paulownia for reforestation.
Just 7,500$ US will buy you 2,000 m2 of land with 132 trees for a 20 year investment term. The trees will be harvested every 5 years and
returns distributed to you by Citadel Trustees Ltd., who also hold the entire project in trust. The decision to reduce the minimum
participation amount came from Silva Tree’s experience with many individuals who wish to invest in the project but do not possess
sufficient funds to participate, particularly via SIPPs and pensions.
To ensure that previous investors as well as those who are investing at the higher level of 35,000$ US are not at a disadvantage because of
this development, the returns achieved by the higher investment amount are also higher. This means that everyone is able to participate in
the project but investors at a higher level are rewarded.
If you are interested in this guaranteed,risk free and stable investment opportunity please contact me ASAP to reserve your plot of
timber forest as eager investors are snapping up this great opportunity.
Best regards,
Mark Waite
Investment Advisor
Omega Land Investments
T/A Sovereign Land
Tel: +27 87 943 4754
Mobile: +27 74 116 5213
mailto: mark.waite@incomeforlife.co.za
Alt email: mjw0710@vodamail.co.za
For more information about this opportunity & other excellent
investment opportunities please visit….
http://www.incomeforlife.co.za
Some of the countries in Africa may be among the world’s pporest but their lush farmlands and natural resources are the envy of more prosperous nations, mostly in Western Europe and the Middle east. They say African farmland represents a new economic opportunity but are new investments in African resources simply a land grab at the expense of the people living there?
Posted in Investments | Tags: 18.7%, 2000, ExcellentGuaranteedInsuredGreen, Guaranteed, Investment, Land, Plots, Producing, Returns, Timber | Comments Closed
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“Diwali” (Deepavali) will be celebrated in India on the 5th November 2010 (Vikram Samvat 2067). The day of Diwali is auspicious for every Hindu but it is more important for business and business community. People take various investment decisions on this day. The attempt of this article is to help investors take informed investment decisions based on their Moon signs.
Aries:
Arians should avoid taking rash decisions concerning investment. Speculation should be avoided generally. Property investment may give positive results. Special care should be taken before entering into any contract and signing any document. Some Arians may gain from abroad. Investment in shares of good companies may also be considered.
Taurus:
Natives of Taurus should exercise extreme caution while investing in property. It may be advisable to go through the history of land or builder before taking any investment decision. There may be gains from stocks if investors go by fundamentals. Greed should be avoided and investment should be made on sound analysis. Ideal investment may be government bonds, IPO’s and mutual funds. Risk free investment is better option.
Gemini:
The Gemini people may invest in property for long-term for real gains. If the idea is to gain quickly, this may become a cause for loss. The natives are advised to remain careful while taking loans. They may fall into some kind of debt trap if prudence is not exercised in managing debts and investments. The focus of investment should be on the shares of good companies. Investment in gold may also payoff in the long run.
Cancer:
Speculative gain is possible from stock market if it is done with caution. Investment should be made on good companies. Care is necessary for investment in property. It is not wise to be overambitious with respect to future price rise of property. Shares or mutual funds may be good option. Gossip and hearsay should be avoided while taking investment decision. Investment in business may also prove to be a good option.
Leo:
Goddess of fortune seems to be kind this year to Leos. Possibility of gain exists in shares, stocks, property and the like. The stars of fortune are smiling and if such fortune is backed by intelligent plans and investment, good money can be made. However, it will be necessary to control nerves and be watchful. Some calculated risks can be taken for extra advantage.
Virgo:
If investment has been made in property, the projects may get delayed. Caution should be taken while making new investment in property. Read the agreements before signing them to find the finer points. Informed investment in stock market, fixed deposits, government bonds and interest bearing securities are better options. In short, it is important to minimize risks.
Libra:
Librans should be extra careful while investing in property. Gains can however be made in commodities market and share market. Planned investment will be better than speculation. Investment in gold may also be done for long-term gains. For investment of any kind, a proper survey of the situation will be beneficial. Possibility of gains from foreign source also exists.
Scorpio:
The time is very good for those who are planning to buy property for personal use. Gains from old property or ancestral property are indicated. Share investment may also give good returns. Stars are favorable with respect to investment right now. However, some calculated risks may be necessary to convert the advantage into material gains. Investment in gold and ornaments can be made for risk free investment.
Sagittarius:
Extreme caution should be exercised in taking investment decisions. It is better to make efforts for maximizing earnings. Invest the hard-earned money in safe instruments like Government bonds, securities, insurance and mutual funds. It is better to avoid speculative investment. Property investment should also be done with due prudence. It is better to seek expert opinion regarding projects in which investment is to be done.
Capricorn:
Time is good for several types of investment. Money can be made from almost every investment, but, investment should not be done with a blind eye. Caution should be exercised with respect to property investments. Delay in delivery of projects may become a matter of concern. There may be some issues with respect to financial liquidity as well. Unnecessary expenses need to be curbed.
Aquarius:
Money can be made from stock market. Speculation and short-term investment may also payoff well. However, informed investment is advisable. Investment in property may also give good returns. Gains from abroad are also indicated. Stars are favorable right now and prudent investments may become rewarding. Yet, caution is advisable while signing contracts and in finalizing deals for long-term.
Pisces:
There may be some career-related issues for natives. Such issues can be overcome with sustained and intelligent efforts. Risky decisions with respect to career and property investment should be avoided. It is better to avoid speculation. Investment in government bonds, securities and fixed deposits may be good investment instruments. Investment in gold can also be made.
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WAHID’S METHOD ? THE CHARISMATIC & FRUITFUL GUIDELINE FOR FINANCIAL INVESTMENT DECISION MAKING
Author Admin
property and business investment @ em conference centre
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Author speech:
This article explicated the analysis of business decisions as economic cost & benefit. If you find the costs and benefits from the investment- You must be clearly defined criteria to be used for evaluation against the investment proposal. The criteria for making an investment analysis of dealing benefits and costs of an investment proposal, these benefits and costs in most cases do not take place directly, but these are variable so that can be generated for changeable periods.
On the basis of my experience, observed, & analysis, this article I have paid attention mainly on the economic benefits achieved from investing in and operating a business. In this article, I have struggled to expose in more specific terms with the economic costs associated by way of business decisions.
Throughout the article I have tried talk about in greater details-the cost of various types of capital employed in a business, examine how this cost is measured, and in what form and for which purposes this economic reality should affect business decision making.
Introduction:
Investment policies have given a new viewpoint to the part of financial administration, Generally, I found that a few people knows the good investment policy and when those people apply their knowledgeable strategy with the investment usually they gain,, it is highly unlikely that without the appropriate knowledge of investment policy a few people try to run a business with a huge amount, but unfortunately most of these investors turn around from this business with huge losses. all decisions involving to business investment from the analysis of investment in running capital such as cash, banks, accounts receivable, inventory and investment capital represented in fixed assets such as buildings, land, machinery, technology etc. to make the right decisions the financier has to take into account elements of evaluation and analysis as the criteria for analysis,
meaning the analysis of investment:
In most types of organizations or private companies, financial decisions are focused or have a clear objective, “the maximization of assets by the utilities, this fact in the present conditions, must refocus on a” maximizing wealth and the creation of “business value”. Against this background in investment resources are allocated and results obtained from them,
Meaning the analysis of Operating decision:
Operating decisions that involve routine responsibilities. Such as planning production and sales, scheduling personnel and equipment, adjusting production rates, and controlling the production Quality
Decisional framework:
The decisional framework I have discussed all along strained the interrelationship of investment, operations, and financing. In my experience observed that, over time, most management decisions cause cash movements in one form or another.
The dynamics of the business system require that funds be available at any time temporarily or permanently from a variety of sources, provided internally or externally. Key internal sources are cash flows from profitable operations or shifts in existing funds commitments.
Type of external sources are borrowing or raising new equity. Because the basic purpose of investing in, operating, and financing a business is to raise the economic value of the owners’ bet over time, management decisions should form economic value for the shareholders by generating after-tax results that are higher than the cost of all the supporting capital inputs.
Investment Decisions
One of the most vital long phrase decisions for any business relates to investment. Investment is the Obtain or making of assets with the purpose of make gains in the future. naturally investment engaged by financial wealth to buy a machine/ building or other asset, which will then give up returns to an organization over a period of time
I think the first thing is to identify what you want. You must know what the business prospect means for you and what you want to achieve out of your investment. It is generally a good plan to have a pre-planned profit level that acts as an object for your investment work. The good investor will also take time to recognize the market that they are trying to pierce. Do not just rely on information or suggestions from the people. You will need to go and see the accurate operation of the business so that you can review whether you are likely to be winning. The past of business investment is beset with stories of people who jumped against schemes they did not know and ended up paying a very heavy price
Following Solution of considerations in making investment decisions are:
1. What is the scale of the investment – can the company afford it?
2. How long will it be before the investment starts to yield returns?
3. How long will it take to pay back the investment?
4. What are the expected profits from the investment?
A good investor will always look for to administer and shelter their investment. If you just put an investment project and hope for the best, you are on a smooth slope to financial ruin. You will need to pay steady attention to what is happening to your business by requesting for management information and evidence of growth. That way smoothly if there are problems you will know about them and formulate a corrective strategy.
As well established that least standards for investments had to be set high sufficient to pay costs both for the projects exact risk and for the chance loss of forgoing the returns from any substitute uses of the funds invested. Such alternative investments in the company’s normal tricks or in new initiatives were equally assumed to sufficiently reimburse both shareholders and lenders for providing their capital.
Cash flows connected with investment:
When creation an investment the company expects a number of fixed cost and production costs for a positive number of future benefits, these invention costs and profit is called “Cash Flow”, this components are importance for investment decision
I recommended that the company’s generally cost of capital, when used as a minimum standard for the economic attractiveness of investments, totally in person all of these requirements, and value would be created if a project’s cash flow performance exceeded the company’s cost of Capital. The analytical methods directly include any financing costs; rather, the cash outflows and inflows as defined represented only investment outlays on the one hand,
Rate of return required for investment decision:
The required rate of return is the minimum rate of return that is necessary for an investment that will be established. In formative this rate must take into account all internal and external factors that influence the investment decision.
My statement in financial theory which states that “investors are risk-aversive” takes great implication in the logic that, as there is more risk involved in the decision to invest in a project will require a higher give up wealth invested. Thus, the expected return for an investment project depends on the exact project risk assessment, taking into account the risk free rate and to invest in this project. The aspects discussed effective tool in achieving the proper financial management in the decision to rent business investment, but all this must be verified and supplemented by technical studies, math and controls executed by the monitoring accountable for the financial area of the company.
The rules of a good investor are not rocket science. Everyone can achieve some level of success if they take the time to go over their investment opportunities and make the most logical business decisions best on the information available and their own knowledge. Common sense does help as well, especially if you are dealing with people.
Operating Decisions:
Role of Operating Level of Management: The top level management divides about finance production, marketing, rules and system for employees, process and working methods. The middle level management collects necessary wealth and services for their execution and bottom level management implements the rules process, methods and programme shaped by the top level management. This type of execution is associated with the industrial regulation, continuity of activities and most usage of resources. Middle level office supervisors and bottom level jobbers, foremen and workers are connected with this work.
Decisions are being implemented at bottom level and for its efficiency the management’s method has to be followed. It includes following of working method and working process. Due to the process and methods, the work of coordination between the activities becomes effective and an effective control which can be put on all types of works. In short for the decisions of efficiency, the administrative process becomes an important part.
The time prospect for operating decisions is generally shorter than that of the typical business investment. however, operational funds movements, such as increases or decreases in trade credit both used and extended and swings in cash balances and accruals as described in do involve costs, both in the form of out-of-pocket charges and opportunity costs. For case, a near-term decision to take pay for discounts might involve significant economic benefits when weighed against the cost of any incremental borrowing essential to take advantage of the discount. Cash management decisions to minimize bank balances can eliminate the opportunity costs inherent in idle funds. In fact, there are myriad circumstances in which near-term decisions can cause or eliminate the cost of employing funds, as these decisions are often directly linked to incremental sources that entail specific costs.
Effective decisions are being full by keeping the present activities in mind and their main aim is to accomplish the present objectives. These decisions are taken for the getting of positive results by fulfilling the departmental objectives. For this the departmental employees are given training according to their activities and an effecting level’s personnel is given essential powers for the same cases,
Above I have tried to expose the costs associated with obtaining financing and compensating providers of different sources of funds, both short-term and long-term, which must be considered by management in making any financing decision. Obviously, using any type of funds entails an economic cost to the company in one form or another. One of management’s obligations is to expand a pattern of funding that both matches the risk/reward profile of the business and is suitably modified to meeting the evolving needs of the company. At the same time, the use of long-term funds entails meeting the prospect of creditors, and meeting or if possible exceeding the potential of the providers of equity funds, the company’s shareholders.
Conclusion: The operative decisions are different in nature in comparison with to strategic decisions. Mostly they possess a special importance for achieving the short term motives in framework to the internal situation of a business component
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The Mountaineer p 81
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Contributors: John R. Cotter, Editor; Pearl Carruthers, Assistant Editor; William J. Sullivan, Business Manager; J.K. Jamison, Faculty Adviser
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Your investment portfolio will typically include conventional investments such as stocks and bonds both equally important parts of a solid, long-term investment strategy. But, there are many other less-typical investments that can supplement your portfolio and provide you with opportunities to reduce some of the effects of market fluctuations. Consider alternative investments such as commodities, hedge funds, mutual funds with alternative strategies, and futures to round off your portfolio.
What are alternative investments?
Alternative investments are asset classes that generally don’t move together with traditional equity and fixed income markets. They usually follow their own cycles. As a result, alternative asset classes have a low correlation with standard asset classes; therefore they may help diversify your portfolio by reducing the overall volatility of the portfolio when traditional asset classes such as stocks and bonds are performing poorly.
Historically, alternative investments have been restricted to high-net worth individuals and institutional investors, but these days they are far more available to a wider audience. Alternative investments range from real estate to hedge funds to commodities and can complement a variety of investing strategies. However, they are designed to complement a well-founded portfolio rather than to serve as the focal point of the portfolio.
Most people are attracted to alternative investment because they may yield a higher return than traditional investments, but note that potentially higher returns also may carry higher risks with them. What’s important to note is that alternative investments may be more illiquid than their conventional counterparts – they cannot be sold readily like stocks and bonds – and some may need to be held for a longer time horizon. Additionally, there may be unique fees or tax consequences.
