Introduction

In today’s modern world, people are very aware of money matters: investing, savings, or anything else. Saving is definitely an important part of anyone’s financial life. It helps one be ready for any uncertainties that may arise and inspires confidence to overcome those times. One recent example can be the Covid-19 crisis, where a lot of people were rendered jobless. But, many of us tend to get confused when it comes to savings as there are many options available on the market. ISA is one of them. We know that you might have a lot of questions, and we’re going to answer all of them for you. So, let’s start:

So in our article, we’re going to tell you about ISA, when they were introduced, types of ISA’s, and what are the requirements to be eligible to open an ISA; find them out below:

What is an ISA?

An ISA is an Individual Savings Account is a kind of Tax-Free savings account that allows the user to keep the interest accrued during the time period. Unlike a regular savings account, the owners of an ISA are exempted from personal income tax up to a specific limit that may accrue during a certain time period. ISA is popular tax-free savings in the UK.

The ISA’s were introduced in April 1999, which replaced the PEP’s (Personal Equity Plans) and TESSA’s (Tax Exempt Special Savings Account) and were available to the UK citizens over 16 provided that they have a national insurance number. Junior ISA’s were also introduced in 2011 to encourage savings for people below the age of 16. 

The biggest difference between an ISA and a normal savings account is that an ISA offers interest payment, which does not attract any taxes, inspiring investors’ confidence that they’re getting more for the money they’ve invested. 

Is there a capital gains tax on ISAs?

Profits from shares held in an ISA are not subject to capital gains tax. Any increase in the value of the investments in your stocks and shares ISA are free of Capital Gains Tax. Investors can not use losses made on investments in their ISA stocks to offset capital gains on their other investments.

Are ISAs tax-free?

Yes, ISAs are tax-free and represent excellent investment accounts and tax-efficient savings. Interest, profits from investments, and dividends that you receive from ISA are free of Capital Gains Tax. The tax-free ISA limit is £20,000 for CashISa and for Stocks & Shares ISA.

But what is with income tax:

Do you pay tax on ISA income?
No, you do not pay income tax you receive from Interest, profits from investments, and dividends from and you are free of Capital Gains Tax.

Are ISAs exempt from inheritance tax?

ISAs are not exempt from inheritance tax (IHT). For example, if ISAs are given on your death to your civil partner or surviving spouse ISAs will not be subject to IHT because of the spouse exemption.

ISA	ISA Age to open	ISA Annual deposit limit	Are Savings at risk?	Withdrawal restrictions	Government bonus?
Cash ISA	16+	£20,000	No	No	No
Stocks & Shares ISA	18+	£20,000	Yes	No	No
Lifetime ISA	18-39	£4,000	Depends	Yes	Yes it is 25%
IFISA	18+	£20,000	Yes	Depends	No
Junior ISA	0-17	£9,000	Depends	Yes	No

Types of ISA

Cash ISA: A cash ISA is an account on which the investor never pays taxes. One can deposit an amount of over 20,000 Euros. Cash ISA’s are offered by building societies or Banks, but certain investment firms also have the allowance to offer them to an investor. 

One should remember that they can open only one ISA per financial year, but they have the option to transfer the money to any other kinds of ISA’s. Like any other Savings account, Cash ISA also come in different kinds which help to provide flexibility to the customer like easy access (one where the customer can withdraw money provided they do it in the same financial year), a regular saver (where the customer gets a fixed rate of interest as long as the customer is depositing a fixed amount every month) or a Fixed one (where the customer gets a fixed rate of interest but the money is locked in for a specific time period) 

Stocks and Shares ISA: A stocks and shares ISA, unlike a Cash ISA, helps one invest the money in a range of different qualifying investments such as cash, stocks and investments, bonds, etc., the qualifying limit, however, remains the same at 20,000 euros. Just like a cash ISA, one can only open a single Stocks and Bonds ISA per year. These kinds of ISA’s are suitable for the people ready to risk their investments for a higher (or lower) return rate. 

It is also mandatory that the money held in stocks and shares be made available within 30 days to avoid any zero-interest penalty on the funds.

Innovative Finance ISA: Innovative Finance ISA was introduced in April 2016 and, unlike before, was more suitable to be used for peer-to-peer (lenders which are ready to invest in businesses or individuals) lending investments. The financial platforms can only offer innovative finance ISA with an FCA (Financial Conduct Authority) certification.

The financial limit for Innovative Fund ISA stays at 20,000 Euros.

Lifetime ISA: A lifetime ISA is more suitable for individuals looking to invest in the long term. The best thing about these ISA’s is that the person can plan for both retirements and property purchases using these ISA’s. Only a person who is in the age bracket of 18-40 can open a Lifetime ISA. These accounts earn 25% on the contributions of up to 4000 euros of the investor after every financial year. This makes it perfect for people who are looking for something long-term. 

As soon as the investor reaches the age of 50, they cannot add any money to these accounts, and the interest bonus is also revoked, but one can withdraw the money either at the time of buying a first home or by reaching the age of 60.

