Category: General Investing

Categories
General Investing

MUTUAL FUNDS: Long story in short

A mutual fund is a type of investment vehicle that collects money from the public and invests in different types of securities (bonds, equities). These are professionally managed by a fund manager. The only motto of a mutual fund is to create wealth for its investors. There are various types of mutual funds according to investors’ needs.

These are mainly classified into 3 broad categories

  1. Equity mutual funds: these MFs invested mainly in the equities. They are further divided into categories based on the market capitalization of the companies. Further classification is like Small Cap, Mid Cap, Large Cap mutual funds.
  2. Debt/ Income mutual funds: these MFs invest in corporate securities and government bonds. They are further classified based on different risk categories of bonds in which they invest.
  3. Hybrid mutual funds (Multicap funds): these are hybrid type MFs i.e. they invest in both debt and equity instruments. There are classified according to a percentage of equity and debt.

Some further categories of mutual funds

  1. Money Market/ Liquid funds: These are debt mutual funds which invest money in short-term markets investment like government securities, call money, treasury bills. These mfs have the least risk and are usually not volatiles. These mfs invest in securities that have maturity up to 91 days. These are recommended for short-term investors who are looking to park money for a short time (30 days- 12 months). An investor can expect better returns than bank fixed deposits.  There is no exit load in these funds.
  2. Ultra-short liquid funds: These funds are another category of short-term debt funds that invest in debt instruments (same as of Liquid funds) having a maturity greater than 91 days or 3 months. There is greater volatility as compared to Money market/ Liquid funds. The returns delivered by these funds are higher and there is no exit load in these funds.
  3. Gilt funds: These are the mutual funds that invest in government bonds and securities. The returns of Guilt funds are linked to the repo rate which is set by Reserve Bank of India (RBI). These mfs carry some greater amount of risk as compared to other debt funds and an investor should keep an eye on development by RBI after investing in it. These funds could be volatile sometimes and can deliver fewer returns over a longer time.
  4. Other funds: There are some mfs that don’t fit in any of the above categories. ETF (Electonic traded fund) are mutual funds that closely resemble an index like Nifty 50, S&P Sensex 30, etc. There are some sectoral based funds also which invest in sector-based companies. An investor should be careful when selecting a sector-based mfs as some of them are cyclic and may or may not give a decent return in the 3-5 year of the horizon period.

According to the risk and reward capability of different people, there are a lot of categories of MFs. But unfortunately, most of the categories are created for marketing purposes. Therefore SEBI has directed all AMC to consolidate their schemes. On a broader level, there are the above-mentioned categories.

Growth Vs Dividend Mutual Funds 

Every mutual fund scheme has at least 2 plan such as Growth or Dividend. In the dividend plan, an investor gets profit on a monthly/quarterly/ half-yearly basis. Generally, the Dividend plan is not recommended as your total investment gets decreased because of the payment of dividends.

Dividends in mutual funds and stocks are entirely different. In mutual funds, a part of the invested amount is given back to the investor on a regular basis. Which causes a decrease in the total invested amount for the investor.  Whereas in stocks, a dividend is paid by the company from its profits.

Direct Vs Regular Plans in Mutual Funds

Most of the investors buy Regular plans in mutual funds from distributors like ICICI Direct, FundsIndia, ScriptBox, etc. These distributors earn their commission based on the amount invested by their customers. After 2013, there exist 2 schemes in every mutual fund plan i.e. Regular and Direct.  Most of the investor never know that they can invest in a direct plan of the same mutual fund scheme and earn greater returns.
Direct plans offer greater returns over a longer duration as there is no commission paid to an intermediary. The amount of commission paid varies from 0.1 to 1% which is directly paid from the profits earned by mutual funds. These commissions are only paid at the time of withdrawal of funds by the investor.  So it is better to purchase Direct Mutual Fund plans.

How are Mutual Funds managed?

As said earlier MFs are professionally managed by a fund manager. They manage the portfolio regularly according to the MFs category and also keep risk rewards under a certain threshold. Sometimes they also hedge the portfolio using derivatives instruments to prevent the portfolio from extreme loss.

How are Mutual Funds beneficial?

As an investor one has not to worry about the fluctuation of the equity and bond markets. An investor can start a SIP (Systematic Investment Plan) and can focus on other important things in his/her career. SIP helps an investor to negate the extreme downside and upside in markets. Over a long time (more than 5 years) an investor can create a good amount of wealth for himself/herself.

Power of Compounding

Do you how many wonders are there in the world? 7 right?……….WRONG!!!

There are 8 wonders of the world. The 8th one is the Compound Interest.

Do you know if you invest for Rs 5,ooo for 25 years and if it is compounded at just 12% per annum, your amount at the end of 25 years will be 1.38 Crs?