Alternative investment options for your portfolio
There are many investment products available today and it sometimes may be difficult to clearly identify which investments are conventional or alternative. But below are is a list of common alternative investments along with their potential benefits and risks.
Gold
Including a small portion of your portfolio toward precious metals such as gold or silver may offset the performance of other assets in the portfolio such as stocks and bonds, because precious metals typically don’t move in tandem with conventional investments.
Gold is typically viewed as a hedge against inflation and currency fluctuations. So when inflation effects the purchasing power of a currency – say the dollar weakens against the euro – gold prices tend to rise. As a result, investors place their money in gold during economic and market downturns.
Investing in gold can be accomplished in several ways, including futures funds, exchange-traded funds, mutual funds, bars, and coins. Nevertheless, since precious metals make up a small sector, prices often change dramatically. This type of volatility can create opportunities for investors in the form of high returns but it can equally result in dramatic losses.
Hedge fund offerings
Hedge funds have historically been available only to high-net-worth individuals and institutions. Hedge funds are investment pools that manage money for institutions like banks, insurance companies, as well as individuals who meet the federal definition of a “qualified purchaser” in terms of net worth and income.
Hedge funds are typically organized as limited partnerships where the fund managers are the general partners and the investors are the limited partners. Hedge fund investments tend to have limited liquidity on a scheduled basis as a result these alternative investments are subject to special regulatory requirements different from mutual funds.
Funds of hedge funds invest in a variety of hedge funds with many different strategies and asset classes with the purpose of reducing overall fund risk through increased diversification. Fund of hedge funds are available to investors that meet the accredited net worth standards of at least million. Fees of hedge funds are higher because of the type of portfolio management and increased trading costs.
Fund of hedge funds are registered with the SEC under the Investment Company Act of 1940 and as securities under the Securities Act of 1933. They may also come in the form of a private offering which will need to adhere to stricter accredited investor standards. Fund of hedge funds can be complicated investment vehicles which often use leverage, lack transparency, may be subject to restrictions, and may include other speculative practices.
Mutual funds with alternative strategies
Mutual funds are offered in many asset categories, including real estate and commodities. Some mutual funds can mimic hedge fund strategies and may be a good option if you’re interested in alternative investments but don’t meet the accredited investor standards.
In contrast to hedge funds and fund of hedge funds with their higher fees and possible restricted liquidity, these types of mutual funds are relatively low cost and are very liquid – they can easily be bought or sold in a public market. As a result they are accessible to a wider range of investors and therefore mutual funds with alternative strategies are prohibited by law in using high leveraging to boost yields as is common with many hedge funds.
Nevertheless, alternative mutual funds do use aspects of hedge fund investing such as employing both long- and short- investment tactics, trading complex derivative products, and short selling. If you are an investor that is looking to help offset market swings or specific sector swings and you understand the risks that may be involved investing in alternative investments, alternative mutual funds may be something to consider adding to your portfolio.
Managed futures funds
Managed futures funds are formed for the purpose of investing assets in the investment vehicles and trading strategies deemed appropriate by commodity trading advisors (CTAs). These specialized money managers use futures, forwards, options contracts and other derivate products traded in U.S. and global markets as their investment vehicles. CTAs are required to be licensed and are subject to the regulations of the National Futures Association and the Commodities Trading Futures Commission (CFTC).
Managed futures are speculative in nature, involving high risks, may carry higher fees, and have limited liquidity. Nevertheless, managed futures investments have been popular investments for high-net-worth individuals and institutional investors for the past several decades. Their appeal comes from their ability to provide investors with greater portfolio diversity by increasing exposure to global investment opportunities and other sectors such as commodities.
There are several categories of managed futures in terms of structure and investment objectives. They may be available to investors in the form of a private offering subject to higher accredited investor standards according Regulation D guidelines of the Securities Act of 1933.
Real estate investment trusts
A popular type of alternative investment is commercial real estate. Until recently commercial real estate has been mostly inaccessible to retail investors and was widely enjoyed by high-net-worth individuals and institutional investors for its potentially higher yields and diversification attributes. Since the inception of real estate investment trusts (REITs), investing in commercial real estate has become available to wider range of investors.
REITs pool money from investors and invest the funds in properties ranging from office buildings to apartment complexes to hospitals and warehouses. REITs are offered to investors in two forms: traded and non-traded. Both offer exposure to commercial real estate assets.
Publicly traded REITs can be easily bought and sold on a daily basis on active secondary market. However, they tend to be more volatile.
Non-traded REITs are illiquid investments appropriate for investors with a long-term investment time horizon of at least 5 to 10 years. Non-traded REITs are not aligned with stock and bond market movements so they add great diversification to a portfolio.
Other alternatives
Alternative investment can also include assets such as art, gems, rare collectibles, and antiques. In addition, venture-capital funds are considered alternative investments. These alternative investments can help provide investors with added diversification and can help balance out performance across various market swings.
Considering alternative investments
Alternative investments can potentially boost your portfolios returns while helping you reduce market exposure and overall portfolio volatility. However, because of a lack of a secondary market for some alternative investments and restricted liquidity for others, as well as the higher risks associated with them, alternative investments should be used as complements to traditional portfolios consisting of equities and fixed-income instruments.
Moreover, because alternative investments often require more professional management than conventional investments, it’s important to look to experienced money managers for help such as your Financial Advisor.
Alternative investments include gold, real estate, hedge funds, funds of hedge funds, commodities along with others and are generally used to round off your portfolio’s performance because alternative investments are typically not correlated to traditional markets such as equities and fixed income.
Alternative investments are often illiquid, with longer investment time horizons and carry higher risks, and often require professional money managers.
Investors must meet a criteria outlined by the law, ranging from product to product, in order to take advantage of alternative investment opportunities.
Alternative investments should generally be used to complement existing portfolios and strategies consisting of mainly stocks and fixed-income products.
See: platinumcoinsandbullion.com For More Platinum Investments. Including Physical and Non-Physical Options!
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What It Takes To Become a Successful Real Estate Investor
Real estate investing is not rocket science. All it really requires is a determined individual who is willing to take the time and learn the business. Real estate investing does not require large sums of money, inside contacts, or a magic touch. All that is really necessary is knowledge and that is what you will find in the pages of this book.
Tips and Secrets for Real Estate Investing was written with the aspiring real estate entrepreneur in mind. This book is designed to provide you with a no-nonsense approach to real estate investing. Everything you read is of importance and has found its way onto these pages for a specific reason. What you will not find in this book is wordy explanations and complicated information that simply waste your time. We all know that time is money, and I am here to help you make money, not waste it.
With that said, let’s return to the original statement of this introduction, real estate investing is not rocket science. I assure you that as long as you have a will, there is a way. Sure, investing isn’t for everyone, but you are not like everyone else. You have an objective and you are searching for a way to obtain it. This factor alone separates you from the rest of the crowd. In other words, if you are reading this, it is proof that you are motivated.
In addition, it is crucial that you have the ability to make decisions. I know this sounds simple, but for some people, decision making is a difficult task. There may be times that you must make difficult decisions. If you are unable to do so, then maybe this isn’t the investment opportunity for you.
There are several traits in a person that can make investing easier. For example, it is helpful if you are organized, computer savvy, and a people person. But none of these things are required of you. Therefore, your first step toward successful real estate investing should begin by studying this book. The more you know and the better you understand the real estate market, the more likely you are to be successful in it. So, what does it take to become a successful real estate investor? Knowledge and the ability to make decisions, it is as simple as that.
Why Invest in Real Estate?
Without argument, there are plenty of ways to turn a profit in today’s economy. So what makes real estate the right option? There are several answers to this question. However, for the purpose of this book, we will focus on one primary answer. Real estate investing consistently offers a better return on your money than other traditional forms of investing such as stocks, savings certificates, commodities, life insurance policies, consumer merchandise, and bonds. Property is extremely versatile. Most pieces of real estate come with a handful of options or different ways to generate a profit. Not only that, but real estate is almost always appreciating, and when it is not, you can use that to your benefit.
Now don’t get me wrong, there are plenty of disadvantages and advantages associated with investing in property. Let’s take a closer look at those factors before moving on.
The Advantages of Real Estate Investing
High Returns
As previously mentioned above, one of the major advantages that come with investing in real estate is the prospect for high yields. It is not uncommon to see a profit average of 20 percent when investing in a piece of property. In fact, depending on the market, it is possible to experience an even higher yield.
High Leveraging Opportunities
Real estate investing offers the investor the best leveraging opportunities. For example, the cash requirements are not the same as they are with other investing alternatives like stocks and bonds that require the purchaser to borrow 50 percent of the value of the securities. In real estate, it is more common to invest between 20 and 40 percent of the value of the property. Furthermore, based on the market and particular situation, it is possible to invest with as little as five percent down.
Flexibility with Income Tax
Who doesn’t appreciate flexibility when it comes to income tax? When investing in real estate, the investor enjoys certain allowances and deductibles. Most notably, common expenses such as insurance premiums, property taxes, management fees, maintenance feeds, and other operating costs can effectively reduce your taxable income.
Personal Control
Not all investing opportunities are created equal. When putting money into real estate, the investor is able to appreciate a higher level of personal control than when investing in alternative options. Each purchase can be crafted to fit the current situation and property. Property can be refinanced, terms can be adjusted, and investors can rent or sell. Essentially these details are left to the investor. Therefore, the investor gets to decide when and how to move forward with the investment. Maybe it’s not a good time to sell. The investor can opt to rent instead. There are several examples, but the point is, when you invest in real estate, you reserve the right to invest and sell under your own terms as determined by what personally and economically satisfies you.
The Disadvantages of Real Estate Investing
Unpredictable Liquidity
Buying real estate is usually fairly easy. Sometimes it is harder to find a sound investment, but overall there are always houses or property for sale. The downfall to real estate is you never know how liquid your asset will be. This is because the market greatly affects and is greatly affected by the overall economy. If the economy is in a slump and lenders are not approving loans, it may be harder to sell a house than say during the housing boom in and around 2006.
With that said, you don’t have to sell your property to make a return on your investment. In fact, there are several ways to earn a profit aside from selling or flipping a house. We will review these methods in full detail shortly. For now, just know that by preparing for the worst, you can overcome the challenge of unpredictable liquidity. Remember, in the long run, investing in real estate is still your best shot at a higher return on your money. You need only know what you face going into the situation.
Capital Requirements
Another primary disadvantage to real estate investing can be attributed to poor liquidity. Depending on the investment, you may be required to come up with a large amount of capital to put down. This very factor makes it difficult for consumers to purchase property and thus makes your investment hard to liquidate. The good news is I will share with you my techniques on how to avoid the need for a large amount of capital when investing. You will find this information in an upcoming chapter.
Risk
More than likely you already know that in order to make a big game, you must be willing to accept a certain amount of risk. Like all investments worth your while, real estate has some associated risk.
It is important that you take a moment and reflect on this fact. Real estate investing is not risk free. While there is potential to earn a great deal of money, there is also the chance that you will lose money.
It is for this very reason you need to educate yourself on the market and investing techniques before diving in. It is also for this reason that you need to be an accomplished decision maker. If you can’t evaluate the situation and make an educated, fast decision, your risk of failure increases.
The market is volatile and heavily dependent on numerous factors. While there are many things you can control as an investor, you have no say in the fluctuation of interest rates and how they respond to laws of supply and demand. At any given moment everything is up in the air. Risk is not be downplayed. Know it, understand it, accept it, if not, it’s time to move on.
The Art of Landlording
Ask just about any landlord and he or she will tell you, it’s no easy job. When you invest in real estate, you almost always run into a situation that requires you to become personally involved with the tenant or manager. How you handle landlordism will depend primarily on your interpersonal skills and the other individuals you interact with.
Being a landlord can be time consuming and emotionally taxing. While it is possible to have pleasant relationships with your tenants, it is just as possible to have the opposite. In fact, landlording is a major deterring factor for some potential investors. It is simply too much hassle. Your feelings on this topic should be taken into consideration when looking into investing. If you have an opportunity that requires landlord duties, perhaps that is not the investment for you. Either way, always make sure to keep this in mind.
Management and Maintenance
Another downfall to investing in property is the requirement for near constant management and maintenance. Investing in real estate is a busy business. You have to keep up on everyday living expenses such as the cost for a new roof, electrical repairs, plumbing expenses, etc. In order to get a sound return on your investment, you may need to enhance or upgrade your property. Management and maintenance can be a major burden, especially if you didn’t invest in a sound project.
As an investor, you may also need to hone your handyman skills. From driving nails to patching holes, your role hat will increase significantly. Most real estate investors are hands on. There presence is required for the upkeep and successful sale of the property.
Summary
In summary, real estate investing is not for the faint of heart. To become a successful investor, one must boast a certain amount of determination and take the steps needed to become educated on the topic. With the right amount of knowledge and understanding, anyone can thrive at investing.
Real estate investing is a popular form of investment because it offers a high return on the investment. In addition, investing in property is a flexible venture that leaves the investor in charge 90 percent of the time. Lastly, investors enjoy certain tax breaks associated with operating costs that help reduce their taxable income and thus reduce the amount of income tax they must pay.
Real estate investing also has a down side, most notably, there is a certain amount of risk that comes with investing in property. This is because there are factors that are out of your control including the health of the economy, interest rates, and supply and demand. Additionally investing can sometimes call for a large amount of capital. This can be difficult if you don’t have a healthy cash flow. When you invest in real estate, you may be required to personally assist with the management and maintenance of your investment. This means your hands are going to get dirty. Finally, investors often find themselves playing the role of landlord. This position requires keen interpersonal skills and patience. If you aren’t interested in interacting with tenants, landlording is not usually a good investment option.
If you want to learn out to invest in real estate and be successful check it out at http://clint18415.my-real-estate-wealth.com
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It’s always good to have at least a basic foundation of fundamental investment knowledge whether you’re a beginner to investing or working with a professional financial advisor. The reason is simple: You are likely to be more comfortable in investing your money if you understand the lingo and basic principles of investing. Combining the basics with what you want to get out of your investment strategy, you will be empowered to make financial decisions yourself more confidently and also be more engaged and interactive with your financial advisor.