Junior ISA: A junior ISA is an account available to investors who are below the age of 18. These were introduced with a limit of 3600 Euros, further increased to 4368 Euros recently. Junior ISA’s are available in both cash as well as stock and bonds type. Money cannot be withdrawn in a junior ISA unless and until there is a terminal illness claim or a closure of the account after the child’s death. A Junior ISA converts to an adult ISA as soon as the investor turns 18.

Eligibility Criteria for ISA’s:

To open an ISA, an investor should be: 

• 16 years or older to open a Cash ISA
• 18 Years or Older to open a Stocks and Shares ISA
• 18 years or older but under the age of 40 to open a Lifetime ISA
• The investor should be a resident of the UK
• A crown servant or their spouse or civil partner

Now that we have a simple Idea about Individual Savings accounts and which one is suitable for you, it’s time for you to save and invest!

So, this was our take on the ever-so-essential individual Savings Account! This seems like a lucrative option to opt for long-term investments. We did our part; you also do your bit! Research, observe and analyze, and get to invest!

 

What is Jensen’s Alpha?

A Jensen’s alpha or Jensen’s performance index or ex-post alpha measures the portfolio’s excess returns compared to returns suggested by the CAPM (Capital Asset Pricing Model) model.  The value of the excess return may be positive, negative, or zero. Jensen’s alpha measures the real performance over a calculated return. It can be an asset, such as a bond, stock, or derivative.

The CAPM uses statistical methods to predict the suitable risk-adjusted return of an Asset. The returns are supposed to account for a certain asset’s riskiness factor, which means that it has to be ‘Risk-Adjusted.’

Michael Jensen first used the Jensen’s Alpha in 1968, where he wanted to evaluate the mutual fund managers. He wanted to know more about the emerging markets and see whether the mutual fund managers’ returns indicated an ability to outperform the market. One of these methods would have been a straightforward one where he could’ve compared the managers’ return to the market portfolio, but it would have been very misleading as the risk factor hadn’t been considered. He was adamant on learning that if the managers could add value over the long term, and this is how Jensen’s Alpha was born. 

Jensen’s Alpha Formula represents the math equation for Alpha calculation based on the realized return of the portfolio or investment, realized a return of the appropriate market index, risk-free rate of return for the period, and a beta (systematic risk of the portfolio).

Jensen’s Alpha Formula is:

Alpha = R(portfolio) – (R(rate) + Beta x (R(index) – R(rate)))

where:

R(portfolio) = the realized return of the portfolio or investment

R(index) = the realized return of the appropriate market index

R(rate) = the risk-free rate of return for the period

Beta = the beta of the portfolio of investment concerning the chosen market index

How does Jensen’s Alpha work?

So the formula involving Jensen’s Alpha is used to calculate the difference between a return that an asset provides and the theoretically calculated expected return. The formula can be applied to all kinds of assets such as a stock, bond, derivatives, etc. the expected return, in this case, is calculated using CAPM (Capital Asset Pricing Model), a model that can be based on average market return, interest rate and the multiplier, calculate the expected rate of return. 

The simple formula which is used to calculate this is as follows:

Portfolio Return-[Risk Free Rate+portfolio beta x (market return-risk free rate)]

The beta multiplier represents the asset’s uncertainty as compared to market factors. The Alpha represents the returns that are generated more than the calculated return. A positive alpha indicates better performance, whereas a negative alpha indicates poor performance. 

If an Asset’s return is even higher than the risk-adjusted or the predicted return, it is known as a positive alpha or an abnormal return. A negative alpha indicates that the fund has performed poorly or has provided lower than expected returns. This basically means that the fund manager has the skills to beat the market.

Why is it important?

Every individual or a fund manager invests in the market for a sole purpose which is a profit. For this, they should be aware of the risks that they’ll have to take while investing in a stock or a bond or any other asset. This is where Jensen’s alpha comes into the picture, which provides them a properly calculated measure of what they’re going to get out of that asset against the risk involved in it. The main challenge that a fund manager faces is that they need to go for securities that offer maximum returns with a minimum risk factor. Jensen’s Alpha helps them to achieve this. 

For example, if two schemes offer a similar kind of return, the investor can go for the one that would be more lucrative for an investor, which offers the same return with a lesser amount of risk. Jensen’s Alpha helps the investor determine whether an asset’s returns are acceptable compared to the applicable risk. 

Limitations to Jensen’s Alpha

An Alpha aims to generate returns that are not in line with market performance. According to statistics, a fund generating higher yields is unlikely to do so at a later stage. Its prices fluctuate according to the performance and adjust accordingly to reflect their value. 

Jensen’s Alpha is a great tool for measuring a certain stock’s performance and helps the fund managers maximize the individual’s or the company’s risk to return ratio. You can also use the same to your advantage to measure your fund’s performance and increase your profitability and decrease risks.

