Which button to press; BUY or SELL?

On a lazy Monday morning, stepping in your office lift, you are stumped by a googly form your lift man, enquiring about a specific stock he is eyeing to buy at the bear party at bourses. The sudden upsurge in the Business TV channels & catchy print headlines wouldn’t even spare the last dim-witted. Adding to this is the friends boasting hot profits made from stocks (minus the losses made), that steams the unlearned investors to entry markets. Having said this, still the equity participation in our country is very low.

Investor, learned or otherwise, every time faces the same dilemma, about what investment strategies they should follow to optimize their investment returns in Bears & Bull fight .The answer to this is not a one solution that can be applied by all. The risk & return expectations differ from person to person, so would be the strategies. The investors can use varied combination of the products suitable to his risk and rewards preferences.

For Risk Takers:-

The volatility in the equity markets should be utilise by the risk takers to buy the Blue-chip stocks and high rated Mutual funds, as they would be trading at the lower value. Many HNIs have special funds marked for buying undervalued investments. These allocations just waited for those steep trough of markets to be deployed. The HNI’s are well informed investors and have prompt access to market information and hence they can actively manage their funds.

Such investors also shift profit portions from their satellite portfolios, for allocation to their core portfolio. The point here is also to note that diversification should always be considered. Choosing in between countries and stock capitalization will always benefit. The Top Ups to the ongoing SIPs should be done.

For Risk Averse:-

For the, masses who waited to enter the Equity markets, an uncertain markets would be a window to enter by enrolling in an SIP in a consistent performing equity diversified mutual fund. Those who have a ready corpus in saving banks should move it to a liquid mutual fund scheme & use the STP mode to deploy funds. Such investors should stick to large cap oriented stocks if opting for some exposure to direct equity. It’s said that every dark cloud has a silver lining, so is with the uncertain markets. The inverse relationship of returns between some of the financial products, help investors to immunise their portfolios to yield positive returns.

Needless to say here, that investors should alter their portfolio based on the asset allocation principles & financial goals. At the heart of any investment decision lies the calculation of the risk and rewards available. Faced with many choices, investors choose between different financial products based on their liquidity attitude, risk appetite, budget constraints and performance objectives.

This would remind you of the mass IPO hysteria of Jan 2008 of Reliance Power Ltd. People were very desperate to get their First Demat account, so as to hook any number of shares they could possibly do. The ultimate motive for most of them was to earn a profit, selling these shares when they get listed. But one shouldn’t invest in IPOs just for listing gains. Initial Public Offerings, (commonly understood as IPOs) are issue of the equity shares of company by the company promoters to the common public so as to mobilize more funds for their Capex needs primarily. IPOs are supposedly the one of the options to acquire shares at a best price. As in IPO, shares of the company are rationally priced so as to get full subscriptions for it. Investors are always confused in terms of which IPOs to invest, and which to refrain. When an investor holds equity shares of a company, he earns dividend (share of profits of the company) and capital appreciation from the price movement of the company’s stock. So investing in IPO of selective companies can earn you decent returns.

How to Apply?

The very first thing you require is a Demat account and secondly a PAN no. & available funds. Funds can be applied in following ways,
1) Application via cheque.
2) Funding against equity portfolio.
3) Application Supported by Blocked Amount (ASBA).

The first method is very simple get a IPO application form, fill it duely , attach a cheque for the specific amount, applying for certain shares at certain price shares and submit it to intermeditaries, mostly banks and stock broking houses.

The other way , when u have existing investment in equity shares through your stock broker , he can offer you an option of funding your IPO application against the pledge of the existing shares. The terms and conditions of such arrangement differ from broker to broker, and client to client .Generally a specific rate of interest is charged for the funded amount.

In case of ASBA, investor has to apply for the IPO via specified Banks called as self Certified Syndicate Banks (SCSBs). Applicant has to apply to IPO through separate ASBA forms .The applicant has to give instruction to his bank to block the application money in his account so as to subscribe for the IPO. Bank freezes the said amount and remaining amount can be used by the applicant as normal bank account .The amount which the applicant has to pay on his allotted shares is debited to the account only when the basis of allotment of shares is finalized and application is selected for allotment .Applying through ASBA, you can only bid at cut off price and revision of bids is not possible, though applicant can withdraw from bidding. The main advantage of ASBA is that applicant doesn’t forgo the interest on the block amount.