Below are a few basic principles that you should be able to understand and apply when you are looking to potentially invest your money or evaluate an investment opportunity. You’ll find that the most important points pertaining to investing are quite logical and require just good common sense. The first step is to make the decision to start investing. If you’ve never invested your money, you’re probably not comfortable with make any investment decisions or moves in the market because you have little or no experience. It’s always difficult to find somewhere to begin. Even if you find a trusted financial advisor, it is still worth your time to educate yourself, so you can participate in the process of investing your money and so that you may be able to ask good questions. The more you understand the reasons behind the advice you’re getting, the more comfortable you will be with the direction you’ve chosen.
Don’t be intimidated by the financial lingo
If you turn on the tv to some financial network, don’t worry that you can’t understand the financial professionals right away. A lot of what they say can actually boil down to simple financial concepts. Make sure you ask your financial advisor the questions that concern you so you become more comfortable when investing.
IRAs are containers to hold investments-they aren’t investments themselves
The first area of confusions that most new investors get confused about is around their retirement vehicles and plans that they may have. If an investor has an individual retirement accounts (IRA), a 401(k) plan from work, or any other retirement-type plan at work, you should understand the differences between all the accounts you have and the actual investments you have within those accounts. Your IRA or 401(k) is just a container that houses your investments that brings with it some tax-advantages.
Understand stocks and bonds
Almost every portfolio contains these kinds of asset classes.
If you buy a stock in a company, you are buying a share of the company’s earnings. You become a shareholder and an owner at the same time of the company. This simply means that you have equity in the company and the company’s future – ready to go up and down with the company’s ups and downs. If the company is doing well, then your shares will be doing well and increase in value. If the company is not doing well or fails, then you can lose value in your investment.
If you buy bonds, you become a creditor of the company. You are simply lending money to the company. So you don’t become a shareholder or owner of the company/bond-issuer. If the company fails, then you will lose the amount of your loan to the company. However, the risk of losing your investment to bondholder is less then the risk to owners/shareholders. The reasoning behind this is that to stay in business and have access to funds to finance future expansion or growth, the company must have a good credit rating. Furthermore, the law protects a company’s bondholders over its shareholders if the company goes bankrupt.
Stocks are considered to be equity investments, because they give the investor an equity stake in the company, while bonds are referred to as fixed-income investments or debt instruments. A mutual fund, for instance, can invest in any number or combination of stocks and bonds.
Don’t put all your eggs in one basket
An important investment principle of all is not to invest all or most of your money into one investment.
Include multiple and varying types of investments in your portfolio. There are many asset classes such as stocks, bonds, precious metals, commodities, art, real estate, and so on. Cash, in fact, is also an asset class. It includes currency, cash alternatives, and money-market instruments. Individual asset classes are also broken down into more precise investments such as small company stocks, large company stocks, or bonds issued by municipalities, or bonds issued by the U.S. Treasury.
The various asset classes go up and down at different times and at different speeds. The purpose of a diversified portfolio is to mitigate the ups and downs by smoothing out the volatility in a portfolio. If some investments are losing value at some particular period, others will be increasing in value at the same time. So the overarching objective is to make sure that the gainers offset the losers, which may minimize the impact of overall losses in your portfolio from any single investment. The goal that you will have with your financial advisor is to help find the right balance between the asset classes in your portfolio given your investment objectives, risk tolerance, and investment time horizon. This process is commonly referred to as asset allocation.
As mentioned earlier, each asset class can be internally diversified further with investment options within that class. For example, if you decide to invest in a financial company, but are worried that you may lose your money by putting everything into one single company, consider making investments into other companies ( Company A, Company B, and Company C) rather than putting all your eggs in one basket. Even though diversification alone doesn’t guarantee that you will make a profit or ensure that you won’t lose value in your portfolio, it can still help you manage the amount of risk you are taking or are willing to take.
Recognize the tradeoff between an investment’s risk and return
Risk is generally looked at as the possibility of losing money from your investments. Return is looked at as the reward you receive for making the investment. Returns can be found by measuring the increase in value of your investment from your original investment principal.
There is a relationship between risk and reward in finance. If you have a low risk-tolerance, then you will take on less risk when investing, which will result in a lower possible return at any given time, relatively. The highest risk investment will offer the chance to make high returns.
Between taking on the highest risk and the lowest risk, most investors seek to find the right balance of risk and returns that he/she feels comfortable with. So, if someone advises you to get in on an investment that has a high return and it is risk-free, then it may be too good to be true.
Understand the difference between investing for growth and investing for income
Once you make the decision to invest, you may want to consider whether the objective of your portfolio is have it increase in value by growing overtime, or is it to produce a fixed income stream for you to supplement your current income, or is it maybe a combination of the two?
Based on your decision, you will either target growth oriented investments or income oriented ones. U.S. Treasury bills, for instance, provide a regular income stream for investors through regular interest payments, and the value of your initial principal tends to be more stable and secure as opposed to a bond issued by a new software company. Likewise, an equity investment in a larger company such as an IBM is generally less risky than a new company. Furthermore, IBM may provide dividends every quarter to their investors which can be used as an income stream as well. Typically, newer companies reinvest any income back into the business to make it grow. However, if a new company becomes successful, then the value of your equities in that company may grow at a much higher rate than an established company. This increase is typically referred to as capital appreciation.
Whether you are looking for growth, income, or both, your decision will fully depend on your individual financial and investment objectives and needs. And, each type may play its own part in your portfolio.
Understand the power of compounding on your investment returns
Compounding is an important investment principle. When you reinvest any dividends or other investment returns, you begin to earn returns on your past returns.
Consider a simple example of a plain bank certificate of deposit (CD) that is rolled over to a new CD including its past returns each time it matures. Interest that is earned over the lifetime of the CD becomes part of the next period’s sum on which interest is assessed on. At the beginning, when you initially invest your money compounding may seem like only a little snowball; however, as time goes by, that little snowball gets larger because of interest compounding upon interest. This helps your portfolio grow much faster.
You don’t have to go at it alone
Your Financial Advisor can give you the investment guidance that you need so that you don’t have to stop yourself from investing in the market because you feel like you don’t know enough yet. Knowing the basic financial principles, having good common sense, and having your Financial Advisor guide you along the way can help you start evaluating investment opportunities for your portfolio and help get you closer toward achieving your financial goals.
President Obama and Vice President Biden address a meeting of the Middle Class Task Force and lay out a series of proposals and initiatives designed to create jobs, strengthen the economy, and ease the burden for middle-class families. January 25, 2010.
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INTRODUCTION
One of the outstanding features of globalization in the financial services industry is the increased access provided to non-local investors in several major stock markets of the world. Increasingly, stock markets from emerging markets permit institutional investors to trade in their domestic markets. Indian stock market opened to Foreign Institutional Investors in 14th September 1992, initially with lot of restrictions. The regulation on them are liberalized and minimized now, since 1993 has received a considerable amount of portfolio investment from foreigners in the form if FIIs investment in equities. This has become a turning point of India stock market. The government of India announced the policy of the government to permit the FII investment in India capital market. According to the SEBI modified the regulation on 14-11-1995. In order to make investment in India equity market they wanted to register with Security Exchange Board of India as foreign institutional investors. It is possible for foreigners to trade in India securities without registering as Foreign Institutional investors, but such cases require approval from Reserve Bank of India or the Foreign Institutional Promotion Board. They are generally concentrated in secondary market.
Domestic market alone not able to meet the growing capital requirement of the country and financing from mutilated institution has lost primary in the emerging in the global order .Besides aimed primarily at ensuring non-debt creating capital inflows at a time of extreme balance of payment crisis. It was to tie over the balance of payment crisis in the early 1990s
Portfolio flows often referred to as ‘hot- money’ are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been plying a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some researchers while others are concerned about possible adverse consequences.
Clark and Berko (1997) emphasize the beneficial effects of allowing foreigners to trade in stock markets and outline the “base-broadening” hypothesis. The perceived advantages of base-broadening arise from an increase in the investor base and the consequent reduction in risk premium due to risk sharing. Other researchers and policy makers are more concerned about the attendant risks associated with the trading activities of foreign investors. They are particularly concerned about the herding behavior of foreign institutions and the potential destabilization of emerging stock markets.
This study addresses these issues in the context of foreign institutional investors’ (FII) trading activities in a big emerging market – India. India liberalized its financial markets and allowed FIIs to participate in their domestic markets in 1992. Ostensibly, this opening up resulted in a number of positive effects. First, the stock exchanges were forced to improve the quality of their trading and settlement procedures in accordance with the best practices of the world. Second, the information environment in India improved with the advent of major international financial institutional investors in India. On the negative side we need to consider potential destabilization as a result of the trading activity of foreign institutional investors. This is especially important in an emerging country that has embarked upon reforms to open up its market.
OBJECTIVES The objectives of this study were as follows;
(1) To study the role of FII investment in the Indian stock market, ( 2 ) To examine the causal relationship between net FII investment and BSE sensex using granger causality test (3) To examine the causal relationship between net FII investment and NSE sensex using granger causality test (4 )To examine whether FIIs were a channel of global disturbance into the Indian stock market.
TOOLS: Study was carried out with the help of unit root test, co integration test, causal regression and F statistics for FII investment and index from BSE and NSE
LETERATURE REVIEWS
Gayathri Devi .R in 2003, she conducted study on “Causal Relationship between FIIs and Stock Market: A critical study”. It revealed that there was long run relationship between net FII investment and sensex, FII investment did not respond the short-run changes or technical-position of the market and they were more driven by fundamentals, and FII investments did granger cause India stock market. “Selen Serisoy Guerin” in 2006, conducted study on “The Role of Geography in Financial and Economic Integration: A comparative Analysis of foreign direct investment, Trade and Portfolio Investment Flows”.. It found support for the argument that most FDI among Industrial countries were horizontal, whereas most FDI investment in developing countries was vertical and our results indicated that portfolio investment flows compared to FDI, were highly sensitive to change in GDP per capita, this implied that if there was a negative output stock, portfolio investment flows would be more volatile than FDI. A.Julia Priya, D. Lazar and Joseph Jeyapual in 2005, they conducted study on “Role of Foreign Institutional Investors on stock market development in India”, Results revealed that sensex, market capitalization of NSE, Turnover of BSE and NIFTY without market capitalizations were influenced by Foreign Institutional Investors“Suchismita Bose and Dipankor coondoo” in 2004, they conducted study on “The Impact of FII Regulation in India”,. These results strongly suggested The liberalization policies had the desired expansionary effect and had either increased the mean level of FII inflows and/or the sensitivity of these flows to a change in BSE returns and /or the Parthapratim pal in 2004 conducted study entitled as “Recent volatility in stock markets in India and foreign institutional investors. Findings of this study indicated that Foreign institutional investors had emerged as the most dominant investor group in the domestic stock market in India. Particularly, in the companies that constitute the Bombay stock market sensitivity index, their level of control was very highinertia of these flows.
“sandhya Ananthanaryanan, Chandrasekhar krishnamurthi and Nilajan Sen in 2003 conducted study as “Foreign institutional Investors and Security Returns: Evidence from Indian Stock Exchanges”, It found strong evidence consistent with the base-broadening hypothesis.It did not find compelling confirmation regarding momentum or contrarian strategies being employed by FIIs.It supported price pressure hypothesis.
It did not find any substantiation to the claim that foreigner’ destabilize the market. J.S. Pasricha and Umesh.C.Singh in 2001, tried to analyze the impact of FIIs investment on Indian capital market. Their study revealed that FII are here to stay and have become the integral part of Indian capital market. Their entry has led to greater institutionalization of the market. They have brought transparency in the market operations.S.S.S. Kumar in 2001, attempted in his study to find the effect of FIIs on the Indian stock market. The inference analysis of the paper suggests that FII investments are more driven by market fundamentals rather than by short term changers or technical position of the market. As per K. Seethapathi and V. Subbulakshmi study entitled “Foreign investment: Need for focus”, They concluded that, the flows have to pick up. The political will is to be demonstrated by the government. In addition, the regulators have to identify the reasons for failure in converting approvals into actual investments and those issues are to be addressed immediately. E. Han Kim and Vijay Singal in 1997, they conducted study entitled “Are open market Good for Foreign Investors and Emerging Nations?”, Conclusion revealed as. Integrating the emerging stock markets into world markets has had benefits, and will continue to have benefits for both global investor and host countries. The end result of integrated markets a better allocation of resources, improved productivity of capital, and a higher standard of living.
THEORETICAL REVIEW
Between late 1990 and the middle of 1991, the economy faced severe balance of payment difficulties, coming close to defaulting on its external payment obligations in January and June of 1991. In January 1991, the Government negotiated with the International Monetary Fund (IMF) for loans. What followed was the implementation of the conventional IMF-World Bank prescription of short-term ‘stabilization’, consisting of devaluation, temporary import compression, fiscal and monetary compression with a rise in interest rates, followed by more long-term ‘structural adjustment’ measures, seeking to restructure the domestic economy.
The New Economic Policy was an outcome of implementation of the ‘structural adjustment’ program. The ‘economic reforms’ or ‘economic liberalization’ program, which began to be implemented with the announcement of the New Economic Policy (NEP), included wide-ranging changes in industrial policy, trade policy and foreign investment policy, a redefinition of the role of the public sector in the economy and redesigning the architecture of the domestic financial system. By narrowing down the topic, first it concentrates on capital account liberalization.
CAPITAL ACCOUNT LIBERALIZATION
The process of capital account liberalization in India needs to be situated in its wider context, for it was shaped by the reality in the national context and the conjuncture in the international context. In response to the external debt crisis, which surfaced in 1991, the government set in motion a process of stabilization, adjustment and reform. Economic liberalization and structural reforms sought to increase the degree of openness of the economy through trade flows, investment flows, technology flows and capital flows. The process began the introduction of convertibility on trade as quantitative restrictions on imports, except for with consumer goods were dismantled and tariff levels were reduced. It was combined with a liberalization of the regimes for foreign investment and foreign technology. And restrictions on international economic transactions, including capital movements, were progressively reduced. This process was also influenced by the gathering momentum of globalization which was associated with increasing economic openness in trade flows, investment flows and financial flows.
The approach to capital account liberalization in India was much more cautious. What was liberalized was specified. Everything else remained restricted or prohibited. The contours of liberalization of the capital account were, in large part, shaped by the salutary lessons of the external debt crisis which surfaced in early 1991 and brought India close to default in meetings its international obligations. The balance of payments situation, then, was almost unmanageable.
