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What is a Sinking Fund?

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What is a Sinking Fund?

Origins of the “Sinking Fund”

A Sinking Fund is a strategy that has not gained much importance even in the present scenario of global downfalls of many economies. It is a distinct fund[i] which a company sets aside to pay off the bonds at maturity. The name sinking fund is the English version of Fondo d’ammortamento, a term used in the Indian Peninsula since the 15th century. By the 18th century, this term was used by Great Britain for funds generated for paying national debts.

By the middle of the 19th century, the United States started using this term specifically to fund pools to retire corporate and public debts from bond issues. So, the primary use of the sinking fund is that the amount owed to bondholders at maturity is reduced considerably less, and thus the investors can be ensured some protection if the company goes bankrupt. This provision of a sinking fund makes the bond more attractive, and therefore the firms can reduce the interest rates of the obligation. As a result, the credibility of the company is increased significantly, which leads to positive credit ratings for its debt.

Advantages of Sinking Funds 

  • Brings in Investors

Nowadays, people are aware that investing in companies which have a large number of debts is very risky. However, if there is a proper functioning sinking fund, they may find a certain level of security that their money is in safe hands.

  • Low-Interest Payments

A company can use the sinking fund to retire a bond issue one portion at a time. For example, a sinking fund for a ten-year bond may repurchase 10 percent of the relationships each year, thereby reducing the interest payments[ii]by a good percentage. The investors appreciate this lower interest commitment as it reduces potential risk.

  • Higher Bond Prices

When the credit risk of the bond gets reduced, the market interest rates may get reduced, thereby increasing the bond prices favorably. Thus, the company takes charge, and the call feature of the sinking fund provision helps out. The callable function allows the companies to buy back the bonds at face value.

  • Buying New Equipment Without Bank’s Assistance

A company may also create a sinking fund for future ventures or expenses like purchasing new machinery. Thus, keeping a part of the company’s profit into a separate account can enable them to focus on these issues without any hassle.

How Do Sinking Funds Work?

Anybody might think that a sinking fund seems like a savings account and nothing else, but what they might not know that it has an absolute power attached to it. Suppose a firm ABC has issued 100 bond certificates at $1000 per 5 bonds at 5% interest payments every year for the next ten years.

  • They will not be worried about the interest payments because it will be $5,000 per year. Instead, they will worry about the principal amount.
  • So, the company ABC decides to create a sinking fund provision of $5,000 every year, and it also decides to buy back the bonds every year at face value.
  • Therefore, at the time of maturity, the firm would be able to buy back $50,000 worth of bond certificates, and the principal amount would be $100,000-$50,000= $50,000

Sinking Fund Example in Current Scenario 

Arunachal Pradesh Government (India) had created a consolidated sinking fund in the year 1999-2000 to make advance strategies to cope with unforeseen emergencies. The government has invested a total sum of Rs. 169.90 crore so far[iii]. The Reserve Bank of India (RBI) handles this fund. The RBI has invested the sinking fund in the Government of India securities and earns a reasonable interest. The total accumulated fund in the sinking fund would be more than Rs 220 crores, including the interest accrued.

Things to keep in mind while buying bonds

  • Before buying bonds, look at all the aspects of the relationship and whether a sinking fund is attached to it or not.
  • As this fund gives an upper hand to the firms, it is always better to read the terms and conditions before purchasing the bond certificates.

Where to Store the Records and Transactions

As an individual, people may build sinking funds such as gift funds, vacation funds, etc. or deposit the money in their ordinary savings accounts. Business firms also build cash pools in a Cash Box to accumulate funds for a seasonal get-together or a similar purpose. However, the significant sinking funds that firms create for making investments, repaying debts, etc. must appear in the company’s accounts, and they can earn interest on the fund deposits during the fund life. The sinking fund itself exists as a balance sheet asset account[iv]and appears under long term investments.