So that was our take on Jensen’s Alpha! But do not just go with our word; investments are a crucial element of ones’ life. Therefore it is essential to analyze, study and learn about them in great detail and then get to the action.  So, huddle up! Research and Learn: It’s time to get investing!

The world of finance is as big as it can be. One needs to take several nuances to enhance the financial position of an individual or a company. Wrong are those people who think that finance is just about equalizing our balance sheets. No!

It’s about so much more! Capital markets, Trading, Shares, Bank Statements, and so much more. One such nuance is Profit and Loss Appropriation. No, it is not in the context of a company, but rather it is a term that is used by the trading markets. Using Profit and Loss Appropriation, one can back-test the risk management models for any given company. Here, we bring different Profit and Loss Account components, observe and analyze to determine whether the given amount has risen out of a chance due to a calculated, well thought-off strategy.

Stock markets are one of the most dynamic places to trade your money. It keeps on changing every single day. As it is essential to keep your tab on the trading part, it is also necessary to note the profit and losses of one’s trade. It is also essential to predict them to plan future things that might happen and compare the predicted profit or loss with the actual ones. This helps to ascertain the efficiency of planning done. Profit and Loss Attribution is definitely, one of the most important things for money matters.

What is P&L Attribution Analysis?

Profit and Loss Attribution or  P&L Attribution model is a testing method to measure a bank’s risk management models, which compares a bank’s predicted profit and loss with the actual profit and loss incurred. Risk managers use P&L Attribution to explain how a bank or company made or lost money.

The P&L Attribution back-testing method for evaluating a bank’s risk management model breaks down profit and loss into different components to ascertain operations’ efficiency.

This is done by analyzing all the conditions that can affect the performance like time, prices of the commodities, applicable interest rates, market uncertainty, new contracts, cancellations, etc. it also helps the financial institutions to evaluate their decisions and justify their losses. 

When was this model introduced?

The Profit and Loss Attribution (or P&L Attribution Model) was first introduced in October 2013 by the Basel Committee on Banking Supervision (BCBS), which was a part of their FRTB (Fundamental Review of the Trading Book). This test was drawn up as a new requirement for the trading desk’s accreditation to use the IMA (Internal Model Approach) to calculate the market risk capital. 

What does the P&L Attribution Model aim to represent?

The Profit and Loss Attribution Model aims to ensure that the coverage of the risk factors used in a bank’s internal model approach calculation is adequate to fully capture the range of Profit and Loss variations that occur. As per the standard, every trading desk will have to make sure that it passes the P&L attribution to maintain accreditation to use the IMA for the capital calculations.

The P&L attribution compares two measures: A Hypothetical P&L and A Risk Theoretical P&L 

A Hypothetical P&L is generated by the bank’s front office pricing models, and the bank’s own risk models generate the risk theoretical P&L. The gap between both is measured using a mean ratio and a variance ratio. The thing that is to be kept in mind by the revenue managers is that the ratios generated from the two P&L’s should always remain within the established thresholds for the test to be legitimate. Otherwise, a breach can occur if the desk surpasses the limit. 

Why is the P&L Attribution Model so necessary?

A risk or a revenue manager should identify whether a company’s decisions resulted in making or losing money. The only thing through which the company can measure its performance is by looking at its books of accounts. The way through which this is possible is by taking into account the decisions that the company has taken throughout the financial year and considering the profits and losses. This is where the P&L attribution Model comes into the picture. By taking into account all the factors such as performance, time, prices, etc., helps to measure the company’s efficiency of operations and compare its performance with the predicted performance. 

Methodologies for measuring the Profit and Loss Attribution model:

There are two methodologies for calculating the P&L Attribution:

1. Sensitivities Method – This method involves calculating sensitivities known as the ‘Greeks’ because of the common practices of representing them using Greek Letters.
   
2. Revaluation Method – This calculates values of trade on the current and prior day’s prices. The Formula for that is: Impact of Prices= Trade value for Today’s Price- Trade Values for Yesterday’s Prices.
   

 

In trading, we have a similar expression.

What are p and l in trading?
The p and l in trading or P&L statement or profit and loss statement represent a financial statement that summarizes the trading cost, revenues, and expenses during a specified period of trading, usually a month, quarter, or year. Profit and loss statements provide information about a company’s ability or inability to generate profit by reducing costs, increasing revenue, or both. In Metatrader, Profit and loss are a standard part of the trading report.

Conclusion:

In the following article, we came to know about the Profit and Loss Attribution method, its history, why this model is so necessary, the different methodologies used to measure the P&L attribution, and the different constituents of this method. So, from the following, we can understand that P&L Attribution is a very crucial part of the financial scenario.

It helps the financial institutions measure their performance with the hypothetical performance and allows the revenue managers to get an idea of operations’ efficiency and eradicate any shortcomings in their organization. The advantage of this method is that it considers all the factors such as prices and market uncertainty. Hence, it indeed is a really great method to measure financial performance and the institution’s efficiency. 

So, now you know all about the Profit and Loss Attribution method!