planning for investments
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An asset or item that is purchased with the hope that itwill generate income or appreciate in the future.
In an economic sense, an investment is the purchase of
goods that are not consumed today but are used in thefuture to create wealth.
In finance, an investment is a monetary asset purchasedwith the idea that the asset will provide income in thefuture or appreciate and be sold at a higher price.
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Higher current income
Saving money for majorpurchases
Planning for the retirement
Shelter for taxes
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BASIS INVESTMENT SPECULATION
Time frame Long Term Short Term
Nature of Reward Interest or
Dividends
Speculative gains
Commonly usedinstruments forinvestments
Stock , Bonds,Mutual Funds
Commodities oroptions
Risk involved Less risk High risk involvedAnalysis/Information
Trading is doneafter thoroughstudy(fundamentalanalysis), past
Trading is usuallydone on Rumors,Hot tips, Insidedopes etc.
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Equities
Bonds
Mutual Funds Real Estate
Gold ETFs
Commodities, Futures and Options Insurance
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Risk Market risk Interest Rate risk
Default risk Purchasing power risk Foreign Exchange Risk Political Risk
Marketability and Liquidity Tax consideration
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An instrument of loan raisedby the government or acompany, against a specifiedinterest rate and a promiseddate of repayment.
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Bonds, while a more conservativeinvestment than stocks, can offercertain investors some very attractive
features:Safety
Reliable income
Potential for capital gains
Diversification (especially for an otherwiseall-equity portfolio)
Tax advantages
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Secured and unsecured loans.
Senior and subordinate bonds.
Convertible and non-convertible bonds.
Treasury bonds and corporate bonds
Junk bonds
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One Period Rate of Return
Current Yield
Yield to Maturity ( YTM )
Capital Gain ( Loss )
Realized Yield
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Rate of return over a single holding period
Rate of return earned if the bond is purchased atcurrent market price and if coupon interest is paid
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Market Value at the end of t years =
C * PVIFA r, ( n t ) + F * PVIF r, (n t )
Where
C = Coupon
r = Reinvestment Rate
n = Term to maturity
t = Holding Period
F = Redemption Price
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Rate of return earned by an investor who holds the
bond till maturity .
YTM = kd in the formula
YTM equates the present value of cash flows to the
current market price
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YTM = Couponbond is selling at par
(P0= P
N)
YTM > Couponbond is at a discount
(P0< P
N)
YTM < Couponbond is at apremium
(P0> P
N)
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1. All coupon and principal payments are made
as per the schedule.
2. The bond is held to maturity.
3. The coupon payments are fully and
immediately reinvested at precisely the same
interest rate as the promised YTM.
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It is the rate that equates the future value of the
purchase price to the total cash flow realized on
the bond.
P * FVIF r, n = Total returns + Purchase price
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Default riskInterest rate risk (price risk)
Reinvestment risk
Call risk
Inflation risk
Foreign exchange risk
Liquidity risk
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Matching strategy
Laddered strategy
Barbell strategy
Interest rate strategy
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More popularly known as the Indian Stock MarketMarket capitalization of nearly $600 billion
Third biggest after China($2,347.4 billion) and HongKong($1,293.7 billion) in the Asian region
Supervised by SEBI (Securities Exchange Board ofIndia)
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Contd..
The Indian equity market depends on three factors :
1) Funding into equity from all over the world
2) Corporate houses performance
3) Monsoons23 stock exchanges BSE and NSE major ones
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Capital AppreciationBonus shares
Dividend earnings
Portfolio
Long term benefits and return on investment
Simple method
Easily cashable
Liquidity
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No guaranteed return
Last to get paid
Volatility in stock prices
Do not enjoy all the rights
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1. Get a Broker2. Get a Demat Account
o With banks, financial institutions,broking firms, NBFC, etc
1. Get a PAN
2. Check if you need a UIN
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ETF is an investment vehicle traded on a stockexchanges, much like stocks.
ETF are securities that tracks an index, acommodity or a basket of assets like an Index
fund.ETF does not have its NAV calculated everyday
like a Mutual Fund.