The vulnerability was accentuated by two factors: it became exceedingly difficult to roll-over short-term debt in international capital markets and there was capital flight in the form of withdrawals from deposits held by non-resident Indians. This experience dictated the parameters of capital account liberalization8. It prompted strict regulation of external commercial borrowing especially short-term debt. It led to a systematic effort to discourage volatile capital flows associated with repatriable non-resident deposits. Most important, perhaps, it was responsible for the change in emphasis and the shift in preference from debt creating capital flows to non-debt creating capital flows. To some extent, the liberalization that was introduced was also influenced by the perceived needs of the economy: financing the current account deficit, mobilizing resources for investment and attracting international firms. But capital account convertibility remained, fortunately, in the realm of rhetoric. The Mexican crisis in late 1994 was, ironically enough, a blessing in disguise for India. It was not just an early warning signal. It dampened the enthusiasm of those who advocated capital account liberalization with a big bang. It lent support to those who questioned the wisdom of capital account convertibility that would have been premature in every sense. The contours of capital account liberalization in India were determined by these factors.
In sketching these contours, it is necessary to distinguish between different forms of private capital inflows and outflows, as there are important differences between these categories in the nature and the degree of liberalization. A complete description would mean too much of a digression. For our purpose, it would suffice to consider the contours of liberalization in the following categories of capital account transactions:
• Direct investment,
• Portfolio investment, and
• Non-resident deposits.
Foreign Direct Investment
It is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based. The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.
The liberalization of the policy regime for direct foreign investment began in July 1991 with two major decisions. First, direct foreign investment with up to 51 per cent equity was to receive automatic approval in selected high priority industries subject only to a registration procedure with the Reserve Bank of India. Second, a Foreign Investment Promotion Board was constituted to consider all other proposals for direct foreign investment where approval was not constrained by pre-determined parameters and procedures. In effect, this created a dual route for inflows of direct foreign investment. The approval was automatic, within the specific parameters, from the Reserve Bank of India, while all other inflows were subject to approval through the Foreign Investment Promotion Board. The access through the automatic route has been progressively enlarged over time. Needless to add, outflows associated with direct foreign investment are not subject to any restrictions, but this was so even in the era of capital controls.
Foreign Portfolio Investment (FPI)
Portfolio investment represents passive holdings of securities such as foreign stocks, bonds, or other financial assets, none of which entails active management or control of the securities’ issuer by the investor; where such control exists, it is known as foreign direct investment.
The liberalization of the policy regime was extended to portfolio investment in September1992. To begin with, foreign institutional investors such as pension funds or mutual funds were allowed to invest in the domestic capital market subject simply to registration with the Securities and Exchange Board of India. Guidelines issued by the Reserve Bank of India permitted such foreign institutional investors to invest in the secondary market for equity subject to a ceiling of 5per cent (subsequently raised to 10 per cent) for individual foreign institutional investors in a single Indian firm with an overall limit at 24 per cent of equity (later relaxed to 30 per cent of equity at the option of the firm) for total foreign institutional investment in a single Indian firm. Foreign portfolio investment further classified into
1. FIIs
2. ADR/GDR, and
3. Offshore funds.
Foreign institutional investors (FIIs)
One who propose to invest their proprietary funds or on behalf of “broad based” funds or of foreign corporates and individuals and belong to any of the under given categories can be registered for FII.
• Pension Funds
• Mutual Funds
• Investment Trust
• Insurance or reinsurance companies
• Endowment Funds
• University Funds
• Foundations or Charitable Trusts or Charitable Societies who propose to invest on their own behalf, and
• Asset Management Companies
• Nominee Companies
• Institutional Portfolio Managers
• Trustees
• Power of Attorney Holders
• Bank
Access was provided to foreign institutional investors in the secondary market for debt. Soon thereafter, foreign institutional investors were also allowed investment or placement in the primary market, subject to approval from the Reserve Bank of India, with a maximum limit of 15per cent of the new issue. It was some time before foreign institutional investors were permitted investment in government securities in the primary and secondary markets. This came in 1996-97 and was subject to the ceiling for external commercial borrowing. Subsequently, in 1998-99, foreign institutional investors were also permitted to invest in treasury-bills. There is no reserve requirements stipulated for, or taxes imposed on, these capital inflows. It also needs to be said that foreign institutional investors are allowed to repatriate the principal, the capital gains, the dividends, the interest and any other receipt from the sale of such financial assets, without any restriction, at the market exchange rate. The income tax rate for dividends on such portfolio investment for foreign institutional investors is 20 per cent, which is much lower than the corporate income tax rate for domestic or foreign firms. But foreign institutional investors are subject to a higher short-term capital gains tax at 30 per cent compared with 20 per cent for domestic investors, while the long-term capital gains tax is the same at 10 per cent. Sales of such financial assets for the purpose of repatriation are absolutely unrestricted, provided the sales are through stock exchanges. However, disinvestment through any other route, or in any other form, requires approval from the Reserve Bank of India.
Global Depositary Receipt:
Global Depositary Receipt A negotiable certificate held in the bank of one country representing a specific number of shares of a stock traded on an exchange of another country. American Depositary Receipts make it easier for individuals to invest in foreign companies, due to the widespread availability of price information, lower transaction costs, and timely dividend distributions. Also called European Depositary Receipt.
The option of portfolio investment was also made available to domestic corporate entities from September 1992. Indian firms were allowed access to international capital markets through global depository receipts or Euro convertible bonds which converted debt into equity after stipulated period. This access, however, was not automatic. Individual applications, drawn up inconformity with the general guidelines of the government, were subject to approval. This process remains unchanged.
Offshore Funds:
An offshore fund is a collective investment scheme domiciled in an Offshore Financial Centre, for example British Virgin Islands, Luxembourg, Cayman Islands or Dublin.
Similar facilities for portfolio investment were subsequently extended to Offshore funds, non-resident Indians (as individuals) and overseas corporate bodies, only for investment in shares or debentures through stock exchanges, on the same terms as foreign institutional investors, but subject to a ceiling of 5 per cent for individual non-resident Indians or overseas corporate bodies in a single Indian firm.
Among the various components of portfolio investment, FII comprises the bulk of portfolio inflows. The main objective of foreign institutional investors is to minimize risk and maximize returns by diversifying their portfolios internationally. Major determinants of investment decisions of FII are country and region specific.
Portfolio flows often referred to as ‘hot- money’ are notoriously volatile capital flows. They have also responsible for spreading financial crisis causing contagion in international market. Evan though, the FIIs have been plying a key role in the financial markets since their entry into this country. The explosive portfolio flow by FII brings with them great advantages as they are engine of growth, lowering cost of capital in many emerging market. This opening up of capital markets in emerging market countries has been perceived as beneficial by some while others are concerned about possible adverse consequences.
Among the most active FIIs are Morgan Stanely Asset Management, jardine Fleming, Capital International, J. Henery schorder, templeton, Warburg Pinkers, Internatioanl Alliance and Quantum fund.
Foreign Institutional Investors in India
India opened her doors to foreign institutional investors in September, 1992. This event represents a landmark event since it resulted in effectively globalizing its financial services industry. Initially, pension funds, mutual finds, investment trusts, Asset Management Companies, nominee companies and incorporated/institutional portfolio managers were permitted to invest directly in the Indian stock markets. Beginning 1996-97, the group was expanded to include registered university funds, endowment, foundations, charitable trusts and charitable. Since then, FII flows which form a part of foreign portfolio investments have been steadily growing in importance in India. Other than in the year 1998, the net flows have been positive. The nuclear tests and East Asian crisis did slow down the flows but as stated by Gordan and Gupta (2003), their effects were short lived. That the percentage of total net turnover of BSE, the share of average of FII sales and purchases increased from 2.6 percent in 1998 to 5.5 percent in 2002. The cumulative net FII investment in India as on August 2003 is approximately 400 million. As of August 2003 net FII investment was 9 percent of the BSE market capitalization which is small compared to the size of the market. However, in the words of Banaji (2002), it is not the market capitalization that matters but what is important is the level of the free float, that is, the shares that are actually publicly available for trading. With floating stock in the Indian market being less than 25 percent, about 35 percent of the free float available has been bagged by FIIs – despite the fact that they invest in just a few highly liquid stocks.
Though India receives hardly 1 percent of the FII investments in emerging markets, the portfolio flows to India have been less volatile when compared with that of many other emerging markets (Gordan and Gupta, 2003). FIIs by adopting a bottom-up approach seem to invest in top-quality, high growth, large cap stocks (Gordan and Gupta, 2003). Sytse et al. (2003) provide empirical evidence that foreign institutional investors in India, invest in large, liquid companies which enable them to exit their positions quickly at relatively lower cost and also that the foreign institutional owners have a larger impact than foreign corporate owners when performance is measured using stock market valuation criterion.
India is one of the fastest growing economies in South Asia, promising a growth of over 9 percent, second only to China, it would not be a surprise to see increased FII flows to India in the future. FIIs are now looking at the economy as a whole, with the macro-economic factors also playing their role in attracting foreign investors. Factors like a strong currency, key reforms in the banking, power and telecommunications sector, increased consumer spending and stable policies are expected to play a major role in attracting FIIs to India. The Securities Exchange Board of India (SEBI) along with the Institute of Chartered Accountants of India (ICAI) jointly monitor the markets and announces the regulatory measures thus making the Indian companies more transparent and more disciplined.
According to the April 2005 report on corporate governance by CLSA Emerging Markets, India ranks fourth with a score of 55.6 percent. Banaji (2000) emphasizes that the capital market reforms like improved market transparency, automation, dematerialization and regulations on reporting and disclosure standards were initiated because of the presence of the FIIs. But FII flows can be considered both as the cause and the effect of capital market reforms. The market reforms were initiated because of the presence of FIIs and this in turn has lead to increased flows.
The Government of India gave preferential treatment to FIIs till 1999-2000 by subjecting their long term capital gains to lower tax rate of 10 percent while the domestic investors had to pay higher long-term capital gains tax. The Indo-Mauritius Double Taxation Avoidance Convention 2000 (DTAC), exempts Mauritius-based entities from paying capital gains tax in India – including tax on income arising from the sale of shares. This gives an incentive for foreign investors to invest in Indian markets taking the Mauritius route. Consequently, we now see investments coming from Mauritius while there were none before 2000.
The country wise distribution of the FIIs registered in India, with majority of them coming from USA and UK. Chakrabarti (2002) and Rao et al. (1999) point out the fact that due to existing inter-linkages, the source of the FII investment might not be the country from where the institution operates. Nevertheless, the figure gives us an idea of the country wise distribution of the FIIs in India. So as to encourage long term investments in the Indian market, Budget 2003 proposed that investors who buy stocks of listed companies from March 1, 2003 be exempt from paying tax on the gains they make on their investments, provided they hold them for more than one year. With so much to benefit from, the FII investment in India is likely to increase in the future.
Regulation on FII
Investment by FII was jointly regulated by Securities and Exchange Board of India (SEBI) through the SEBI (Foreign Institutional Investors) Regulations, 1995 and by the Reserve Bank of India through Regulation 5(2) of the Foreign Exchange Management Act (FEMA), 1999. The promulgation of legislation pertaining to foreign investment by SEBI in 1995 market a watershed for FII flows to India; this led to a significant increase in the level of FII equity inflows in the pre-Asian crisis period. The SEBI FII Regulations and RBI policies are amended and modified from time to time in response to the gradual maturing of the Indian financial market and changes taking place in the global economic scenario.
In order to trade in India equity market, foreign corporation need to register with SEBI as Foreign Institutional Investors. Without registration they can invest, but cases require the approval from RBI. They are generally concentrated in secondary market. FII are allowed to invest in
a) Securities in primary and secondary market including shares, debentures and warrant of companies, unlisted, listed or to be the listed in India.
b) Units of mutual funds
c) Dated government securities
d) Derivative traded in a recognized stock market and
e) Commercial papers
FII can invest their own funds as well as invest on behalf of their over seas clients registered as such with SEBI. These client accounts that the FII manages are known as ‘sub accounts’. FII sub accounts include those foreign corporate, foreign individual, institution funds or portfolio established or incorporated out side India.
FII may issue deal in or hold off share derivative instrument such as participatory notes (PN). The entities that can subscribe to the PN are : a) Any entity incorporated in a jurisdiction that requires filing of constitutional or other documents with a registrar of companies or comparable regulatory agency or body under the applicable companies legislation in that jurisdiction; b) Any entity that is regulated, authorized or supervised by a central bank, such as the Bank of England, or any other similar body provided that the entity must not only be authorized but also be regulated by the aforesaid regulatory bodies; c) Any entity that is regulated, authorized or supervised by a securities or futures commission, such as the Financial Services Authority or other securities or futures authority or commission in any country , state or territory ; d) Any entity that is a member of securities or futures exchanges such as the New York Stock Exchange or other self-regulatory securities or futures authority or commission within any country, state or territory provided that the aforesaid mentioned organizations which are in the nature of self- regulatory organizations are ultimately accountable to the respective securities financial market regulators.
Investment limit
As per the September 1992 policy permitted foreign institutional investment registered FII could individually invest in a maximum of 5% of a company’s issued capital and all FIIs together up to a maximum of 24%. From November 1996 are allowed to make 10 percentage investment in debt securities subject to the specific approval from SEBI as a separate category of FIIs or sub accounts as 100% debt fund investment such investment were of occurs subjected to the fund specific ceiling prescribed by SEBI and had to be within overall ceiling US 1.5 $ . The investment was however, restricted to the debt instrument of companies listed or to be listed on the stock exchanges. In 1997, the aggregate limit on investment by FIIs was allowed to be raised from 24% to 30% by then board of directors of individual companies by passing a resolution in their meeting and by special resolution to that effect in the company’s Board meeting. In June 1998 the 5% individual limit was raised to 10%.In March 2000, the ceiling on aggregate FII portfolio investment increased to 49%.This was subsequently raised to 49%, on March 8 2001, Finance minister announced February 28 2002 that foreign institutional investors can invest in accompany under the portfolio investment rout beyond 24% of the paid up capital of the company with the approval of the general body of the share holders by a special resolution.