That is the power of compounding. Billionaire investors like Warren buffet have built his entire wealth at just 20-24% earning compounded annually.

You can easily calculate your corpus amount from this compounding tool by MoneyControl

Bonus point

If an investor is investing in equity MFs and remained invested over a long time (more than 1year) then there is only a 10% capital tax gain on his income.

Which MFs one should buy?

There are various AMC which offer different types of MFs. Some of the popular ones are

  1. SBI
  2. Birla SL
  3. Franklin India
  4. Mirae Asset India
  5. HDFC

You can start doing some research on mutual funds and select them based on your risk type. There are very good online resources for selecting MFs such as

  1. MoneyControl
  2. Value Research

You can go through ratings given on MoneyControl or Value research. You can also consult a financial advisor regarding your investment goals.

Read:  Start investing when the market is all-time High

I hope you find this article helpful.

Categories
General Investing

WHY STOCK MARKET EXISTS?

Have you ever wondered why stock market exists? I always did but never thought that stock markets provide a boost to the whole economy. Let me explain how it does the same?

Need for Stock Exchanges

Stock exchanges are nothing more than a place where trades are executed. You can consider it as a marketplace where a seller and a buyer meet and do trade. In this era of computers, every transaction is facilitated electronically only.

Read: Brief introduction to stock markets

How it is beneficial for Economy?

When any company want to raise money for its expansion or want to provide an exit to its early investors they raise money from the public. Public (investors) always invest their money to create wealth for their future. In fact, equity is the best asset class which can protect one’s money from inflation.

Raising capital is good but what is a need to stock exchanges?

Now you must be wondering if an investor invests his money then why we need a stock exchange. A stock exchange provides a way to transact so that an investor who has previously invested in the company through IPO can get an easy exit. So this means any investor who has invested his money can exit from his investment anytime. This also applies the other way. Any prospective investor now can invest in the company by buying shares via stock exchanges.

What else?

The stock market also allows foreign investors to participate in the growth of the economy. Foreign investors participate in the stock market to create wealth. Generally developing economies provide better investment opportunities than developed ones.

Participants in stock markets

On a broader level there are 3 types of participants in stock markets.

  1. Retail Individual Investor (RII): These are investors like you and me. They usually invest in small quantities but there is not limit for individual to invest.
  2. Domestic Institutional Investor (DII): These are represented by domestic fund houses such as Mutual Funds. They usually invest in large amount in various companies.
  3. Foreign Institutional Investor (FII): These are some high worth foreign fund houses and investors. They also invest in large amounts in various companies.

Read: What is Sensex and Nifty 50?

I hope this post has been helpful to you. Happy Investing.

Categories
General Investing Important Concepts Investing Lessons

BITTER TRUTH ABOUT STOCK MARKET

Bitter truth about Stock Market

I am sure, you have listened or read about making money from the stock market but very rarely you must have read or discussed how one’s wealth is destroyed by it. In fact, if you bet on any stock without knowing the anything about the company and its fundamentals then there are good chances of your wealth getting destroyed. Today, we will focus on some of the bitter truth about stock market.

Analyst on TV keeps talking about big ace investors like Rakesh Jhunjhunwala, Porinju V Veliyath etc. They will tell how much wealth these ace investors have created in a decade. But today I want to show you if one is not diligent and up to date with the market scenario he/she can lose all its money, instead of creating wealth for future.

Read: Why long-term investing creates wealth?

Let us see some prime example in Indian scenario where investors have lost close to 80 to 95% of their invested money.

1. Suzlon Energy Ltd

Suzlon energy

Over the last decade, from the peak of 395 to 15-20 level, Investors have lost 95% of their money in this share. The primary reasons for its fall are poor management practices including huge debt on books, low promoter holding, negative cash flow over a long time.

2. Unitech Limited 

unitech

From the highest level of 500, it presently trades at mere 7 Rs. Investors have lost close to around 98% of their wealth. The company was very popular in the real estate construction sector. The main reason for their downfall is huge debt on their books, lawsuit against management, extended project deadlines etc.

In future, there is no sign of any recovery of even half of the topmost level for this stock.

3. Jaiprakash Associates Ltd

Jaiprakash associate


This stock was daring of stock market and a decade ago, everyone wanted to own it because of its diversified businesses. A big conglomerate in Infrastructure, Cement and Power sector.

Investors have lost close to 93% of their total wealth.

4. Reliance Power Ltd

R power


This company had a very ambitious plan in power sector but failed to capitalize its power business. This company’s huge IPO went to a whopping subscription of 73 times and still, it comes under one of the top 10 IPO in Indian stock market history. During its grand IPO company raised close to 11,863 Cr of money from the public.

