The options for investing savings are continually increasing, yet every investment vehicle can generally be

categorized according to three fundamental characteristics: safety, income and growth.

Those options also correspond to types of investor objectives. While an investor may have more than one of
these objectives, the success of one comes at the expense of others. Let's examine these three types of
objectives, the investments that are used to achieve them and the ways in which investors can incorporate them
into a strategy.
Safety
There is truth to the axiom that there is no such thing as a completely safe and secure investment. Yet, we can
get close to ultimate safety for our investment funds through the purchase of government-issued securities in
stable economic systems, or through the purchase of the corporate bonds issued by large, stable companies.
Such securities are arguably the best means of preserving principal while receiving a specified rate of return.
The safest investments are usually found in the money market. In order of increasing risk, these securities
include: Treasury bills (T-bills), certificates of deposit (CD), commercial paper or bankers' acceptance slips, or
in the fixed-income (bond) market, in the form of municipal and other government bonds and corporate bonds.
As they increase in risk, these securities also increase in potential yield.
There's an enormous range of relative risk within the bond market. At one end are government and high-grade
corporate bonds, which are considered some of the safest investments around. At the other end are junk bonds,
which have a lower investment grade and may have more risk than some of the more speculative stocks. In
other words, corporate bonds are not always safe, although most instruments from the money market can be
considered very safe.
Income
The safest investments are also the ones that are likely to have the lowest rate of income return or yield.
Investors must inevitably sacrifice a degree of safety if they want to increase their yields. As yield increases,
safety generally goes down, and vice versa.
In order to increase their rate of investment return and take on risk above that of money market instruments or
government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment
ratings. Investment grade bonds rated at A or AA are slightly riskier than AAA bonds, but generally also offer a
higher income return than AAA bonds. Similarly, BBB-rated bonds can be thought to carry medium risk, but
they offer less potential income than junk bonds, which offer the highest potential bond yields available but at
the highest possible risk. Junk bonds are the most likely to default.
Most investors, even the most conservative-minded ones, want some level of income generation in their
portfolios, even if it's just to keep up with the economy's rate of inflation. But maximizing income return can be
an overarching principle for a portfolio, especially for individuals who require a fixed sum from their portfolio
every month. A retired person who requires a certain amount of money every month is well served by holding
reasonably safe assets that provide funds over and above other income-generating assets, such as pension plans.
Growth of Capital
This discussion has thus far been concerned only with safety and yield as investing objectives, and has not
considered the potential of other assets to provide a rate of return from an increase in value, often referred to as
a capital gain.
Capital gains are entirely different from yield in that they are only realized when the security is sold for a price
that is higher than the price at which it was originally purchased. Selling at a lower price is referred to as a
capital loss. Therefore, investors seeking capital gains are likely not those who need a fixed, ongoing source of
investment returns from their portfolio, but rather those who seek the possibility of longer-term growth.
Growth of capital is most closely associated with the purchase of common stock, particularly growth securities,
which offer low yields but considerable opportunity for increase in value. For this reason, common stock
generally ranks among the most speculative of investments as their return depends on what will happen in an
unpredictable future. Blue-chip stocks can potentially offer the best of all worlds by possessing reasonable
safety, modest income and potential for growth in capital generated by long-term increases in corporate
revenues and earnings as the company matures. Common stock is rarely able to provide the safety and income-
generation of government bonds.
It is also important to note that capital gains offer potential tax advantages by virtue of their lower tax rate in
most jurisdictions. Funds that are garnered through common stock offerings, for example, are often geared
toward the growth plans of small companies, a process that is extremely important for the growth of the overall
economy. In order to encourage investments in these areas, governments choose to tax capital gains at a lower
rate than income. Such systems serve to encourage entrepreneurship and the founding of new businesses that
help the economy grow.
Secondary Objectives
Tax Minimization: An investor may pursue certain investments in order to adopt tax minimization as part of his
or her investment strategy. A highly paid executive, for example, may want to seek investments with favorable
tax treatment in order to lessen his or her overall income tax burden. Making contributions to an IRA or other
tax-sheltered retirement plan, such as a 401(k), can be an effective tax minimization strategy.
Marketability/Liquidity: Many of the investments we have discussed are reasonably illiquid, which means they
cannot be immediately sold and easily converted into cash. Achieving a degree of liquidity, however, requires
the sacrifice of a certain level of income or potential for capital gains.
Common stock is often considered the most liquid of investments, since it can usually be sold within a day or
two of making the decision to sell. Bonds can also be fairly marketable, but some bonds are highly illiquid, or
non-tradable, possessing a fixed term. Similarly, money market instruments may only be redeemable at the
precise date at which the fixed term ends. If an investor seeks liquidity, money market assets and non-tradable
bonds aren't likely to be held in his or her portfolio.