Benefits and costs of FII investments
The terms of reference asking the Expert Group to consider how FII inflows can be
encouraged and examine the adequacy of the existing regulatory framework to adequately address the concern for reducing vulnerability to the flow of speculative capital do not include an examination of the desirability of encouraging FII inflows. Yet, for motivating the consideration of the policy options, it is useful to briefly summarize the benefits and costs for India of having FII investment. Given the Group’s mandate of encouraging FII flows, the available arguments that mitigate the costs have also been included under the relevant points.
Benefits
Reduced cost of equity capital
FII inflows augment the sources of funds in the Indian capital markets. In a commonsense way, the impact of FIIs upon the cost of equity capital may be visualized by asking what stock prices would be if there were no FIIs operating in India. FII investment reduces the required rate of return for equity, enhances stock prices, and fosters investment by Indian firms in the country.
Imparting stability to India’s Balance of Payments
For promoting growth in a developing country such as India, there is need to augment domestic investment, over and beyond domestic saving, through capital flows. The excess of domestic investment over domestic savings result in a current account deficit and this deficit is financed by capital flows in the balance of payments. Prior to 1991, debt flows and official development assistance dominated these capital flows. This mechanism of funding the current account deficit is widely believed to have played a role in the emergence of balance of payments difficulties in 1981 and 1991. Portfolio flows in the equity markets, and FDI, as opposed to debt-creating flows, are important as safer and more sustainable mechanisms for funding the current account deficit.
Knowledge flows
The activities of international institutional investors help strengthen Indian finance. FIIs advocate modern ideas in market design, promote innovation, development of sophisticated products such as financial derivatives, enhance competition in financial intermediation, and lead to spillovers of human capital by exposing Indian participants to modern financial techniques, and international best practices and systems.
Strengthening corporate governance
Domestic institutional and individual investors, used as they are to the ongoing practices of Indian corporates, often accept such practices, even when these do not measure up to the international benchmarks of best practices. FIIs, with their vast experience with modern corporate governance practices, are less tolerant of malpractice by corporate managers and owners (dominant shareholder). FII participation in domestic capital markets often lead to vigorous advocacy of sound corporate governance practices, improved efficiency and better shareholder value.
Improvements to market efficiency
A significant presence of FIIs in India can improve market efficiency through two channels. First, when adverse macroeconomic news, such as a bad monsoon, unsettles many domestic investors, it may be easier for a globally diversified portfolio manager to be more dispassionate about India’s prospects, and engage in stabilsing trades. Second, at the level of individual stocks and industries, FIIs may act as a channel through which knowledge and ideas about valuation of a firm or an industry can more rapidly propagate into India. For example, foreign investors were rapidly able to assess the potential of firms like Infosys, which are primarily export-oriented, applying valuation principles that prevailed outside India for software services companies.
Costs
Herding and positive feedback trading
There are concerns that foreign investors are chronically ill-informed about India, and this lack of sound information may generate herding (a large number of FIIs buying or selling together) and positive feedback trading (buying after positive returns, selling after negative returns). These kinds of behavior can exacerbate volatility, and push prices away from fair values. FIIs’ behavior in India, however, so far does not exhibit these patterns. Generally, contrary to ‘herding’, FIIs are seen to be involved in very large buying and selling at the same time. Gordon and Gupta (2003) find evidence against positive-feedback trading with FIIs buying after negative returns and vice versa.
BoP vulnerability
There are concerns that in an extreme event, there can be a massive flight of foreign capital out of India, triggering difficulties in the balance of payments front. India’s experience with FIIs so far, however, suggests that across episodes like the Pokhran blasts, or the 2001stock market scandal, no capital flight has taken place. A billion or more of US dollars of portfolio capital has never left India within the period of one month. When juxtaposed with India’s enormous current account and capital account flows, this suggests that there is little evidence of vulnerability so far.
Possibility of taking over companies
While FIIs are normally seen as pure portfolio investors, without interest in control, portfolio investors can occasionally behave like FDI investors, and seek control of companies that they have a substantial shareholding in. Such outcomes, however, may not be inconsistent with India’s quest for greater FDI. Furthermore, SEBI’s takeover code is in place, and has functioned fairly well, ensuring that all investors benefit equally in the event of a takeover.
Complexities of monetary management
A policymaker trying to design the ideal financial system has three objectives. The policy maker wants continuing national sovereignty in the pursuit of interest rate, inflation and exchange rate objectives; financial markets that are regulated, supervised and cushioned; and the benefits of global capital markets. Unfortunately, these three goals are incompatible. They form the “impossible trinity.” India’s openness to portfolio flows and FDI has effectively made the country’s capital account convertible for foreign institutions and investors. The problems of monetary management in general, and maintaining a tight exchange rate regime, reasonable interest rates and moderate inflation at the same time in particular, have come to the fore in recent times. The problem showed up in terms of very large foreign exchange reserve inflows requiring considerable sterilization operations by the RBI to maintain stable macroeconomic conditions. The Government had to introduce a Market Stabilization Scheme (MSS) from April1, 2004.
With the foreign exchange invested in highly liquid and safe foreign assets with low rates of return, and payment of a higher rate of interest on the treasury bills issued under MSS,
sterilization involves a cost. With a rapid rise in foreign exchange reserves and the need for having an MSS-based sterilization involving costs, questions have been raised about the desirability of encouraging more foreign exchange inflows in general and FII inflows in particular. While there is indeed the issue of timing the policy of encouragement appropriately to avoid the pitfalls of throwing the baby with the bath water, there can not be a turnaround from the avowed policy of gradual liberalization, including the cap ital account. All modern market economies have evolved policies to reconcile prudent monetary management with the benefits of a liberal capital account. There is no scope for any diffidence in India also moving in the same direction.
CONCLUSION
The liberalization policies had the desired expansionary effect and had either increased the mean level of FII inflows and/or the sensitivity of these flows to a change in BSE returns and /or the inertia of these flows. On the other hand, the restrictive measures aimed at achieving greater control over FII flows also did not show any significant negative impact on the net inflows, it had found that these policies mostly render FII investment sensitive to the domestic market returns and raise the inertia of the FII flows.
Foreign institutional investors had emerged as the most dominant investor group in the domestic stock market in India. Particularly, in the companies that constitute the Bombay stock market sensitivity index, their level of control was very high. Data on shareholding pattern showed that the FIIs were currently the most dominant non-promoter shareholder in most of the sensex companies and they also controlled more tradable shares of sensex companies than any other investor groups .The sensex, market capitalization of NSE, Turnover of BSE and NIFTY without market capitalizations were influenced by Foreign Institutional Investors. FIIs investment was not across the shares listed in the stock exchange but instead it was very concentrated on the top few company’s shares. Though there was a role by FII on Indian stock market. It was to be taken very cautiously because their influences were on the very few shares in the stock market, which influenced the indicator included in the study but which might not help the Indian economy to grow
The influence of FIIs on the movement of sensex became apparent after general election in India, during this period sensex experienced its worst single-day decline in its history and in the three month period between April to June 2004, it declined by about 17 percent. Moreover, this study also showed that even sharp changes in sensex did not necessarily indicted a significant alteration of actual shareholding pattern of different investor groups even in sensex companies. The activities of foreign institutional investors in emerging economies following the opening-up of the capital account were not simply positive for these countries but could also exert adverse effects. The reasons were derived from asymmetric distributions of information between local and foreign investors and between fund holders and mangers. Foreign institutional investors could be assumed to have relatively little information on specific developments in emerging markets so that ‘diluted information’ and ‘illusive competition’ could result. Their influence on these markets was likely to worsen the relative position of local investors which leads to ‘unbalanced diversification’. Moreover, due to their incentives they were likely to amplify occurring imbalances or even trigger financial shocks leading to what they call ‘obscure risks’ and ‘booming contagion’. The was long run relationship between net FII investment and sensex, FII investment did not respond the short-run changes or technical-position of the market and they were more driven by fundamentals, and FII investments did granger cause India stock market. The FIIs investments are highly concentrate in terms of their market value in very small number of companies. There seemed to be a clear distinction in the FIIs shareholding in nifty and non-nifty companies. There was a wide gap between the actual investments by FIIs and the investments allowed as per the cap.The gap in their investments existed both in nifty and non-nifty companies
REFERENCES
1 “Parthapratim pal” in 2006, he conducted study on “Foreign Portfolio Investment, Stock market and Economic Development: A case study of India”,
2 “Selen Serisoy Guerin” in 2006, conducted study on “The Role of Geography in Financial and Economic Integration: A comparative Analysis of foreign direct investment, Trade and Portfolio Investment Flows”
3 Keneeth A. Froot and Tarun Ramadorai in 2005, they conducted study on “The information content of international portfolio flows”,
4 A.Julia Priya, D. Lazar and Joseph Jeyapual in 2005, they conducted study on “Role of Foreign Institutional Investors on stock market development in India”,
5 Keneeth A. Froot and Tarun Ramadorai in 2005, they conducted study on “Currency Returns, Intrinsic value, and Institutional-Investor flows”,
6 Megumi Suto and Masashi Toshino in 2005, they conducted a study entitled as “Behavioral Biases of Japanese Institutional Investors: fund management and corporate governance”
7 “Suchismita Bose and Dipankor coondoo” in 2004, they conducted study on “The Impact of FII Regulation in India”,
8 Lakshmi sharma in 2004, he studied, “A Gap Analysis of FIIs Investment-An estimation of FIIs investment Avenues in Indian Equity Market.
9 Parthapratim pal in 2004 conducted study entitled as “Recent volatility in stock markets in India and foreign institutional investors.
10 “Michael Frenkel and Lukas Menkhoff” in 2004, they conducted study on “Are Foreign Institutional Investor Good for Emerging Markets?”,
11 “Brian Bushee” in 2004, he conducted study on “Identifying and attracting the “right” investors: evidence on the behavior of Institutional investors”,
12 “Christophe faugere and Hany A. Shaby in 2003, they analyzed study on “Volatility and Institutional Investor holdings in a declining market: A study of NASDAQ during the year 2000”.
13 Gayathri Devi .R in 2003, she conducted study on “Causal Relationship between FIIs and Stock Market: A critical study”
14 “sandhya Ananthanaryanan, Chandrasekhar krishnamurthi and Nilajan Sen in 2003 conducted study as “Foreign institutional Investors and Security Returns: Evidence from Indian Stock Exchanges”,
15 Stuart L. Gillan and Laura T. Starks in 2003, they conducted study as “corporate Governance, corporate ownership, and the Role of Institutional Investors: A Global perspective”,
16 “Vihang Errunza” in 2001, he conducted study entitled as “foreign portfolio equity investments, financial liberalization and economic development
17 J.S. Pasricha and Umesh.C.Singh in 2001, tried to analyze the impact of FIIs investment on Indian capital market.
18 S.S.S. Kumar in 2001, attempted in his study to find the effect of FIIs on the Indian stock market.
19 “Rajesh chakrabarti” in 2000 conducted study on “FII Flows to India: Nature and Causes”
20 C.H. Rajeswar in 2000, he conducted study entitled “Foreign Institutional Investors – A new force of support and discipline”
21 As per K. Seethapathi and V. Subbulakshmi study entitled “Foreign investment: Need for focus”,
22 Ila Patnik and Deepa Vasudevan in 1998, their study entitled “foreign portfolio investment to India
23 “Rene M. Stulz” in 1999, he analyzed study on “international portfolio flows and security markets”.
24 Yung Chul Park and Chi-Young Song, they conducted study on “Institutional Investors, Trade linkage, Macroeconomic similarities and contagious Thai crisis
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Finance, Credit, Investments – Economical Categories. Modern Interpretation
Scientific works in the theories of finances and credit, according to the specification of the research object, are characterized to be many-sided and many-leveled.
The definition of totality of the economical relations formed in the process of formation, distribution and usage of finances, as money sources is widely spread. For example, in “the general theory of finances” there are two definitions of finances:
1) “…Finances reflect economical relations, formation of the funds of money sources, in the process of distribution and redistribution of national receipts according to the distribution and usage”. This definition is given relatively to the conditions of Capitalism, when cash-commodity relations gain universal character;
2) “Finances represent the formation of centralized ad decentralized money sources, economical relations relatively with the distribution and usage, which serve for fulfillment of the state functions and obligations and also provision of the conditions of the widened further production”. This definition is brought without showing the environment of its action. We share partly such explanation of finances and think expedient to make some specification.
First, finances overcome the bounds of distribution and redistribution service of the national income, though it is a basic foundation of finances. Also, formation and usage of the depreciation fund which is the part of financial domain, belongs not to the distribution and redistribution of the national income (of newly formed value during a year), but to the distribution of already developed value.
This latest first appears to be a part of value of main industrial funds, later it is moved to the cost price of a ready product (that is to the value too) and after its realization, and it is set the depression fund. Its source is taken into account before hand as a depression kind in the consistence of the ready products cost price.
Second, main goal of finances is much wider then “fulfillment of the state functions and obligations and provision of conditions for the widened further production”. Finances exist on the state level and also on the manufactures and branches’ level too, and in such conditions, when the most part of the manufactures are not state.
V. M. Rodionova has a different position about this subject: “real formation of the financial resources begins on the stage of distribution, when the value is realized and concrete economical forms of the realized value are separated from the consistence of the profit”. V. M. Rodionova makes an accent of finances, as distributing relations, when D. S. Moliakov underlines industrial foundation of finances. Though both of them give quite substantiate discussion of finances, as a system of formation, distribution and usage of the funds of money sources, that comes out of the following definition of the finances: “financial cash relations, which forms in the process of distribution and redistribution of the partial value of the national wealth and total social product, is related with the subjects of the economy and formation and usage of the state cash incomes and savings in the widened further production, in the material stimulation of the workers for satisfaction of the society social and other requests”.
In the manuals of the political economy we meet with the following definitions of finances:
“Finances of the socialistic state represent economical (cash) relations, with the help of which, in the way of planned distribution of the incomes and savings the funds of money sources of the state and socialistic manufactures are formed for guaranteeing the growth of the production, rising the material and cultural level of the people and for satisfying other general society requests”.
“The system of creation and usage of necessary funds of cash resources for guarantying socialistic widened further production represent exactly the finances of the socialistic society. And the totality of economical relations arisen between state, manufactures and organizations, branches, regions and separate citizen according to the movement of cash funds make financial relations”.