Conclusion 

A sinking fund is elementary to start and understand. It requires a particular discipline for keeping money out in another box. But once followed and maintained, it can yield better results and help anyone to cope up with any unseen financial strain. The goal is always to preserve our money judiciously and not letting it sink.

[i]https://www.investopedia.com/terms/s/sinkingfund.asp

[ii]https://corporatefinanceinstitute.com/resources/knowledge/finance/sinking-fund/

[iii]https://www.wallstreetmojo.com/sinking-fund/

[iv]https:// www.business-case-analysis.com

Investing

What is the procedure for proving a missing or lost Will?

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Intermediaries will be key to Investment Houses navigating the Covid19 crisis

By Alexa Payet, Partner at Bolt Burdon and listed specialist in the Certainty

Contentious Probate Hub & Area

Initial steps

When an individual dies it is necessary to search their paperwork to establish whether they made a Will and gather information regarding their estate. This is important because the personal representatives of the estate have a legal duty to distribute the estate correctly and could be held financially responsible for any mistakes made through any breach of duty.

Where a Will cannot be found but is believed to exist there are a number of steps that can be taken to help confirm its existence, including (but not limited to) the following:

  • making enquiries of the deceased’s family and friends;
  • making enquiries with the deceased’s professional advisors;
  • instructing The National Will Register to undertake a Certainty Will Search.

Presumption of revocation

Where the original Will is known to have been in the testator’s possession before their death and cannot be located afterwards, there is a rebuttable presumption that the Will was destroyed by the testator with the intention of revoking it. If an order for the proof of a copy is to be obtained then this presumption must be rebutted.

Procedure for proving a copy Will

The procedure for proving a copy Will is set out in Rule 54 of the Non-Contentious Probate Rules 1987 (‘NCPR’).

The application is made to the Probate Registry at which the application for the grant will be made and the order can be made by a district judge or registrar.

The application must be supported by evidence in the form of an affidavit (although during the global pandemic the rules have been amended by the Non-Contentious Probate (Amendment) Rules 2020, SI 2020/1059, to provide for the use of witness statements as an alternative to affidavits).

The evidence must set out the grounds of the application and any available evidence that the applicant can adduce as to the Will’s existence after the death of the testator or, where there is no such evidence, the facts on which the applicant relies to rebut the presumption that the Will was destroyed by the testator during his/her life.

The applicant must ensure that the Court has the best available evidence of what happened to the testator’s Will in order that effect may be given to his/her testamentary wishes.

It is important to understand that the applicant does not need to demonstrate that the Will has been lost (it is the fact of its loss which gives rise to the presumption of revocation). Instead, the applicant must establish, by evidence, that the Will was not in fact revoked.

What is a Certainty Will Search and why is it necessary?

A Certainty Will Search searches for Wills that have been registered on The National Will Register (circa 8.7 million Will registrations in the system) and for Wills that have not yet been registered in geographically targeted areas where the deceased used to live and/or work. A Certainty Will Search is extremely important as it will be necessary to notify the probate registry of any persons who would be prejudiced by the grant if the copy Will is proved. If no such person exists then the registrar is more likely to grant the application. Alternatively, if such a person does exist then you should seek to obtain their written consent to the application. The written consents can then be lodged with (or following) your application.

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Oil prices rise as investors look to higher demand seen in second half

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Oil prices rise as investors look to higher demand seen in second half 1

By Shadia Nasralla

LONDON (Reuters) – Oil prices climbed on Tuesday as optimism that government stimulus will eventually lift global economic growth and oil demand trumped concerns that renewed COVID-19 pandemic lockdowns globally are cooling fuel consumption.

Brent crude futures for March rose 72 cents to $55.47 a barrel by 1152 GMT after slipping 35 cents in the previous session.

“The perception that any retracement will be quick as confidence in economic and oil demand recovery is unlikely to fade away,” said PVM analysts in a note.

U.S. West Texas Intermediate crude was at $52.65 a barrel, up 29 cents. There was no settlement on Monday as U.S. markets were closed for a public holiday. Front-month February WTI futures expire on Wednesday.