The Bottom Line
Again, the advantages of one investment often comes at the expense of the benefits of another. If an investor
desires growth, for instance, he or she must often sacrifice some income and safety. Therefore, most portfolios
will be guided by one pre-eminent objective, with all other potential objectives carrying less weight in the
overall scheme.
Choosing a single strategic objective and assigning weightings to all other possible objectives is a process that
depends on such factors as the investor's temperament, his or her stage of life, marital status or family situation.
Each investor can determine an appropriate mix of investment opportunities. But you need to spend the
appropriate amount of time and effort in finding, studying and deciding on the opportunities that match your
objectives.
How does total capital investment influence economic growth?
An economy grows in only a few specific ways. People might find new or better resources, as with the
discovery of oil wells in the 1850s. More people (or more productive people) might enter the workforce.
Technology might be improved, as with the advent of the internet. The most important, consistent and
controllable way to grow an economy is through improved capital goods structure and growing capital stock,
which is where capital investment comes in.
Explaining Capital Investment
Capital investment is the spending of saved money on capital goods. Capital goods include assets such as
factories, machines, computers, vehicles, tools and other productive equipment.
Capital goods are not the same as financial capital or human capital. Financial capital includes the funds
necessary to sustain and grow a business (debt and equity), and human capital represents actual human labor. It
takes financial capital to invest in capital goods, and it takes human capital to design, build and operate capital
goods.
Capital Investment, Capital Goods and Economic Growth
Improved capital goods increase labor productivity. A simple example of this can be seen when a lumberjack
upgrades from a standard axe to a chainsaw. Superior capital equipment directly makes individuals, businesses
and countries more productive and efficient. Increased efficiency leads to economic growth. A business does
not see an immediate increase in revenue when it develops capital goods. To make it economically viable to
increase or improve the capital structure, a company must have a pool of saved funds to draw upon. This pool of
funds needs to last until the new capital goods lead to additional revenue.
Increased capital investment allows for more research and development in the capital structure. This expanding
capital structure raises the productive efficiency of labor. As labor becomes more efficient, more goods are
produced (higher gross domestic product) and the economy grows.
Investment and women
Have you ever wondered how a simple housewife, from any strata of society, can manage her household in
whatever budget she has? Why do banks and microfinance institutions lend money to the woman in the
household? Simple, women have inherently been better money managers on a small scale. Yet, many women,
including working women, seem comfortable leaving their long-term finances and retirement planning to their
fathers or husbands. On the occasion of Women’s Day, it will be worthwhile to take a look at simple measures
that women could take to plan their finances for a secure future.
The first and most important step is to understand her financial needs and develop a suitable plan. For this, a
good start would be to calculate the inflows and expenditure and the level of savings possible. As many
personal finance managers recommend, she must keep emergency funds in the form of ready cash to the tune of
3-4 times her monthly salary/ allowance. When this level is achieved, she can then take the next step towards
financial planning.
The second step is to identify financial goals for her family. Goals, typically, include retirement savings, higher
education of children, provision for her daughter’s/ son’s wedding, old-age care for her parents and in-laws etc.
While these are worthy goals, it is extremely important to correctly estimate the sum needed for their fulfillment
with the time frame in mind. Also, any likely liabilities should be identified and accounted for, as this affects
the quantum of investment substantially. For eg: repayment of a housing loan.
The next step is to evaluate possible investment options so as to meet liabilities and financial goals. It is
imperative that a woman educate herself about money management and investing. Various investment options
such as mutual funds, bank fixed deposits, national savings certificates, pension plans, real estate etc. could be
considered. Women usually do not consider insurance, both life and health, as priority. However, with rising
medical costs and growing incidence of lifestyle related illnesses, it just makes sense to invest in an insurance
plan that covers such contingencies, apart from the usual projected living costs, education expenses and
retirement benefits.
Retirement planning has become important in the last two decades. The joint family structure has disintegrated,
nuclear families have become a norm and parents cannot realistically expect their children to bear their financial
liability during their retirement years anymore. Hence, it’s critical for every woman to plan for retirement, the
earlier the better. She wouldn’t want to spend her golden years worrying about meeting even her basic needs,
right?
Of course, at different life stages, it is advisable that a woman reviews her goals, her investments and the
adequacy of her insurance cover and jiggles her investments accordingly. It is extremely necessary that her
contact details, nomination details etc. be totally updated, at all times. Utmost care should be taken to ensure
that all documents should be clear in every respect, especially real estate ownership deeds, so that there is no
ambiguity at the stage of realization of the investments.