It is attractive coz: Stock like features
Diversification of index Low cost
Tax efficiency
Demat form
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Gold backed Exchange Traded Funds (ETFs) are securitiesdesigned accurately to track the gold price.
It tracks the performance of Gold Bullion
It provides investors a means of participating in the goldbullion market without the necessity of taking physical deliveryof gold, and to buy and sell that participation through thetrading of a security on stock exchange.
While investing in Gold, few points need to be considered:
Volatility
Entry time matters
Other selection factors
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Requirements for trading:Trading account with a stock exchange broker
Demat account as Gold ETF can be traded only in dematform
Load Structure:Entry Load: Nil
Exit Load: Nil
Tax treatment:Is taxed as per non equity mutual fund taxation rules.
Need not pay Wealth tax.
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No worry on adulteration
Gold provides diversification to the portfolio
Gold is considered as a Global Asset Class
Gold is used as a Hedge against Inflation
Gold is considered to be less volatile comparedto equities
Held in Electronic Form
Store of valueExtremely Liquid
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Parameters Jeweller Bank Gold ETF
FORM Bar or Coin Bar or Coin Demat form
SECURITY Investorsconcern
Investorsconcern
Fund house takesthe responsibility
PRICING Neither standardnor transparent
Differs from bankto bank. Notstandard
Transparent. Willbe traded at NSE
WEALTH TAX Yes Yes No
LONG TERMCAPITAL GAINTAX
Only after 3years Only after 3years After 1 year
RESALE Conditional andUneconomical
Banks do not buyback
At secondarymarket prices
IMPURITY RISK High Nil Nil
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SafetyBrings diversification and stability to a
portfolio
Highly liquid and portable
Tool against inflation
Less regulatory intervention
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Are subject to market risks. As with any investment in securities, the NAV of the units
issued under the Scheme can go up or down depending on thefactors and forces affecting the Bullion Market, Capital Marketand Money Market.
The Past Performance of the fund house issuing the ETF shouldnot be construed for the future performance of the fund.
ETFs are a new concept in India compared to other parts of theworld.
The sponsor of the mutual fund is not responsible or liable forany loss or shortfall resulting from the operation of the fundbeyond the initial contribution made by it of an amount of Rs 1Lac towards setting up of the Mutual Fund.
Investors are not offered any guaranteed or assured returns
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Benchmark Mutual Fund - Gold BenchmarkExchange Traded Scheme (NSE Symbol:GOLDBEES)
Kotak Mutual Fund - Gold Exchange Traded Fund
(NSE Symbol: KOTAKGOLD)UTI Mutual Fund - UTI Gold Exchange Traded
Fund (NSE Symbol: GOLDSHARE)
Reliance Mutual Fund - Gold Exchange TradedFund (NSE Symbol: RELGOLD)
Quantum Gold Fund - Exchange Traded Fund(ETF) (NSE Symbol: QGOLDHALF)
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Commodities are any goods that are common and unbranded.
Gold, Silver, Rubber, Pepper, Jute, Wheat, Sugar and cotton are a few popular
commodities. Commodity market represents a formal system for the interplay of demand for
and supply of commodities.
These markets are classified into spot market and future market.
Due to erratic weather changes and uncertain economic environment acommodity shortage (or oversupply) in a particular season lead to increase
(decrease) in the price of the commodity. Farmers and merchant could not predict what the prices would be on a given day
or season.
It was in this context, the farmers and food grains merchants in Chicago startednegotiating for future supplies of grains in exchange for cash at a mutuallyagreeable price.
Thus the farmer could lock in his price in advance thereby securing his income. This effectively started the system of commodity market forward contract which
subsequently led to the development of future markets.
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Hedging Process :
Examples :
A copper wire manufacturer has 100 tones of copper in his inventory
and there may be a threat of inventory revaluation due to decrease in
copper prices.