Now, Investors have lost around 87% of their total money in this share.

5.  Reliance Communication

rcom


In the last 9 year investors has lost 97% of their wealth in RCOM. This company also has the same story behind its losing market capitalization. It has huge debt on books and promoters have pledged some of their holdings.

There is no ray of hope for all these fallen stocks. They will never be going to recover their investor’s money. If you stay with these fallen rocks you will stay forever waiting for these rocks to move. Therefore, Investors should always be careful while investing and be in touch with current economic and political scenarios which can effects business to a large extent.

Read: New to investing, Learn Fundamental analysis

Thanks for reading.

Image credits Tradingview

Categories
General Investing

WHAT IS SENSEX OR NIFTY 50?

In this post, we will discuss more on indices. Sensex and Nifty 50 are Indian stock market indices and are also used to study the trend of the investor sentiments.

Let us take an example of different types of markets like wholesale market and consumer market. They also have indices like consumer inflation index, wholesale inflation index. Economists use these indices to analyse and plan different policies. Our government periodically monitors the inflation rate and changes monetary policy accordingly.

Today we will see what is Sensex or Nifty50?.

Sensex is the index managed by BSE which contains top 30 companies by market capitalization whereas Nifty50 is the index managed by NSE which contains top 50 companies by market capitalization.  BSE and NSE periodically review the list of companies in the index and make changes accordingly.

Now the question arises what conclusions could be drawn based on these indices. As I told, an index gives a broader picture of a trend in the stock market. If an index is going up, then we can note the following observations:

  1. Investors are optimistic about the growth of the companies.
  2. There is more demand in the market and investors are investing more and more money in the stock market.
  3. As investors are optimistic about the companies, it directly shows they are optimistic about the country’s growth and its GDP.

Let us understand what is happening when an index is going down

  1.   Investors are pessimistic about the growth of companies.
  2.   Investors are pulling out money from the market, therefore, creating more supply and less demand in the markets.
  3.   Generally, the growth of companies is not affected by the decline in the index. But on a long run like 1-2 years, it can impact their businesses also.

I hope, now you will have a good picture of Sensex 30 and Nifty 50.

Read:  Why stock markets exist?

The same principle could be applied when an index is going down.

I hope now it will give you good picture what Sensex and Nifty stand for. We will take more such small concepts on our journey to improve financial literacy.

Read:  Why stock prices change every second?

Thanks for reading.

Categories
Book Review General Investing

PICKING UP STOCKS FOR YOUR BASKET: SHOPKEEPER STRATEGY

A few days ago I came across a wonderful book written on investment with keeping a mind of a trader. The winning theory in the stock market by Mahesh Kaushik tell you some of the beautiful methods to pick stocks.

Mahesh Kaushik considers buying a stock is just like he buy vegetables in a large store. It the place where we should buy only when we are getting a proper bargain and should sell when those things have appreciated high in value. I have mentioned below some of the brief points from his book.

  1. Diversify your portfolio– do not invest more than 5% of your portfolio in the single stock.
  2. Don’t incline to the same sector.
  3. Profit book– should happen and don’t get married to any stock. But try to do at the end of the complete year.
  4. Stock nature– Prefer dividend-paying companies over non-paying companies.
  5. Averaging out a stock– Never ever average out a stock just because their prices are falling but because you have a high probability of winning.
  6. Opportunist– Keep free cash for an upcoming opportunity.
  7. Base price concept– It is an average price of a stock over 3 years.
    Buy case- Base price < CMP(current market price). Buy when CMP is around 80% of the Base price. Sell when CMP cross over 120% of base price.
  8. RPS vs EPS– Look at EPS (earning per share) but don’t forget to look at RPS (revenue per share) as EPS could be negative for a fast growing company for years.
  9. Book value– When book value is 20% lower than CMP then that company could be a value buy.
  10. Block deals– Stay away from those stocks where block/ bulk deals happen regularly.
  11. Buying opportunity- The ratio of stock year high price to year low price should be less than 2.5. Mostly it is recommended around 2.
  12. Face value comparison– While comparing 2 companies  Min(CMP/FV(face value)) is considered better than the other.
  13. Maximizing profits– If your stock has been appreciated above 20% of base price then you can keep a trailing loss at 5% of the CMP.
  14. Promoter holding– You should select only those stocks where promoter holding is not less than 15%.

I hope this article will give you basic information about the book. If you are a beginner and want to master the art of winning in the stock market then I would definitely recommend you to read the book. It will add a lot to your knowledge.

Read: Some bitter truths about the stock market

Thanks for reading.

