Diversification (Finance) and its benefits

Diversification is the most important technique available to investors. It helps you avoid losing all of your money in financial crisis. Diversification is allocating your investing capital to different asset classes with the goal to reduce your total risk. 

 

But question arises as to why to invest in variety of assets when some may perform poorly.  Why not invest only in assets with greater returns.  The simple answer is that investment returns depend on variety of future events, which nobody can reliably predict.

Diversification can help reduce the risk associated with these future events.

Making diversification effective can take more than simply spreading out your money in more than one asset. The real benefits of your diversification strategy can be fully achieved by owning uncorrelated multiple asset classes which behave differently under different economic conditions.

For example, having a portfolio of 30 oil and gas stocks isn’t diversification. Even owning stocks and bonds may not be sufficiently diversified. Investing in variety of unrelated industries is real diversification.   

Different assets are exposed to different types of risks. If one asset perform badly there are good chances that other assets would perform well and would nullify the impact of bad-performing asset.

Investors should distribute their investments in assets with varying degree of liquidity, risk, and potential of earning. If you are investing in financial markets, you may diversify by investing in real assets like gold or real estate. Financial markets also offer avenues for diversification. Bond market often moves in opposing direction to that of equity. Investing in bonds can save you during period of falling share prices.

Although no amount of diversification can save you from complete disaster but it provides your assets with considerable protection against random events.

   

How Sugar industry can help ease Pakistan's energy crisis

Taking too much sugar may be bad for your health, but not for your country. Sugar industry can help ease the energy crisis faced by Pakistan for more than a decade.

The energy shortage is growing with ever increasing population and rising domestic consumption.  The production gap can be met by mobilizing sugar mills to produce electricity. The bagasse produced by sugar mills can be used to produce thermal energy for onsite use as well as production of electricity.

In many countries of the world sugar mills are earning more from selling electricity than they earn from selling sugar. Sugar industry is second largest, with 89 mills; agro based industry of Pakistan after textile and therefore offers tremendous potential to fill the energy gap.

A sugar mill crushing 2000 tons cane can produce 9 MW of electricity after meeting its own requirement. The total estimated power potential of Pakistan’s sugar industry is 2000MW. The cost of producing electricity is very low as the fuel (bagasse) is available at no cost. The raw material need not to be transported so considerable savings can be made on transportation head. Transportation losses can also be reduced as bagasse power plants are decentralized. Moreover, there is zero carbon dioxide emission as bagasse is a biomass. During combustion biomass re-releases carbon dioxide into the air.

Most of the sugar mills in Pakistan use bagasse to heat inefficient boilers of 26bar. The Indian sugar industry is using 50bar boilers, which uses half as much bagasse as used by 26bar boiler to produce the same megawatts of energy.

The high pressure boiler (80-100bar) available in Pakistan cost from 700 million rupees to 1 billion rupees. The high investment involves make it unfeasible for using these boilers only for 120 days, the cane crushing season. For the rest part of the year sugar industry wants to utilize coal and other biomass fuels like rice bran, corn cobs.

One more Asian billionaire every other day: UBS study finds

According to a study by UBS and PwC a billionaire in Asia is created every other day. Total billionaires in Asia are 637 as compared to 563 in U.S. The study further says that a 17% surge in billionaire wealth is supported by new billionaires born in Asia as well as an uptick in growth in materials, industrial, financial and technology sectors.

The total billionaire wealth has increased from USD 5.1 trillion to USD 6 trillion in 2016.

Billionaires from United States owns 2.8 trillion USD, an increase of .4 trillion dollars. Combined wealth of Asian billionaires grew from 1.5 trillion dollars to 2 trillion USD. Combined total wealth of 342 European billionaires was 1.3 trillion USD.

The study also mentioned that if the current trend continued, it is likely that Asian billionaires would overtake U.S. billionaires in wealth in four years. The surge in billionaires’ population in Asia can be attributed to growth in China and India, which have 318 and 100 billionaires respectively.

The report further points to increasing role of networks in raising capital outside financial markets which is no surprise, given the increasing role of Asian businesses which feels comfortable going to family rather than capital markets for funds.

Europe, the report says, in 2016 was the story of multigenerational wealth preservation. The number of billionaires in Europe was 342, by the end of the year.

The business controlled by these billionaire employees 27.7 million people, which is roughly the size of U.K. workforce.

Provident funds and Gratuity funds

According to Pakistani law provident fund and gratuity funds are two distinct things.  Provident funds are paid to regular employees and gratuity payments are made to contract employees. Gratuity is a tip for good services and therefore its payment is contingent on successful completion of contract. Employees who are removed on disciplinary basis are not entitled to gratuity payments.

Permanent employees are to be paid provident fund at the end of service irrespective of quality of their services. Hence, removal of permanent employee from employment on disciplinary basis doesn’t disqualify him/her for receiving provident fund.

How these funds work

Employer makes regular payment to these funds and these funds are then invested in variety of securities. The returns generated on these funds are reinvested and generally paid to employees at the end of their term.

Employers register these funds as trusts and appoint the trustee who oversee and invest these funds for the ultimate benefit of beneficiaries.

Tax treatment

These funds are exempt from taxes provided they are registered. Any unregistered fund is to be taxed at reduced rate.

Where these funds are invested

These funds are invested in variety of securities. Generally Govt. securities are preferred for the investment as these are secure and there is smaller risk of default. A small portion of fund can also be invested in equity to generate increased return. The problem faced by the managers of the fund is to strike a balance between return and risk.

Federal Govt provident fund

Federal Govt maintains provident fund for its employees. Finance Ministry has notified new rates for minimum subscription to GP fund. Employees in grade 1 has to pay at least 3% of their average salaries in the fund. From BPS 2 to BPS 11 employees has to subscribe atleasat 5% of their mean salaries into the fund whereas BPS 12 and above will have to contribute on minimum 8% of their mean salaries to the fund.

Govt. pays 11.30 % per annum mark up on the fund to civilian employees serving under ministries other than defense and railway ministry.

Challenges for provident funds/gratuity funds

These funds must earn huge returns to pay off the accruing liabilities. This present a challenge to fund manager (trustee), who has to invest these funds in venues where returns outweigh the risk. With one wrong decision, the fund manager risks millions of workers’ hard earned money. To find a right balance between risk and reward a manager employees the services of financial analysts. These professionals make sure that workers’ hard earned money doesn’t wipe away in market crashes.