In case financial planning seems too overwhelming, it is recommended that she find an experienced financial
planner who can help her visualize and plan for her long-term financial goals. In the long run, a woman should
not let the fear of losing money or the fear of failure stop her from investing. After all, the financial wellbeing
of her entire family rests in her hands and she is the best money manager in the household.
There has been a dramatic social change in India and across the world with respect to life of women over the
last two decades. With this transformation being under way, urban women, especially, often are required to
juggle between their career and household responsibilities. Women are also increasingly playing a larger role in
making important family decisions, thanks to the improved education, healthcare, increased exposure through
media and internet and change in family structure.

Why women need to play an active role in investment decisions

Many a time, we come across views that women are temperamentally more patient and prudent when it comes
to managing household finances as compared to men. Various studies have shown women to be better at
multitasking than men. While these can be debated, it is broadly accepted that men and women don't think alike.
This is actually a great situation for decision making, including investment decisions.
Consider this: In a family in which all decisions are taken by the man, there are high chances that they could be
more emotions-driven and biased as compared to relatively high level of objectivity that could be achieved
when two brains are involved.
Even in case of investments, the concept of efficient portfolio theory states that a mix of an uncorrelated assets
lead to a more stable return. Low correlation in assets makes them behave differently during a given period of
time. For instance, the performance of equities and debt has relatively lower correlation and a portfolio with a
mix of equities and debt is likely to be more stable than a 100 per cent equity portfolio. Similarly, a decision
making process that involves two differently thinking people is likely to produce superior results over a period
of time. Since investment decisions can have ramifications spanning over decades or generations, it is highly
important for both the spouses to understand and agree upon choices to be made.
Another reason why women need to be active in financial decisions in a family is to be prepared in the advent
of any contingency like death of/separation from the spouse. It is highly important for a woman to be aware of
these possibilities and the financial implications thereof. For starters, we have outlined a few aspects in relation
to saving for the future.
Importance of asset allocation—a balanced diet
Just as women are experts in providing a balanced diet to their family members, a parallel can be drawn here
with reference to investments too. This brings up one of the most important aspects of investments —to allocate
savings into different “options available” or “asset classes”. The idea of asset allocation is simple that it is a
process of spreading one’s investments into different asset classes like equities, debt, gold, real estate, etc for
long-term wealth creation, while managing the risks as much as possible.
Broadly, one can classify various asset classes according to three factors—expected returns, risks involved and
liquidity or the ease with which one can exit the investment. Generally speaking, returns and risks go hand in
hand. In other words, higher the risks, greater will be the chances of earning higher returns. For instance,
equities or stocks can be risky in the short term, while they have the potential to deliver higher returns than most
asset classes in the long run. In contrast, debt investments do not undergo volatility like equities, but the return
potential is limited. Hence, one needs to optimise the risk and returns by taking into consideration the risk
tolerance, time horizon and most importantly, the financial goals. Risk tolerance is primarily a function of the
age of the investor. The younger you are, higher is your risk taking capability due to the fact that there is more
time left till you retire and can better recover from any short term financial mishaps.
Return expectations from various asset classes are also different. For instance, an investment of Rs 1 lakh for 30
years would grow to over Rs 10 lakh at 8 per cent compounding, which is approximately the returns expected
from risk free investments, like a bank FD. On the other hand, at 15 per cent compounding, the investment of
Rs 1 lakh would grow to a staggering amount of over Rs 66 lakh in 30 years. If you look at the historical returns
of equities, the S&P BSE SENSEX has compounded at nearly 14 per cent over the past 30 years. Hence, the
expected returns out of equities are higher as compared to that of debt investments.
Hire an investment expert—your trusted partner
We often take advise from the most trusted professional, whether a doctor, a lawyer, a CA, etc. Investment
planning is a serious subject and one should not take things in her own hands. While the valued advice of an
investment expert comes at a cost, it is often negligible when compared to the potential benefits and the costly
investment mistakes one may make. As investments encompasses making the asset allocation decisions,
evaluating various investment options available, assess the impact of taxes, taking care of emergency fund
requirements and closely follow macro-economic developments that may impact the portfolio, it would be wise
to engage with an investment professional. Moreover, an investment adviser would help an investor stay firm on
course tiding over short-term market ups and downs and not bowing down or giving in emotions while making
investment decisions.
Rationalise large spending vs saving for future
There is often a debate in families with regard to the priority of expenses. Children want to have fun and spend
whereas the parents want to save for the future. What we need to successfully achieve is a harmony between the
two. How should one go about saving money?
First, a family needs to have financial goals in mind and both husband and wife need to be on the same page
regarding that. For instance, the priorities need to be spelt out as to where to spend and where not, when it
comes to aspirational needs. An example of disconnect between the spouses in terms of aspirational needs could
be the wife thinking of a foreign vacation and the husband dreaming of a buying a car ahead of receiving yearly
bonus. One needs to rationalise between such spending vs saving for the future. Lack of clarity as to aspirational
needs and financial goals is a recipe for disaster.