Categories
General Investing

A INTRODUCTION TO THE STOCK MARKET

Introduction to Stock Market

Most of us have heard about SENSEX/ NIFTY at some or other point in our life. The SENSEX and NIFTY are the indices run by BSE and NSE respectively. We will talk more about these indices later on in this book. When I heard about SENSEX or NIFTY they did not matter much to me and they were very confusing to understand. Do not be amazed if I tell you a healthy stock market corresponds to the growing economy which directly correlates to a growing nation. Therefore the Stock Market is very much necessary for a nation.

How Stock Market came into the picture?

  1.      Starting of business

Now let me give you an example of why we need a stock market.

One fine day I was having a beer with my 2 besties. We were discussing our career and future prospects. Then I proposed to them a business idea of selling T-shirt merchandise. Both of them got excited about the idea and were willing to be a part of it.  But both of them were busy with their jobs. They decided to support me financially. Assume that we started our business next month with the basic capital I had and the rest contributed by my mates. Now, I and my mates are the promoters of the company. And after a month, I was lucky and my hard work paid off. We started earning decent profits within a month of starting my business.

  1.      Expansion of business

Now, if I want to move ahead and expand my business I find there is a problem. I do not have enough capital to start the operation in another city. But I know a bunch of people who are willing to invest in my company. So, I approached an investor for some investment in my company. Now I need to give him something in return. Therefore, I decided to give 5% equity of my company and this made him a shareholder of the company. In order to finalize the investment, I brought a legal stamp paper and complete the deal.

  1.      Raising money from Equity

As you saw, I transferred some amount of shareholding of my company to an interested investor. This is the real meaning of shares. So, whenever you are buying a share of the market, you are buying some ownership in the company. And only a handful of the successful companies are listed on stock exchanges.

  1.      Sharing of Ownership

Irrespective of your shareholding in the company, whenever the company makes profits or losses you will be the part of its profit or loss-making. Usually, Investors do not like loss-making companies.

The companies distribute profits to their shareholders by means of dividends. The dividend amount which is needed to be distributed is decided by the company management. If the company has performed very well then maybe the company will distribute good dividends. Approval of dividends is subject to the approval of management and shareholders. Now you must be a clear idea that a person who is buying a share of the particular company is actually investing in the future growth of the company. When you are investing in the company you are also taking a risk involved in the future developments of the company.

Read: All you need to know about IPO

Regulator of Stock Market: SEBI

In India, we have a government body SEBI (Securities and Exchange Board of India) which regulates the listing of the company on the stock exchanges. SEBI also provides certain compliances and guidelines for all listed companies.

SEBI is like a watchdog which protects investors rights and monitors any fraud or illegal activities. When any company wants to get listed on market, they need to get permission from SEBI. For the purpose of raising money from the public, promoters of the company hired investment banks (SBI Capital, Morgan Stanley etc) which help them to raise capital known as IPO. These investment banks analyse the company’s financial health which includes the balance sheet, P & L, the past performance, and goodwill. After doing a thorough research, they prepare a document containing the company’s financial records, owners of the company, past investments in the company and the price band of shares with a lot size.  Now, the company can issue shares to the general public and whoever is interested could subscribe to the IPO of the company. Once the issue is fully subscribed, then within a week or so the company will be listed in the market.

Who Runs These Exchanges: NSE or BSE?

Stock exchanges are private organizations which list other companies. As said earlier, these exchanges are monitored and directly work under regulation laid by SEBI. In India, we have BSE and NSE exchanges and across the globe, there are exchanges like NYSE, NASDAQ etc.

What is an Index?

SENSEX 30 or NIFTY 50 is a number which represents top 30 and top 50 companies listed on their respective exchanges. One day Sensex or Nifty falls which indicates that top 30 or top 50 companies aren’t performing well and their share prices are decreasing.

Share Price Increasing or Decreasing, Why?

Now again a very important question should arrive. Why does the share price increase or decrease?

Initially, the share prices are decided by the investment bank during the IPO. Once a company is listed on the stock exchange, based on people sentiments the value of the share is decided. Stock prices move based on demand and supply in the market. One should understand that people usually see the company financial records like quarterly or annual earnings, any new progress made by the company, future scopes of the company etc. There may be the times that a company is not showing any profits but showing huge revenue growth. This could signify that may be the company is expanding very fast or implementing new ideas and due to which it was not able to show profits. In such cases, if investors think that the company will give profits in the future and then also the stock prices increases.

Read: Which factor pushes an increase or decrease in Stock Prices

So when there is a surge in a number of buyers of a share than the share price increases and vice versa. So the next time you go and buy a share do your homework first. You should be assured enough that why you are buying the share of the particular company, why not other company. What is the future of that company?

Read: Why long-term investing creates wealth? 

Read:  Some bitter truth about Stock Markets

I hope this small article has helped you in your investor journey.

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