As we’ve seen, definitions of finances made by financiers and political economists do not differ greatly.
In every discussed position there are:
1) expression of essence and phenomenon in the definition of finances;
2) the definition of finances, as the system of the creation and usage of funds of cash sources on the level of phenomenon.
3) Distribution of finances as social product and the value of national income, definition of the distributions planned character, main goals of the economy and economical relations, for servicing of which it is used.
If refuse the preposition “socialistic” in the definition of finances, we may say, that it still keeps actuality. We meet with such traditional definitions of finances, without an adjective “socialistic”, in the modern economical literature. We may give such an elucidation: “finances represent cash resources of production and usage, also cash relations appeared in the process of distributing values of formed economical product and national wealth for formation and further production of the cash incomes and savings of the economical subjects and state, rewarding of the workers and satisfaction of the social requests”. in this elucidation of finances like D. S. Moliakov and V. M. Rodionov’s definitions, following the traditional inheritance, we meet with the widening of the financial foundation. They concern “distribution and redistribution of the value of created economical product, also the partial distribution of the value of national wealth”. This latest is very actual, relatively to the process of privatization and the transition to privacy and is periodically used in practice in different countries, for example, Great Britain and France.
“Finances – are cash sources, financial resources, their creation and movement, distribution and redistribution, usage, also economical relations, which are conditioned by intercalculations between the economical subjects, movement of cash sources, money circulation and usage”.
“Finances are the system of economical relations, which are connected with firm creation, distribution and usage of financial resources”.We meet with absolutely innovational definitions of finances in Z. Body and R. Merton’s basis manuals. “Finance – it is the science about how the people lead spending `the deficit cash resources and incomes in the definite period of time. The financial decisions are characterized by the expenses and incomes which are 1) separated in time, and 2) as a rule, it is impossible to take them into account beforehand neither by those who get decisions nor any other person”. “Financial theory consists of numbers of the conceptions… which learns systematically the subjects of distribution of the cash resources relatively to the time factor; it also considers quantitative models, with the help of which the estimation, putting into practice and realization of the alternative variants of every financial decisions take place”.
These basic conceptions and quantitative models are used at every level of getting financial decisions, but in the latest definition of finances, we meet with the following doctrine of the financial foundation: main function of the finances is in the satisfaction of the people’s requests; the subjects of economical activities of any kind (firms, also state organs of every level) are directed towards fulfilling this basic function.
For the goals of our monograph, it is important to compare well-known definitions about finances, credit and investment, to decide how and how much it is possible to integrate the finances, investments and credit into the one total part.
Some researcher thing that credit is the consisting part of finances, if it is discussed from the position of essence and category. The other, more numerous group proves, that an economical category of credit exists parallel to the economical category of finances, by which it underlines impossibility of the credit’s existence in the consistence of finances.
N. K. Kuchukova underlined the independence of the category of credit and notes that it is only its “characteristic feature the turned movement of the value, which is not related with transmission of the loan opportunities together with the owners’ rights”.
N. D. Barkovski replies that functioning of money created an economical basis for apportioning finances and credit as an independent category and gave rise to the credit and financial relations. He noticed the Gnoseological roots of science in money and credit, as the science about finances has business with the research of such economical relations, which lean upon cash flow and credit.
Let’s discuss the most spread definitions of credit. in the modern publications credit appeared to be “luckier”, then finances. For example, we meet with the following definition of credit in the finance-economical dictionary: “credit is the loan in the form of cash and commodity with the conditions of returning, usually, by paying percent. Credit represents a form of movement of the loan capital and expresses economical relations between the creditor and borrower”.
This is the traditional definition of credit. In the earlier dictionary of the economy we read: “credit is the system of economical relations, which is formed while the transmission of cash and material means into the temporal usage, as a rule under the conditions of returning and paying percent”.
In the manual of the political economy published under reduction of V. A. Medvedev the following definition is given: “credit, as an economical category, expresses the created relations between the society, labour collective and workers during formation and usage of the loan funds, under the terms of paying present and returning, during transmission of sources for the temporal usage and accumulation”.Credit is discussed in the following way in the earlier education-methodological manuals of political economy: “credit is the system of money relations, which is created in the process of using and mobilization of temporarily free cash means of the state budget, unions, manufactures, organizations and population. Credit has an objective character. It is used for providing widened further production of the state and other needs. Credit differs from finances by the returning character, while financing of manufactures and organizations by the state is fulfilled without this condition”.
We meet with the following definition if “the course of economy”: “credit is an economical category, which represents relations, while the separate industrial organizations or persons transmit money means to each-other for temporal usage under the conditions of returning. Creation of credit is conditioned by a historical process of fulfilling the economical and money relations, the form of which is the money relation”.
Following scientists give slightly different definitions of credit:
“Credit – is a loan in the form of money or commodity, which is given to the borrower by a creditor under the conditions of returning and paying the percentage rate by the borrower”.
Credit is giving the temporally free money sources or commodity as a debt for the defined terms by the price of fixed percentage. Thus, a credit is the loan in the form of money or commodity. In the process of this loan’s movement, a definite relations are formed between a creditor (the loan is given by a juridical of physical person, who gives certain cash as a debt) and the debtor.
Combining every definition named above, we come to an idea, that credit is giving money capital of commodity as a debt, for certain terms and material provision under the price of firm percentage rate. It expresses definite economical relations between the participants of the process of capital formation. Necessity of the credit relations is conditioned, from one side, by gathering solid quantity of temporarily free money sources, and from the second side, existence of requests of them.
Though, at the same time we must distinguish two resembling concepts: loan and credit. Loan is characterized by:
· Here, the discussion may touch upon transmission of money and also things form one side (loaner) to another (borrower): a)under the owning of the borrower and, at the same time, b) under the conditions of returning same amount or same quantity and quality of the things;
· The loaning of money may bear no interest;
· Any person may take part in it.
With the difference with loan, credit, which is somehow a private occasion of the loan, represents:
· One side (loaner) gives to the second one (borrower) only money, and _ for temporal usage;
· It may not bear no interest (if the assignment doesn’t foresee something);
· In it creditor is not any person, but a credit organization (at the first place, banks).
So, a credit is the bank credit. To our mind, it is not correct to use “credit” and “loan” as the synonyms.
Banking crediting is the union of relations between bank (as a creditor) and its borrower. These relations touch upon:
a) Giving a certain amount of money to the borrower for definite purpose (though, we meet with the so-called free credits, aims and objects of crediting are not appointed in the assignment);
b) Its opportune returning;
c) Getting percentage rate from the borrower for using the sources under his/her disposal.
The essential foundation of the credit essence and its important element is existence of trust between the two sides (in Latin “credo”, from which comes the word “credit”, means “trust”).
From the position of circulation of money forms (in the abstraction, historical process of formation economical relations and social budget and banking systems expressed by them) comparing different definitions of finances and credit, the paradox conclusion appears: credit is the private occasion of finances. And truly, from the position of movement of the money forms, finances represent the process of formation and usage of the funds of cash means. Very often such movements are fulfilled without returning, but sometimes, it is possible to give loans from the budget for the investment projects of other needs. Also, when a manufacture or corporations use their cash funds and we mean the finances of industrial subject, such usage may be realized as inside the manufacture or corporation (there is no subject about returning or not returning of the usage), so gratis under conditions of returning. This latest is called commercial form because of transmitting the sources to others, but even in this occasion, it is the element of financial system of the manufacture and corporation.
From the point of cash means movement, main character of credit is the process of formation and usage of the funds of cash means under the conditions of returning and, as a rule, taking the value-percentage. If gating the credit value doesn’t take place (even in the exceptional occasions), according to the movement form, credit becomes a private occasion of finances, as from the net financial funds (consequently from the state budget) the loans which bear no interests may be used. If gating credit value takes place, by the appearance form, credit is discussed to be financial modification.
From the historical point of view, finances (especially in the sort of the state budget) and credit (beginning with usury, later commercial and banking) were developing differently for considering credit to be the part of finances. Though, from the genetic-historical point of view, previous loaners, before giving loan, needed gathering the permanent capital not returning, that is the net financial foundation. The banks analogously needed concentration of the important own capital for influxing the consumers’ means and for getting higher percentage rate under the conditions of returning. Herewith, exactly on the financial basis, in the sort of financial fund (which later partially becomes loan fund) part of the bank capital appears to be the reservation (insurance) part of the fund, which by nature is financial and not loan. So notwithstanding the essential distinctions between finances and credit form the genetic-historical point of view, credit appears to be formed from finances and represent their modification.
From the essential position of expressing economical relations of finances and credit, we meet with cardinal distinctions between these two categories. Which mostly expressed by the distinction of the movement forms notwithstanding they are returnable or not. Finances express relations in the aspects of distribution and redistribution of social product and part of the national wealth. Credit expresses distribution of the appropriate value only in the section of percentage given for loan, while according to the loan itself, a only a temporal distribution of money sources takes place.
Herewith, there is a lot of common between the finances and credit as from the essential point of view, so according to the form of movement. At the same time, there is a significant distinction between finances and credit as in the essence, so in the form too. According to this, there must be a kind of generally economical category, which will consider finances and credit as a total unity, and in the bounds of this category itself, the separation of the specific essence of the finances and credit would take place.
Funding of the cash means is common to the researched economical categories. It takes place in any separate system of finances and credit, which have been touched upon during the analyses of defining finances and credit. Word combination “funding of the cash sources (fund formation)” reflects and defines exactly essence and form of economical category of more general character, those of finances and credit categories. Though in the in economical texts and practice, it is very uncomfortable to use a termini, which consists of three words. Also, “unloading” with an information hardens greatly its influxing into the circulation even in the conditions of its strict substantiation and thoroughness.
In the discussing context we consider:
1) wide and narrow understanding of economical category of the finances;
2) discussing finances in narrow understanding under general traditional meaning;
3) discussing finances, as funding of the cash means, in wide understanding, which concerns finances – in narrow meaning and credit – in complete meaning.
Termini “funding” and its equivalent “fund formation” are used by us as the purposeful structuring of cash means, which is based on two poles – accumulation of money sources (gathering) and its usage for definite purpose in the way of financing and crediting.
We have established a new termini – “finance-investment sphere” (FIS). Analyses about interrelation of finances and credit made by us give us an opportunity of proving, that in the given termini, the word “financial” is used with the meaning of funding cash sources, its purposeful structuring. In this process we consider at the same time financial, credit and investments’ economical categories.
Let’s sum up middle results of discussing new concept – “finance-investment sphere” and discuss its investment consisting parts.
The concept “investments” was brought into the native economical science from the West. In the Soviet economical science they for a long time used in the place “investments” the termini “capital placement”, which expressed the usage of the industrial factors in the sphere of real industrial activities during realization of capital projects. From one glance, this termini in its concept is identical to the “investments”, consequently it is possible to use them as synonyms. Though the termini “investments” and “investing” have the advantage towards the termini “capital placement” from linguistic and philological points of view, because they are expressed with one word. This is not only economical and comfortable in the process of working with the termini “investment” itself, but also it gives an opportunity of termini formation. More concretely: “investment process”, “investment domain”, “finance-investment sphere” – all these termini are much more acceptable.
Changing native economical termini with foreign ones is purposeful, if it really matters (by keeping parallel usage of the native termini for the inheritance). Though we must not change native economical termini into foreign ones all together, when by ordinal traditional language easy to explain private and narrow concrete processes and elements get their own termini. The “movement” of these termini is approved in the narrow professional bounds, but their “spitting out” into the economical science may turn economical language into the tangled slang.
Let’s discuss termini – “investment” and “capital placement’s” usage in the economical literature.
Investments are placement of funds into the main and circulation capital for the purpose of getting profit. “Investments in material assets – are the placements of funds into the mobile and real estate (land, buildings, furniture and so on). Investments in financial assets are the placements of funds into the securities bank accounts and other financial instruments”.
We don’t meet with the termini “investments” in the earlier economical dictionary, but we meet the combined termini “investment policy” – the union of the industrial decisions, which guarantee main directions of the capital investments, the activities of their concentration in the determinant suburbs, on which the reaching of planned rates of development of the society production is depended, balancing and effectiveness, getting more and more production and profit of the national income for every lost Ruble”. For today, in the most actual definitions, the capital investments are bounded only by financial means, when not only financial, but also the investment of natural, material-technical and informational resources takes place. Labour resources take an actual place in the investment process. They themselves fulfill this or that investment process.
A positive side of the discussed definitions is that they connect investment policy and capital placements (investments):
- economical development according to the key directions to the concentration;
- providing high rates of economical growth;
- raising an economical effectiveness, which is expressed:
a) by growing the throw off of the production and national income for every lost Ruble;
b) by fulfilling the branch structure of the investments;
c) by improving their technological structure;
d) by optimization of their further production structure.
Compared with such definition of the investments (capital placement) the definition of investments in the dictionary attaching the “Economics” seems to be unimproved: “investments – the expenses of gathering production and industrial means and increasing material reserve”. In this definition current expenses (production expenses) are mixed with the investment (capital) expense. Also, not the investment expenses but (though the investments are followed by the appropriate expenses) exactly advancing. It differs from the expenses by that the means (means) are put by returning the advanced values, also, under the conditions of growth, to which the concept-advanced capital is corresponding. the advancing may be realized in the money, natural-material and informational forms.
Except the termini “investments”, there are two more termini related with the investment. They are shown below.
“Human capital investment” – any activity provided for rising the workers labour productivity (in the way of growing their qualification and developing their abilities); at the expenses of improving the workers’ education, health and raising the mobility of the working forces”. It is very useful to use the mentioned termini, though it needs one correction: the human capital investments do not concern only workers, but also the servants, representatives of every kind of labour.
“Investment commodity, capital goods – a capital.”
In the official manuals of political economy of the reformation time the capital investments are discussed as “expenses for creating new main funds and widening, reconstruction and renewing the active ones”. In this definition the investments (capital placements) during separation of the forms (types) of further production of the main funds are bounded only by main funds (without increases of the circulation funds and insurance reserves): a) creating new ones; b) widening; c) reconstruction; d) renewing. Also, the concept of the industrial gathering appears, at the expenses of widening of basic, circulation funds and also insurance reserves takes place”.