Invest with a goal
Having a goal associated while making an investment brings in an inherent discipline to stay invested for a long
time and not giving in to the temptation of overspending. In the Indian context, two major goal-oriented themes
that have emerged over the years in the mutual fund industry have been savings towards retirement needs and
children’s education/marriage expenses. Most people underestimate the need to save towards retirement saying
it is a distant event that one can prepare for later. One needs to remember that retirement is inevitable and at
some point when the income stops, it important to be financially prepared for the same. Similarly, the rising
cost of education is known to all, and it is important to build a separate corpus towards one’s children’s needs as
they grow up.
It is important to start early and invest regularly towards the stated financial goals. Systematic investment plans
offered by mutual funds are a great way to save in a disciplined fashion as a particular amount of money gets
debited from the bank account automatically and gets invested.
To conclude, all we need to drive is the fact that you are an important member in the family. You should not
stay happy confined to television soaps, kitty-parties and rearing up children. You need to participate in all
financial decisions. This is good for your own self-esteem as well as the way your family would respect you for
your contribution.
—The author is senior vice president & head—products & marketing, HDFC Asset Management
What does negative working capital mean?
Negative working capital is common in some industries such as grocery retail and the restaurant business. For a
grocery store, customers pay upfront, inventory moves relatively quickly but suppliers often give 30 days (or
more) credit. This means that the company receives cash from customers before it needs the cash to pay
suppliers. Negative working capital is a sign of efficiency in businesses with low inventory and accounts
receivable. In other industries, negative working capital may signal a company is facing financial trouble.
In this answer to this interview question, it’s important to consider the company’s normal working capital cycle.
What is a Working Capital Cycle?
The Working Capital Cycle for a business is the length of time it takes to convert net working capital (current
assets less current liabilities) all into cash. Businesses typically try to manage this cycle by selling inventory
quickly, collecting revenue from customers quickly, and paying bills slowly, to optimize cash flow.
Working Capital Cycle
Steps in the Working Capital Cycle
For most companies, the working capital cycle works as follows:
The company purchases, on credit, materials to manufacture a product (for example, they have 90 days to pay
for the raw materials).
The company sells its inventory in 85 days, on average (days payable outstanding)
The company receives payment from customers for the products sold in 20 days, on average.
In the first step of the process, the company get the materials it needs to produce inventory but doesn’t initially
have any cash expense (purchased on credit under accounts payable). In 90 days’ time, it will have to pay for
those materials. Eighty-five (85) days after buying the materials, the finished goods are sold, but the company
doesn’t receive cash for them initially (sold on credit under accounts receivable). Twenty (20) days after selling
the goods, the company receives cash, and the working capital cycle is complete.
Working Capital Cycle Formula
Based on the above steps, we can see that the working capital cycle formula is:
WCC Formula
Working Capital Cycle Sample Calculation
Now that we know the steps in the cycle and the formula, let’s calculate an example based on the above
information.
Inventory days = 85
Receivable days = 20
Payable days = 90
Working Capital Cycle = 85 + 20 – 90 = 15
This means the company is only out of pocket of cash for 15 days before receiving full payment.

Positive vs Negative Working Capital Cycle

In the above example, we saw a business with a positive, or normal, cycle of working capital. Sometimes,
however, businesses enjoy a negative working capital cycle where they collect money faster than they pay off
bills.
Sticking with the above example, imagine now that the company decides to become a “cash only” business with
its customers. By only accepting cash (no credit cards or payment terms), its accounts receivable days become
0.
Let’s use the same formula again and calculate their new cycle time.
Inventory days = 85
Receivable days = 0
Payable days = 90
Working Capital Cycle = 85 + 0 – 90 = –5
Now, this means the company receives payment from customers 5 days before it has to pay its suppliers.
Financing Growth and Working Capital
Businesses with normal/positive cycles often require financing to cover the period of time before they receive
payment from customers and clients. The is especially true for rapidly growing companies, and hence the idea
that it’s possible to “grow the company out of money.”
To solve this problem, companies often arrange to have financing provided by a bank or other financial
institution. Banks will often lend money against inventory and will also finance accounts receivable.
For example, if a bank believes the company is capable of liquidating its inventory at 70 cents on the dollar, it
may decide to provide for 50% of the cost of the inventory (to give the bank a buffer in case the inventory has
to be liquidated). Additionally, if a company sells products to businesses that have high creditworthiness, the
bank may finance those receivables (also called “factoring”) by providing early payment.
By combining one or both of the above two banking solutions, a company can reduce the capital required to
finance their operations.