Flame Newsletter - January 04, 2012

Who goeth a borrowing goeth a sorrowing. - Thomas Tusser
Debt is the amount borrowed by a person, company or government to fulfill certain personal or financial activities. Credit cards, loans, government treasuries etc. are all forms of debt. While availing debt may be required to fulfill certain needs at times, it is best to limit one’s exposure to debt. Debt is sensitive to interest rate fluctuations in the economy. In a rising interest rate scenario, personal, home, auto loans etc become very expensive. One must avail a loan he is comfortable with paying back without squeezing his resources. Defaulting on loan payments can erode a spotless credit history.
Overburdening oneself with the debt and its repayment may not be the best option. One must only take that much credit as he is able to pay back. The easy availability is not worth the sleepless nights that may follow trying to repay loans.
Investing in debt instruments such as bond issued by the government and companies could work well for an investor if balanced well with his portfolio. These instruments are low on risk and provide low but fixed returns.
The U.S. national debt on January 1, 1791 was just $75 mn. Today, the U.S. national debt rises by that amount about once an hour.

The housing crisis in the US triggered the collapse of Lehman Brothers in 2008 which sparked off the recession. Now, when there are signs of improvement from the US, it is the euro zone debt crisis that has held world markets to ransom.

In a nutshell, the European debt crisis started in late 2009 when fears emerged of governments of various nations in the euro zone defaulting on their debt. This may have happened due to easy credit conditions during the 2002-2008 period that encouraged high-risk lending and borrowing, international trade imbalances, weak economic growth post the 2008 crisis etc. When lenders expect a nation to default on its debt, they may demand a high interest rate in compensation for the risk of default. When a country’s debt yield rises above 6%, it indicates that markets suspect a default by that country. That is the reason why we have seen yields on bonds of troubled countries such as German, Italy and Portugal in double digit figures. The governments of European nations have approved rescue packages for the countries plagued by debt but the issue is far from being resolved.
While economies the world over are grappling with debt, let us, on an individual basis, understand the repercussions of taking excess debt and defaulting on it. What if you too are caught in a situation where you are unable to pay your loans or require some additional time to do so? Read on to find out what one should do to rise from debt to life.

Drowning in debt? Here’s your way out
The current situation in the Indian equity markets is uncertain to say the least. Not only are we grappling with global concerns such as the debt crisis in Europe, but are also fighting our own demons of low growth, stubborn inflation, a weakening rupee and political showdowns. At such a time, how can one know if a spike in the market is the start of a bull run or just a short term relief rally? The best option is to exercise caution.
Control your investment optimism
Every investment expert agrees that the one thing that affects our investment strategies is our heart. An investor is always advised to invest with his head and not with his heart, but that does not stop him from making decisions with excessive optimism. A positive mind set is important but one must not get carried away. There are many reasons why overconfidence may fail us with an investment. The investment world is full of scams and risks. An attractive looking plan can turn out to be nothing but a trap. Also, a market meltdown can ruin our plans.
1. Too much optimism
Optimism and confidence are two very important qualities in life. One should believe in himself and always hope for the best. Problems arise when we overestimate our abilities and get disappointed when we cannot live up to those expectations. Overconfident people think they are always right and are more intelligent than those around them. Over optimism is tricky and dangerous as it makes one take unwanted risks. “Nothing can go wrong with me,” is a thought that has brought many from riches to rags. An overconfident person assumes that he can invest any amount of money anywhere and make handsome returns. It is akin to thinking that one can jump off a building and expect to grow wings and fly himself to safety.
2. Over optimism in investments
The biggest concern with over optimism is the belief that one is infallible and can never fall into any trap or miscalculate an investment plan. One may assume that he understands the market extremely well and can predict the future. However, even experts cannot always predict future risks and one may often ignore the signs of imminent financial turmoil.
3. Getting over it
Only thorough research and calculations can beat over optimism in investments. One has to study the market, its history, outlook and possibilities very well. He should take all the risks involved into account and then take his investment decisions.  He must keep in mind the amount of money he is investing and should calculate the expected returns on them. It is always better to stay on the conservative side when it comes to calculating returns as one should factor in market risks, corrections and the like. 
It’s the start of a brand new year alive with hopes and the optimism of a better economic and investment environment after a disturbing 2011. As a New Year gift of sorts to the Indian markets, the Government has approved Qualified Foreign Investors (QFIs) to directly invest in the Indian equity market. The move is aimed at widening the class of investors, attract more foreign funds, and reduce market volatility and to deepen the Indian capital market.
Govt allows QFIs to directly invest in equity market
So, you are saving a component of your salary and also keeping some aside to invest. But do you know for sure if this would secure your future? Find out the future worth of your savings using this calculator.
 Worth of your savings


FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India's spectacular growth story.
In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation's economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL's FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.
Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity
This portal is but one of the various IIFL initiatives that would be part of FLAME.

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