In such a scenario he is better off going short (Sell) on copper
futures contracts to protect this against any possible decline in
prices. This method is called Short Hedge If a copper wire manufacturer has to sell copper wires to a telecom
company at a predetermined price, and if the delivery needs to
made after four months he can take a long (Buy) position in the
futures market to hedge against risk of increase in copper prices.
This method is called Long Hedge.
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Indian Commodity Exchanges
There were 23 regional commodity future exchanges active in the
country prior to 2003 when the Govt. open the field for nationawise
electronic exchanges.The growth of futures trading after that was tupendous and the total
turnover crossed Rs.50 lacs crores in 2008.
The three national commodity exchanges
Of this, Rs.35,05,137 crore was contributed solely by MCX and
NCDEX.
The increasing awareness and popularity of commodity futures in
India and the slowdown in equity markets have contributed
spectacularly to the turnover in the market. The turnover of the MCX
and NCDEX reached Rs.63,62,603 crore for the period January 2008until March 2009.
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The economic survey for 2008-2009 has recommended certainreforms in the commodity markets
1. Bring commodity future regulations under SEBI Since commodity futures are part of the financial market bringing
all financial market regulations under SEBI is better. At present commodity futures are regulated by FMC2. Lift ban on futures trading in rice, tur, urad
Futures trading of rice, tur, urad were banned in early 2007 astrading in these commodities was perceived to be causingpressure on inflation.
Lifting of ban on these commodities will restore pricediscovery and price risk management.
Futures in wheat was also banned but the curve was lifted in
May this year. Sugar has been put on the suspended list till December this
year. FMC had recommended to the Govt. to lift the ban on all
commodities as there were no direct evidence to suggest thatfutures trading caused price spiral.
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Insurance is a contract whereby, in return for the payment ofpremium by the insured, the insurers pay the financial lossessuffered by the insured as a result of the occurrence ofunforeseen events.
Commercial mechanism for transferring risk and spreading loss.
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EngineeringProperty & Casualty
Accident & Health
Liability
Specialised
Individual & Group
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Economic Concept of Insurance:1. Insurer offers policy to cover specifiedrisks
2. Insurer collects policy premiums fromcustomers
3. Insurer invests premiums
4. Insurer pays money to insured customersin the event of losses covered by policy.
Opportunities in life
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Opportunities in lifeinsurance
Life insurance premium as % of G
10.7%
8.9% 8.7%
5.7%
4.4%
3.4%
2.3% 2.3%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
UK J apan Ko rea A ustrlia US M alaysia India China
Opportunities in non life
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Opportunities in non-lifeinsurance
Non-life insurance premium as %
4.6
3.5% 3.4% 3.4%
2.2%
1.8%
0.9%0.6%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
US U K A ustralia Ko rea J apan M alaysia China Ind ia
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AS A FULLER PRODUCT LIST COME ON OFFERLATENT DEMAND WILL GET RELEASED
50
Pre 2000
Endowment and moneyback policy - ~98% to totalpremium income
Products with guaranteedreturns, limited, if any term
Products viewed asnecessary evil for tax-breaks
Personal non-life insurance
products (except motor)virtually nil
Corporates buying Non life
Today
Variety of products withriders coveringdisability,critical illness,accidents etc.
Increasing acceptance ofvariable returns and pureterm products
Unit linked products
New products emerging to
cater to personal needs:HealthTravel
(overseas/domestic)Household articlesBuilding
(structure/content)Mobile insuranceCredit insurance
Tomorrow
Pension scheme
Annuity scheme
Income protection
Increased term
Home building structureand contents (penetration
in India~1% v/s ~70% in UK)
Health insurance(penetration in India 1-2%v/s 10% in UK)
Corporate and professionalliability
Life
NonLife
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Real estate is a legal term that encompasses land along withimprovements to the land, such as buildings, fences, wells and othersite improvements that are fixed in location immovable
According to The Economist, "developed economies'" assets at theend of 2009 were the following:
Residential property: $108 trillion;
Commercial property: $84 trillion; Equities: $40 trillion; Government bonds: $45 trillion; Corporate bonds: $31 trillion;Total: $268 trillion.