Investors are upbeat about demand in China, the world’s top crude oil importer, after data released on Monday showed its refinery output rose 3% to a new record in 2020.

China also avoided an economic contraction last year.

Investors are watching out for U.S. oil inventory data from the industry association API, due on Wednesday, the same day U.S. President-elect Biden’s inauguration speech will likely give details on the country’s $1.9 trillion aid package.

The International Energy Agency cut its outlook for oil demand in 2021, but pointed to a recovery in demand in the second half of the year to an annual average of 96.6 million barrels per day.

“Border closures, social distancing measures and shutdowns…will continue to constrain fuel demand until vaccines are more widely distributed, most likely only by the second half of the year,” it said in its monthly report.

(Additional reporting by Florence Tan, editing by Louise Heavens)

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Can Thematic Investing provide investors with growth opportunities in uncertain times?

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The impact of COVID-19 on the investment market

New whitepaper from CAMRADATA explores

CAMRADATA’s latest whitepaper on Thematic Investing, considers the role this type of investing can play in asset management and explores trends that can permeate society and traverse sectors. The whitepaper includes insights from guests who attended a virtual roundtable on Thematic Investing hosted by CAMRADATA in November, including representatives from CPR Asset Management, Sarasin & Partners, Impact Investing Institute, PwC, Quilter Cheviot, Scottish Widows and Stonehage Fleming.

Sean Thompson, Managing Director, CAMRADATA said, “In these seminal times, thematic investing has the potential to shape how the future unfolds. Yet running a successful thematic fund is no easy feat – it is a bit like navigating unchartered waters trying to identify the trends and the long-term opportunities.

“Trends such as AI and biotechnology are still in their relative early days, for example, and global economies are undergoing dramatic changes. But mapping out certain trends, identifying potential sustainable returns through a unifying thread that spans multiple sectors, could help future-proof investments. “Our roundtable guests considered current key themes, which themes worked well, and which have not and how thematic investors could identify trends with the potential to offer future growth.”

The guests named themes they currently like which included artificial intelligence, China, climate change, clean energy, automation, evolving consumption, ageing, digitalisation, water, waste management, biodiversity, and board diversity.

After discussing themes that have worked or not, the guests looked at total allocation to themed funds, and whether clients might be blinded by themes to the overall risk exposure in their portfolios.

Key takeaway points were:

  • Themes have a habit of coming and going. One guest recognised that automation and robotics, for example, were cyclical, which means that investors will have to think carefully about entry-points.
  • It was agreed that the commodities ‘super cycle’ of the 2000s came about with the economic development of China. Many commodities-based products found their way into mainstream investing, but this is unlikely to happen again.
  • One guest was surprised by some of the themes that interested their customers; with their research showing that Board Diversity was almost the lowest-ranking concern among the ESG choices they listed.
  • There was correlation between environmental impact and social benefits to investing. The theme that concerns the Impact Investing Institute, which is less than two years old, is improved measurement of such relationships.
  • In terms of successful themes, one clear winner due to COVID had been digitalisation.
  • One theme that has not done so well is the Ageing theme focused on older people travelling and enjoying experiences abroad later in life.
  • One guest said their firm used themes for ideas generation, not as a shortcut for portfolio construction. They said themes lead to good ideas, but they then spend at least three months researching a stock, so that the best themes are represented by the best investments.
  • The final point was that there are sensitivities for any global investor in allocating to themes, even the biggest one of all, Climate Change.
  • But on a positive note, one guest added if all stakeholders can resolve their differences on definitions such as impact and ethical investing, then more capital will be readily transferred into opportunities.

The whitepaper also features two articles from the sponsors offering valuable additional insight. These are:

  • CPR Asset Management: ‘Central Banks: leading the path towards Impact Investing’
  • Sarasin & Partners: ‘Theme or fad? How to invest for the long term’

To download the Thematic Investing whitepaper, click here

For more information on CAMRADATA visit www.camradata.com

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