You’ll meet below the definitions of investments from “the course of economy”: the investments are called “placements of fund into the basic capital (basic means of production), reserves, also other economical objects and processes, which request long-termed influxing of material and cash means. “According to the division of capital into physical and money forms, the investments too must be divided into material and cash investments”.
They apportion investment commodity, to which belong industrial and nonindustrial building objects, vehicles purposed for changing or widened technical park and the furniture, increasing reserves and others.
“They call the total investments of production an investment product, which is directed towards keeping and increasing the basic capital (basic means) and reserve. Total investments consist of two parts. One of them is called the depreciation; it represents important investment resources for compensation of renewal till the level of before industrial usage, wearing out and repairing of the basic means. Second consisting part of the total investments is represented by net investments – capital investments for the purpose of increasing basic means”. Depreciation is not a compensation resource of wearing the basic funds out, but it is the purposeful financial source of such resources.
Human capital investment is “a specific kind of investments, mostly in education and health protection”.
“Real investments are the investments in the economical branches and also, they are kinds of economical activities, which provide influxing the increases of real capital, that is increasing material values of the industrial means”. We can agree with such definition with one specification that material and nonmaterial values too belong to the real capital (wealth), consequently science-researching experimental-construction results, various information, education of he workers and others. Such service as organization of the excitable games, also the service of redistribution social wealth from one private person to another (except charity).
“Financial investments represent placement of funds into the shares, obligations, promissory notes, other securities and instruments. Such investments, of course, do not give increases of the real material capital, but they help getting profit, consequently at the expenses of changing the course of the securities in the time of speculation, or distinguishing the course in different places of sell and purchasing”. We share wholly such definition, hence it follows that financial investments (if it is not followed by real investments as a result) do not increase real material wealth and real nonmaterial wealth. According to this context, the expression below is very important: “we must distinguish financial investments, which represent placement of the funds in the ways of selling and purchasing the securities for the purpose of getting profit and financial investments, which become cash and real, moved to real physical capital.”
In the “economical course” quoted before long and short-termed investments are separated. Recognizing the existence of the bounds between them, the authors ascribe short-termed investments to “one month or more” investments. If we get such conditioned criteria, that we can call the investments which overcome the terms of some months, long-termed ones, which is very doubtful and we don’t agree with it. A long-termed character of the fund placement is a significant feature of the investments (short-term doesn’t combine with the concept of investments). Principally, it would be better to point out quick compensative, middle termed compensative and long-termed compensative investments:
- less then 6 months – quick compensative;
- from 6 months up to the year and a half – middle termed compensative;
- more then the year and a half – long termed compensative.
We stopped at the definition of the investments in the capital work “economical course” for the special purpose, as, in it the author tried to discuss the concept of investments systemically and quite completely, herewith the book is published just now.
We’ll return to the discussion the definition economical category of “investments” in different publications in the following chapter. The definitions given here are quite enough for having a notion of the level of lighting up the given category in the economical literature.
What conclusions may be made according the definition of the mentioned economical category in the published works, except the made notions and specifications?
There is quite deeply, concretely and thoroughly defined the concept of “investments”, different definitions in the economical literature; but mostly in every works about the investments discussed by us until now, there is not opened the essence of investments as an economical category. In every monograph, even if it has a title investment, as an economical category, there is given only the definition, concept of investments. But, as the Academician Vasil Chantladze explains, “a concept is a discussion, which proves something about the distinguishing feature of the researched object. A concept out of much essential characteristic features represents only one, and essential in it is only – definition”.
But the categories are much wider; it is “a key, the most fundamental concept of every science”. Economical categories theoretically represent real, objectively existed productive relations. A category is the defining of occasions of existed characters, connections, relations of the objective world. Generally, any educational process is fulfilled by the categories, which give opportunities for dividing the processes and occasions semantically, for expressing the definitions of a subject and realize their specific peculiarities and economical relations of a material world.
Our goal is exactly to substantiate investments – as an economical category and also, as a financial category in the narrow understanding.
Here we apply for another manual thesis made by the academician Vasil Chantladze: “every financial relation is an economical one and every financial category is and economical one, but not every economical relation and economical category is financial relation and financial category”.
In the process of defining the investments, it is important to take in mind the sides of resources, expenses and incomes, because investment, from one side, is the result of the manufacture’s activity, and, from another one, – a part of income, which, in this case, is not used for usage.
Another occasion: it is advisable to discuss investments in two aspects: as a category of reserve and flow, which will reflect exactly the connection between “placement of funds” and “investments”.
As we’ve mentioned above, not long ago, in the well-known Soviet literature the concepts of “the placement of funds” and “investments” were accepted to be the synonyms and concerned to be investment of sources for further production of the main funds and formation of the turnover funds. We meet with such understanding of the concept of “investment” (here, they separate three types of the investment expenses: investments in the basic capital of investments, investments in the house building and investments in the reserves) in the modern economical publications and it is mostly used on the macro level during a statistical analyze of economical processes. In this concrete occasion investment is the category of reserve.
According to the aspect of flow the investments may be discussed in the process of analyzing industrial activity, when it is necessary to learn the variety of the economical relations related with the investments’ further production and formation, sources, objects and subjects, that is on the micro level.
Main distinguishing criteria of different methods of approach towards the concept of “investment” the aspect of prolonging of measuring this showing. Is it possible or not to measure the investment showing separate from the term factor (the norm of gathering, the volume of capital property, the reserves of production and so on). If it is possible, then it is the category of reserve, and if it is not, then it is measured in the section of time and belongs to the category of flow.
Thus, investment, as an economical category, is quite consuming concept. It concerns the elements defining the regularities of function and regulation of the investment domain, privately:
First, resources and values put into the industrial activity. Here, investments may be realized in the following ways:
1. mobile and real estates (buildings, constructions, furniture and other material values);
2. cash sources, purposeful bank accounts, credits, shares and other long-termed securities;
3. owners rights according to the author’s rights, licenses, Now-How, experience and other intellectual values;
4. the rights for using land and other natural resources, also other owners rights.
Notwithstanding any forms, investments are results of capital gathering. Leading investments – regularity of gathering defines its volume and dynamics and, generally, whole investment activity.
Second, the incomes ruling volume and dynamics of the resource investment. Herewith, we must underline the circumstance, that the process of getting profit, the regularity of its creation, isn’t a constant of the concept “investment”. The factors of production (also the conditions of exploitation of capital values) and selling (market conjuncture), also the process of capital gathering is the leading and important condition only for the investment formation. Though, we underline again, that the process of getting and distributing the income is a significant component of the investment activity.
The transformation of investments makes the basis for the investment activity, which concern the following circles: resources – investment (expense) – capital property – income. The practice of realization such circles of the investments transformation is exactly the investment activity (investing). The investment activity, except the investments itself, concern motivation and stimulation of the capital gathering, relations of capital gathering and ruling, also, totality of the defined level of profitability on the capital and the goals of capital growth.
According to the mentioned above, in the definitions of the investment as economical category sometimes the needed exactness and clearness is not felt, some categories of the wealth are represented tightly enough. For example, real prosperity is bounded only by material estimation. This leads us to the unvalued investment resources in the era of transformation industrial society into the investment one; also to the recognition of yet uninvolved valuable scientific researches in the production, securities turned into speculation objects, and unreal property in the consistence of one and the same parts; to there equalization. On the basis of the made analyses, we can cite a wide definition of the investments together with the leading categories.
Investment resources – are values, invested into this or that project in this or that kind for the purpose of getting profit beginning with material ones, finished with cash.
Kinds of the prosperity are equal to the kinds of the investment resources and is divided into real and cash, consequently into financial resources.
Real investment resources concern all kinds:
- natural resources;
- labour resources;
- material resources, the usage of which is possible in the economical development (buildings, constructions, vehicles and furniture, transport and communication means and so on;
- investment resources (in the widest understanding, that is from scientific-research and experimental-construction works, till the education potential of the society and till all kinds of gathering useful information, written about every possible, that is typing and electronic bearer).
Cash, consequently financial resources concern every cash means for usage in this way in definite conditions or directed in the sort of investments.
Cash means (resources) turn into the financial resources in the case of structuring of funds of purposeful destination foreseen for investments of this or that kind.
After defining investment resources we can make wide definition of the investments as economical category.
Investments – are the placements of real, financial and intellectual resources into the projects, the fulfillment of which leads us to getting the increases from real wealth, in the material and informational forms. It is followed by a cash (financial) prosperity or its increases (at the expenses of the distribution of the cash means).
As an economical category, investments express economical relations, which are created in the ways of using and formation of the investment resources between the participants of the investment process for the purpose of improving and widening of the enterprise.
Resources of financing investments for elevation of the role of commercial and investment banks
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Again about investment financing of the banks. As practice shows, long-termed financing of programs doesn’t take place spontaneously, but it means analyzing and control of current activities of the enterprises. For satisfaction of such requests, unfortunately, not every enterprise appeared to be ready. There, where all these requests are satisfied, banks become active participants in processing plans of strategy and financial provision of investment activities of the enterprises.
A special attention is required by such direction of the activities of commercial banks, as project financing is, which, to our mind, requires administration and financial support from the government, we mean the condition, that for effective salvation of investment problems it is necessary to create finance-industrial groups, and holding unions, which, in its turn, represents initial form of forming thick financial capital at the market and confluence of bank capital to the industrial one.1 This will give rise to the growth of investment volume in the economy and growth of effectiveness of capital investments. Of course, creation of such unions will be actually supported by commercial banks, but this is interrupted by such condition, that groups created today provide this activity in unregistered form and nobody is interested in their registration. This is supported by incomplete logistic, slow development rates of the institute of private property, interruptions in realization of agrarian reforms, provision of accounting calculations of financial structures in incomplete form and existence of separate statements working opposite to the creation of holding unions in the low about industry. All mentioned above may be solved immediately, by processing special low about investment activity and on the basis of its setting by the parliament in a short period of time.
It must be mentioned, that there are enough conditions for widening financial investments in the economy from the bank side because of the existence of free cash means. It is important, that these financial resources were influxed and to create a system of rational organization of purposeful usage, which must be expressed by processing of the investment policy. Here an important meaning belongs to the investment policy and correct definition of tactics.
What problems are there in front of the banks? It is also to be mentioned, that commercial banks have numbers of problems while realization of their investment activities, which prevent their normal functioning. We mean the banks, working on financing investment projects, in fact, represent only one unit in the system of private institutions. We consider following to be preventing conditions of their activities:
· Existence of marketing center of the investment projects, a coordinating organ in the country scale, which would play a function of regulator in the financial provision of the investment projecting;
· Unacceptability o the information about position of a potential borrower or investment institution;
· Refusal of creation of deposit web;
· Low level of development of the investment funds existed today;
· Absence of state investment bank, total specific organ of financing investment activity and, consequently, spontaneous distribution of the functions of investment banks working abroad under the conditions of market economics among Georgian commercial banks.
It must be also mentioned, that there are many economical factors, which may influence negatively upon realization of investment processed by the banks and nobody can define beforehand nontransiency of expected risk danger of these factors. Herewith, widening of working sphere in the investment activity of commercial banks objectively requires: giving more independence and rights to the commercial banks, growth of effectiveness of long-term investments and growth of incomes, relatively with those received from short-term financial operations, fastening of this process, ll kinds of supports from the side of the government and finally, further statement of trustfulness and firmness of the activities of banking system.
About necessities of providing structure institutional reforms in the country. For guaranteeing firmness of banking activities structure-institutional reforms, min goal of which is preparation for new stage of development of banking field, come to the first place. Necessity of the mentioned reforms is conditioned by the position of financial market of the country. New institutions, as mentioned in the works of D. Nort – the laureate of Nobel Premium, are formed in the case when the society sees the possibility of making profit, which is impossible during active institutional system. Maximal investment activities of banks are possible during many-fielded system o a financial market. This is a result of logical development of competition, as it solves problems of optimal usage of financial resources. Exactly this many-fielded character reduces and stops crisis in the country.
Many-fielded character of the banking system is characteristic to the most part of developed countries (the USA, countries of western Europe, Japan) and also for the countries having transitional economics, which applied for firm economical growth in the last decimal (China, Poland, Brazil and others). Exactly this many fielded banking system gives possibilities for using various types and forms of financial service in economics by credit department.
In this system the state creates various mechanisms of artificial reduction of competition among financial organizations. An evident example of this is separation of credit institutions into commercial and investment-credit institutions in the USA, also reduction of the bans of countries in the sphere of realization of many year credit investments and separation of state bank into separate category.
About development of small-scale business in Georgia. Creation of advantage regime for small-scaled business, in the first place, regulates creation of competition able outer conditions of the investment activity, which must be definitely foreseen in the activities of the country’s banking system. It must also be mentioned, that according to the development and improvement of the economy in the future, perhaps, such activities may not be needed, but under the conditions of transitive economics their importance may not be specially noticed. It is natural, that many-fielded financial sector is formed only under the equal conditions of competition, as there is reason-resulted, reverse-influencing relation. Mentioned relation between many-fielded financial sector and competition is expressed by that it helps creation of advantage regime for the investment activity being in the position of an embryo and its further development.
Briefly about state regulation of the investment process. According to the many-fielded principle of the financial market, the state must work out such a system of regulating investment activity, which guarantees “peaceful” coexistence of various financial institutions notwithstanding their size and specialization. Banks of every category must “act” in their marketing “sphere”, while regulation of banks of different levels from the state is stated according to the rules of regulation. Privately, to our mind, it is important to point out and regulate activity spheres of those banks, which use a capital of governmental organs. Under the conditions of many-fielded system of a financial market competition carries “fair” character and this is why such system is much firmer. Privately, in case of many-fielded system, under the conditions of concrete fight, while financing concrete state programs by forming a system of specialized state banks usage of state resources is possible more effectively. In this case objective usage of lobbing of state resources from the side of commercial banks is not allowed. For example, in Germany realization of state projects of ecological, agrarian, building and other fields are provided by specialized commercial banks. There are specialized credits in the banking system of other developed countries (Japan, Italy, France and so on) too. Such practice significantly reduces danger of incorrect usage of state resources under the conditions of competition fight.
One of the most important factors, which degrade effective development of real sector of the economy, is the irrelevance of the needed financial capital for the regional services. Basic volume of financial resources from the enterprises is accumulated in the center. Such situation is in a way justified for the state, but it is absolutely insoluble in relation with the private companies.