That makes real estate assets 60% and financial assets 40% oftotal stocks, bonds, and real estate assets. Assets not counted here
are bank deposits, insurance "reserve" assets, natural resources, andhuman assets. It is not clear if all debt and equity investments arecounted in the categories equities and bonds.
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Liquidity Risk: It is the risk that a given security or asset cannot betradedquickly enough in the market to prevent a loss (or make the required profit)
Types of Liquidity Risk:
Asset liquidity - An asset cannot be sold due to lack of liquidity in the
market - essentially a sub-set of market risk. This can
be accounted for by:Widening bid/offer spread
Making explicit liquidity reserves
Lengthening holding period for VAR calculations
Funding liquidity - Risk that liabilities:
Cannot be met when they fall due
Can only be met at an uneconomic price
Can be name-specific or systemic
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Market riskis the risk that the value of a portfolio,either an investment portfolio or a trading portfolio, willdecrease due to the change in value of the market riskfactors. The four standard market risk factors are stockprices, interest rates, foreign exchange rates, andcommodity prices. The associated market risk are:
Equity risk:The risk that stock prices and/or the impliedvolatility will change.
Interest rate risk: the risk that interest rates and/orthe implied volatility will change.
Currency risk: The risk that foreign exchange ratesand/or the implied volatility will change.
Commodity risk:The risk that commodity prices (e.g.corn, copper, crude oil) and/or implied volatility willchange.
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VOLATILITY RISK: In financial markets it is the likelihood offluctuations in the exchange rate of currencies. Therefore, itis a probability measure of the threat that an exchange ratemovement poses to an investor's portfolio in a foreigncurrency. The volatility of the exchange rate is measured asstandard deviation over a dataset of exchange rate
movements. A far more sophisticated extension of thismodel is the Value at Risk method, which helps to determinethe actual risk exposure to a portfolio of several currencies.
SETTLEMENT RISK: It is the risk that a counterparty does
not deliver a security or its value in cash as per agreementwhen the security was traded after the other counterparty orcounterparties have already delivered security or cash valueas per the trade agreement.
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Sovereign riskis the risk of a government becomingunwilling or unable to meet its loan obligations, or renegingon loans it guarantees. The existence of sovereign riskmeans that creditors should take a two-stage decisionprocess when deciding to lend to a firm based in a foreigncountry. Firstly one should consider the sovereign riskquality of the country and then consider the firm's credit
quality.Five macroeconomic variables that affect the probabilityof sovereign debt rescheduling are:
Debt service ratio Import ratio
Investment ratioVariance of export revenueDomestic money supply growth
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Three factors have contributed much toglobal real estate opportunities :
Rapid Economic Growth
Changing Demographics
Phenomenon of off-shoring
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First, the Advisory Board determines the broader framework of thereal estate investment strategy and oversees the InvestmentCommittee and Fund Management team with annual reviews ofportfolio performance and approval of large transactions that areover a preset amount or percent of total portfolio.
Investment Committee oversees and approves Portfolio Setupframework, as well as Asset and Portfolio Management operations.
Within this context the Investment Committee reviews semi-annuallyasset and portfolio performances, current and projected, for thewhole portfolio and by category, such as property type, location,tenant industry etc.; reviews portfolio optimization recommendationsand makes decisions regarding changes in portfolio mix in terms ofproperty types and locations in order to maximize portfolio return
prospects and minimize risk; sets and reviews risk mitigationprocesses both at the portfolio and at the asset level. Ideally,portfolio optimization recommendations should be based on theresults of advanced portfolio analysis using reliable return and riskprojections by property type and location (derived through advancedeconometric and forecasting techniques) and modeling frameworksthat draw from the modern portfolio theory
CONTD.
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The Implementation Committee executes the portfolio setup and structure, asdetermined by the Advisory Board and the Investment Committee. The acquisitiondepartment executes the portfolio build up process by screening properties availablein the market to identify those that fit the Funds investment strategy, performing
preliminary screening to select assets that will go through more detailed marketanalysis and feasibility study, negotiating transaction terms and financial structuring,preparing project documentation and analysis package to be presented toInvestment Committee for final approval.
Return and risk analysis by asset should take into account each asset's cash flowprospects, given current leases, stipulated rental rates, annual rent increases,
expiration dates, probabilities of renewing, probabilities and time duration for findingnew tenants for non-renewed leases, and projected market rents at which newleases will be signed and renewed leases will rollover. Lease renewal probabilities,time for finding new tenants and rental rate projections should be based on marketvacancy rate projections, which provide a very good indicator of market tightness.
Transaction closing, post-acquisition management and liquidation of the property inorder to realize capital gains will complete the real estate investment process for aparticular asset.
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A mutual fund is a professionally managed type ofcollective investment scheme that pools money frommany investors and invests it in stocks, bonds, short-term money market instruments, and/orother securities
Investors
Fund Managers
Securities
Returns
Mutual Funds Operations Flow Chart
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Diversification benefitsLow transaction costAvailability of various schemesProfessional ManagementLiquidityTax benefitFlexibilityWell regulated
Convenient AdministrationReturn PotentialTransparencyAffordability
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RisksInstrument RiskMarket RiskPortfolio Risk
Business RiskFinancial RiskRisk in Money Market FundsRisk in Bond FundsRisk in Stock Funds
Strategies for risk reductionDiversification by investment styleDiversification by investment objective
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Novice uninformed investors
Ordinary small investors
Risk averse investors
RetireesInvestors with time constraint
Investors on the look out for liquidity
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Clarity of objective
Collect information from sources like Funds'prospectus and advisors
Do not be swayed by peripheralsGo through the Investment Mix carefully
Past record is not always reliable
Know your Fund Manager
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Standard Deviation allows you to evaluate the volatility of the fund
Beta indicates the level of volatility associated with the fund as compared to thebenchmark
R squared measuring the correlation of a fund's movements to that of an index,R-squared describes the level of association between the fund's volatility and
market risk
Alpha is the difference between the returns one would expect from a fund, givenits beta, and the return it actually produces. An alpha of -1.0 means the fundproduced a return 1% higher than its beta would predict. An alpha of 1.0 meansthe fund produced a return 1% lower.
Sharpe Ratio = Fund return in excess of risk free return/ Standard deviation ofFund
The higher the Sharpe ratio, the better a funds returns relative to the amountof risk taken. Sharpe ratios are ideal for comparing funds that have a mixedasset classes
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Rank Scheme Name Date NAV(Rs.)
Last 1Week %
1 SBI Magnum Midcap Fund -Growth
Jan 11 ,2010
23.12 4.7576
2 Birla Sun Life CommodityEquities Fund - Gbl Pre
Metals - Retail - Growth
Jan 11 ,2010
12.9365 4.6659
3 Birla Sun Life CommodityEquities Fund - Gbl MultiComm - Retail - Growth
Jan 11 ,2010
13.3829 4.6054
4 JM Agri & Infra Fund-Growth
Jan 11 ,2010
3.4109 4.3504
5 Reliance Media &Entertainment Fund -Growth
Jan 11 ,2010
27.5008 4.2495
*Note:- Returns calculated for less than 1 year are Absolutereturns and returns calculated for more than 1 year arecompounded annualized.
Source: ICRA Online (www.mutualfundsindia.c
Rank Scheme Name Date NAV (Rs.) Last 1Month %
1 JM Basic Fund - Growth Jan 11 ,2010
20.2104 10.4798
2 Sundaram BNP Paribas
Select Small Cap Fund -Growth
Jan 11 ,
2010
12.5118 9.8008
3 Escorts Power and EnergyFund - Growth
Jan 11 ,2010
18.0001 9.7192
4 Religare Mid N Small CapFund - Growth
Jan 11 ,2010
11.66 9.2784
5 JM Mid Cap Fund - Growth Jan 11 ,2010
27.6654 9.2449
*Note:- Returns calculated for less than 1 year are Absolutereturns and returns calculated for more than 1 year arecompounded annualized.
Last one Week Last one Month
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THANK YOU