According to the various estimations, regional banks control not more, than 20-30% of inflow of financial resources of the regional enterprise, and this seriously degrades development of the local banks and enterprises. Thus, for solving problems about lack of resources for crediting real sector of a small economics of regional banks, question related with it, must be discussed in relation with outflow of financial resources from the region. Solving of these problems by administrative activities is impossible, processing of appropriate economical activities is needed. We mean the condition, that together with the growth of the share of local budgetary tax income, it is important to define responsibilities of the budgets of municipal creations in the development of regional economics. Thus, financial federalism is that necessary condition, which guarantees, from one side, formation of balanced market of financial service, and, from nother, further development of the investment activities on the basis of appropriate legislative base.
What does a financial federalism bring to the financial market? Creation of equal conditions for the competition under the conditions of financial federalism will naturally lead us to the formation of many-fielded system of the financial market. Such process also gives rise to the creation of thick financial centers on the basis of the existed and newly formed banks. Thus, development of regional banks within the bounds of the conception of banking industry development, gives rise to the growth of financial potential o regional economics. At the modern stage conditions of development of bank branch sphere are being widened more and more. Today banks mostly provide sources of basic financial capital inflow in the way of “region-center”, after transition to the real federalism many-fielded banks transform into the banks providing sources for financial capital outflow among the regions.
It also must be mentioned, that it is important to grow the importance of banking business, which must be expressed by forming town and country credit relations, mutual crediting and insurance societies, and loan-constructing associations. All these must be foreseen in Georgia in the process of banking system development and, accordingly, an adequate logistic must be prepared for advantage conditions for development of small and middle banking businesses, because formation of effective financial system in the regional scale is absolutely impossible. Therewith, if we take into account the fact, that the investment portfolio in the structure of joint assets of Georgian commercial banks did not overcome 1% for the first of January of 1999, and 4% for the first of January of 2005, this speaks for the tendencies of growing portfolio investments.
Attraction of foreign investments. Globalization and internationalization of the world’s industrial relations gives rise to the growth of the role of foreign investments, as financing investment activities.
Essence and types of foreign investments. Foreign investments are hose capital resources, which are taken out of one country and invest abroad in this or that industrial activity, for the purpose of making industrial profit or receiving percents. Foreign investments may be realized in various forms. While analyzing this form we can use distinguished methods of approach for classification of the investments, which men their separation from each-other according to the objects, purposes, terms of investments, forms of property on the investment resources, risks and other signs. Herewith, the necessity of specific of foreign investments defines statement of number of classification features for the investments of this type.
For example, foreign investments may be state, private and combined according to the property forms on the investment resources.
State investments are those resources of state budget, which are directed abroad by decision of the government or inter governmental organizations. These resources may have the face of state resources, credits, grants ot support.
Private (nongovernmental) investments are resources of private investors placed into those objects, which are placed out of the bounds of given country.
They call combined investments joint placement abroad of the resources of the private investors and the government.
According to the character of usage, foreign investments may be industrial and loan.
Industrial investments are direct or indirect ones placed into the business of this or that type for taking some rights for making profit of dividend kind. Loan investments are related with the distribution of resources under the loan condition, for the purpose of receiving percent.
While analyzing foreign investments, apportioning of straight, portfolio and other investments is of a great importance. Movement of foreign investments according to the international currency funds and methodology of the countries’ taxation balances are reflected in this section.
Briefly about legislative situation of the foreign investments in Georgia. As shown in the chapters above, “investments” conceptually express long-term placement of the capital of solid quantity for the purpose of making profit. According to the Georgian low “about support and guarantees of the investment activities” investment is considered to be the valuable of every property and intellectual kind or the right, which is invested for the purpose of making possible profit and is used in the industrial activities provided on the Georgian territory. It may lean upon as inner (inside country), so outer (foreign) sources.
Here a great attention is paid to the investment surrounding (climate), which means real conditions existed in the country for the investments. It defines intensive attraction or declining foreign capital for the long-term investments. I.e. according to the concrete condition, investment surrounding may be as advantage, so in advantage, which is foreseen by every investor before making concrete step. Fundamental analyzing of the investment climate existed in the country and foreseeing risk factors are the basic goal f every investor.
Thus, it is definitely difficult to say, is present situation in Georgia good or bad. It would be more correct if we say that there are as advantage (stimulating), so preventing conditions in the country.
Foreign investments in Georgia are prevented by constitution, by the low “about support and guarantees of the investment activities” and by two-side agreement about investment encouragement and protection. Today Georgia has signed agreements with more then 23 countries about mutual support and protection and with 111 countries – about avoiding two-side taxation.
Legislative foundations and guarantees of their protection of realization of local and foreign investments in Georgia are defined by the low about guarantees and support of the investment activities, according to which foreign and local investors use equal rights. Privately, while realization of investment and industrial activities rights and guarantees of the foreign investors must not be less then those of the local juridical and physical persons.
According to the same low, physical and juridical person, also international organization, which provide investments in Georgia are considered to be the subject of the investment activity.
It must be mentioned, that after paying taxation and compulsory payments, a foreign investor gains right for unreduced repatriation abroad of the profit received from investments and other cash resources, and this may reduced only on the basis of the low – according to the court decision in case of bankrupting, crime or not fulfillment of civil obligations. Herewith, foreign investor has right to take abroad the property being under his/her property.
Georgian low “about supporting and guarantees of the investment activity”. Positive and negative sides. Georgian low “about supporting and guarantees of the investment activity” foresees as preventing and reductions in the sphere of providing investments, also the guarantee of protecting them, which means untouchable character of the investments and compensation in case of taking away investments within the bounds of the mentioned low. The compensation, which is given to the investor in case of taking investments off him/her, must conform to the real market value of the taken investments for that moment, when the taken off takes place. The compensation must be granted without any hamper and it must concern that loss of the investor from the moment of taking off till paying of the compensation mount.
It must be mentioned, that a new legislative act, which somehow worsens conditions of investments stated by this low, isn’t spread on already realized investments, ten years after its setting. In such case the investor realizes his/her activity according to the actual low until the new one is put down to the action.
A quarrel between foreign investor and state organ, if the method of its decision is not defined by dual agreement, is solved at Georgian court or in the international center of the investment quarrel. In the case, if the quarrel is not discussed in the international center of investment quarrel, the foreign investors have right to apply for the additional institute of the center or any other international arbitrageur organ, which is founded according to the rules set by the arbitrageur and international agreements of the commission of international trade low of the United Nations. Arbitrageur court of international trade palate in Georgia functions from December 11, in 2000.
According to the statistical showing, the most attractive sectors for the foreign investors were production of oil and gas, energetic, telecommunications and food industry according to the statistic showings during last years. Among largest investors there are such companies as Frontera Resources Corporation (USA), which has invested more then 30 million US dollars into Georgian oil production; Metromedia international – 40 million US dollars of investments in telecommunication; Pernod Ricard (France) – with the investments in alcohol production; AES (USA) – investments in distribution and generation of electro power.
By comparing showings we learn, that according to the hydro energetic potential, Georgia significantly overcomes such countries rich in the so-called “White Coal”, as France, Italy, Spain, Sweden, Romania and others. Though practically, less then 15% of real possibilities are used, and this gives large perspectives to the foreign investments in Georgia.
The fact is to be mentioned, that the foreign companies are interested in the process of privatization of state property, which is one of the most important part of the realized economical reform in Georgia. The fact, that foreign capital is invested in more then 100 Georgian companies proves this.
For influxing foreign capital into Georgia a positive surrounding is created by the existence of advantage conditions for development of such reduced fields, as oil production, black and colored metallurgy, separate kinds of mechanical engineering, mountain chemical industry, bottling of fresh and mineral water, production of building and decorating materials, tea, wine, fruit, citrus, wool, tobacco, industry of their refining and others.
Though foreign companies provide capital investments into these fields, for example, in agrarian and food industries, but it is provided in a very little quantity.
Factors of disadvantage surrounding in Georgia. Among those factors, which give rise to the disadvantage climate for influxing foreign investments in Georgia following are to be mentioned:
· Political strain and not quite seldom facts of lobbing business with unacceptable methods by the representatives of executive and legislative government, this takes away the basis of healthy competition as in common, so among the investors;
· Violation of the territorial integrity of the country, ethno conflicts, Not controlling of Abkhazia and South Alania (Smachablo), difficulties with protecting state boards, which spreads widely the door to contraband and prevents growth of risk factors of influxing of as native, so foreign investments;
· From the beginning of 90s of last year, analogue to the countries of post soviet space, sharp economical, financial, energetic, food, ecological and other crises developed in Georgia for not ordinal conditions, gave rise to the backwardness of our country’s economy for some decimals. It would be enough to say, that a level of whole European product consisted only 36.8% in 1999, compared with 1991. This was the lowest showing in whole post Soviet space. Such destroying of economical functioning, evidently, reduces requests on foreign investments and significantly restricted their influxing;
For the purpose of statement of the level of spreading negative occasions mentioned above and processing appropriate recommendations World Bank and European bank of reconstruction and development provided joint research, where they learned 22 countries having transitional economics. According to these researches they made a conclusion, that a showing of “state obedience” (of corrupting, taking into hands) in these countries consists average 21%. It must be mentioned, that same showing consists 24% in Georgia. What about average level of administrative corruption, it reaches up to 3%, while in Georgia – 4.3%.Iit is natural, that created situation fears foreign investors and prevents influxing of their capital in a large quantity in our countries.
According to the experience of last years, giving state guarantees to the foreign investments is more difficult. Though, if it were easy to achieve, it would not be enough for the foundation, as Georgian state doesn’t stand on the firm positions, for making n investor sure in stability of the country. For comparing let’s discuss investment surrounding of Czech Republic, privately, that part, according to which investment logistic of the country foresees from April 1998 such scheme of advantages, which concerns taxation, custom and those of definite regions, also, grants for creation working places and so on . According to the mentioned analyze following is cleared out, that equal priorities in using advantages are given as to the foreign investors, so to the local ones. At the same time, if we pay attention to the showing of inflow of straight foreign investments into Czech Republic by years, we’ll see, that after the quantity of straight foreign investments had been reduced in 1997 (1300 billion USD) relatively to 1996 (1428 billion USD), in 1998 it was doubled and consisted 2720 billion USD, and in 1999 equaled to 5108 billion USD. One of the stimulating factors of the mentioned progress must be considered involving a system of advantages activated in Czech Republic from 1998.
Unfortunately, there is not a firm system of foreign investments and insurance yet in Georgia, which would significantly help the process of making investment surrounding healthy and inflow of a large amount of investments from abroad.
Factors preventing development of the country economy – significantly wide scales of shadow economics and corruption, so-called distribution of influence spheres by clans, setting of a barrier in this or that spheres of business especially prevent, from one side, development of local business and, from another – influxing of large-scale international investments.
How to use international legislative norms in the Georgian investment activities. Thus, a lot of problems (complex of problems) are formed in the process of attracting and using of foreign investments, and they are regulated by legislative norms.
Whole logistic regulating foreign investments may be grouped in the following way:
1. special norms;
2. total civil norms;
3. norms of international agreement.
To special logistic in the first place belong special logistic and its following acts of quite large quantity.
Civil logistic regulates and conditions relations of foreign capital and enterprises participating with numerous counteragents. We mean various kinds of agreements, questions of representation, researching questions and so on. Thus, civil logistic is used in the case, when regulation of the activities of foreign investors is not provided with the special one, for its tight direction.
Norms of international agreements is the part of the country’s legislative system. International agreement gains special importance during international economical relations. Activation of the mentioned norm is basically spread on attracting and usage of foreign investments; following legislative acts belong to this sphere:
1. International dual agreement of mutual protection and encouragement of the investments. Dual agreements of foreign investments are discussed in this sphere as additional guarantees of the norms foreseen in national lows. Capital exporting countries and their investors consider that protection of foreign investment is more effectively solved in the way of inter-protection and encouragement of investments.
2. International two-sided agreement for avoiding double taxation. Such agreement usually defines sources of income – profit and property, which is taxed in the country without any reduction. It is being set, which incomes (profit) and property may be taxed in the country – with some reductions and what source of incomes may be set free from taxations;
3. Many-sided conventions. From those international conventions, which regulate relations related with the investments, two are important – Seoul Convention about stating many-sided agencies of protecting investment guaranties (1985) and Washington Convention about solving quarrels (1965).
Involving of many-sided system of investment guarantees was outrun by creation and development of state system of insuring capital export in the developed countries.
Before making decision about placement of sources by the foreign investor, one of the important conditions is – guarantees of security and protection of capital investments in that country, where investments are inflown, the state takes obligations – to guarantee protecting of foreign property, guarantee of rights and interests of the foreign investor, guarantee privacy of realization of investment activity of the country territory. Thus, under the conditions of strict competition, state forms as much liberal regime for foreign investors as possible.
What difficulties are there in Georgia from the point of attracting foreign investments? Difficulties of definite kind are expressed today in the developing countries and, accordingly, in Georgia in the affair of attracting foreign capital and its effective usage. We my name following reasons for this:
· Regulation of the activities of foreign investors is getting difficult with the absence of stabile legislative base;
· Worsening of material position of the most part of the country population gives rise o the growth of social tension;
· There still are criminal and corruption in some sectors of industrial activities;
· Inappropriate level of infrastructure development; also of transport, communications, system of telecommunication, hotel services, roads and so on;
· High level of unsteadiness of total politics, privately, instability of logistic and court system;
· Absence of joint state investment policy in the business of attracting foreign investments;
Herewith, notwithstanding the difficulties named above, the country owns great potential, what may be the subject for interesting foreign investors. Privately:
· Rich and comparatively cheap resort and tourist resources;
· A large inner undeveloped market;
· Richest reserves of mineral and curing waters;
· Comparatively cheap qualified labor force;
· Quite high staff of marketing development, which can master new technologies of production successfully and fast;
· Absence of serious competition by Georgian producers;
· Current process of privatization and possibilities of foreign investors in it;
· Possibility for making high profit very fast.
Thus, we can make a conclusion that, compared with the countries of Western Europe, notwithstanding large economical backwardness, Georgia can develop total investment activity comparatively faster, with the help of correct and effective usage of native and foreign investments.
Lamara Qoqiauri
Real member of the Academy of Economical Sciences of Georgia and New-York Academy of Science, Doctor of Economics, Professor
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