One should take a note of the following points for investing in IPOs :-

a)Promoters/ management : The foremost important criteria is to inquire about the promoters of the company. The promoters and the management are entrusted the job of managing the affairs of the company. The Experience and qualification of management counts when taking a call on the vital matter of businesses. The management is responsible for extracting profitability and promoting growth to the business.

b) Industry analysis: One should also be aware about the general outlook of the industry to which the company belongs to. For E.g. Textile industry in past were not doing good due to governments unfavorable policies towards the sector. And during this period, most of the textile companies were facing heavy competition in Export market, which in turn reduced sales and profits. Textile Company IPOs during such times wouldn’t be a good investment option. So invest in those sector Companies IPOs which are flourishing and project promising growth in sales and profits.

c) Uniqueness: The uniqueness of the company also matters in order to have a distinguish identity and command a premium over the peer companies in terms of share prices and cliental. For E.g. Infosys Technologies is known for its ethical business practices, Reliance Industries for wealth creation for its shareholders.

d) Need of funds: The Company is offering its common stock to public for getting the required funds. These funds would have numerous applications, as funding capacity expansion, retiring high cost debts, working capital. The detail allocation of the funds to the cost of particular expansion plan or a project should be vetted.

e) Past financial of Company: SEBI (Securities Exchange Board of India) has laid down very strict norms in terms of issue of shares to public. The regulation in terms of drafting of prospectus and filing requirements are very exhaustive. The companies have to include previous years financial statements in the prospectus. This is helps the prospective investor to gauge the business of company in terms of efficiency in use of resources. Investors should ensure that companies have a profitable track record. It should be also seen that the company’s product and services have a long standing demand. This will keep intact earnings per share of the company positive.

f)Justification of the financial projections: The companies have to show a utilization of the funds in the project and depict a projection of the sales and revenue that would be earned. It is not that easy to validate the projections, this is where the role of the Rating agency comes in to picture. Rating agencies perform a thorough assessment of the financial statements and future growth projections of the companies and assign ratings to the companies. Applicant should avoid applying IPOs of lower rated companies.

g)Is the IPO price justified: As mentioned earlier IPO price of the shares are generally rationalized. But its seen when the companies get listed on the Bourses, their price fell below the issue price. For e.g.; Most of the Power sector companies shares are currently trading below their issue price. The best way to ensure that the price per share offered is justified by the earnings of the company, one should compare the its Peer companies operating in the same industry and with similar asset size .The gauge here is the EPS (earning per share) .The earning per share (post issue) should be compared to the peer group companies to get a tentative idea about the issue price.

Its not that you should invest in every IPO and hope to strike lucky with a huge listing gain. Be diligent in selecting the IPOs you apply. IPO route of acquiring shares should be used to get shares of promising companies at a value price. The key to earn returns is to subscribe to underpriced IPO issues and refrain from overpriced ones. Judging this although is a tough task, so one should be receptive in seeking a professional help.

Mutual funds for mutual benefit.

You get a call from your banker,” Sir I have Best performing mutual funds for you”. You turn him down ,thinking Mutual funds are complex equity products .But it’s not true ,In reality Mutual funds (MF)are very fundamental product .To put simply the concept of Mutual Funds, suppose there are 4 people who want to travel to a same destination. All of them waiting at a Bus Depot. The Bus is indefinitely delayed, so these 4 people agree to share a taxi to their destination. They Hire a taxi and reach their destination. The Taxi here is the Mutual fund instrument, and passengers, the MF investors.

How it works?

Suppose Mr. A, Mr. B Mr. C have ideal funds of Rs. 100 each. They want that there money to earn fair return over the time. They approach XYZ Company who pools money and invest in other financial instruments. XYZ Co.’s Fund Manager would purchase instruments worth Rs.300 which would serve the investor’s objective. The Investors are allotted Units of the schemes at a price, which is called Net Asset Value (NAV) for e.g. Rs. 10 .So the Investor will get 10 units each .Appreciation of the value portfolio of the MF schemes will increase the NAV of the scheme. If after 1 year the NAV of the scheme increases to Rs. 12/unit, the investor has earned a return of 20%p.a.

Mutual fund groups people, having similar investment objective and invests in equity, debt or money market instruments .In India the concept of mutual funds was initiated by UTI in the year 1964. There were very limited Mutual fund schemes and lesser Companies(Asset Management companies) offering Mutual funds at that time . The Mutual fund industry has grown very rapidly in the last two decades, with assets of more than Rs.7.5 trillion at present. Those who have invested in reputed MFs in last decade would vouch for the returns they have earned. We often don’t take the Mutual funds as a return earning instruments. Even if we invest, we have a very casual approach towards what we are buying.

Some of the reasons to buy Mutual Funds

1. Ideal for first time equity Investors.
2. Benefit of Professional Fund Management.
3. Low transaction Cost
4. Portfolio Diversification
5. Choice of variety of asset class.
6. Liquidity.

Mutual funds are mostly popular to masses as tax saving Instruments. The Equity linked saving schemes (ELSS) of MFs offer Deduction u/s 80C of Income tax Act. 1961. But MFs have gained more importance rather just being a Tax saving instruments. Today, Mutual funds are actively used by the financial planners in formulating one’s financial plan. The Asset of the MFI has grown considerably over the year due the increase in the awareness of the MF products and the returns delivered by the Mf schemes.

Investors Looking for Investment in Mutual funds should consider following points.

1. Financial goal & current portfolio.

The investor should ascertain his requirement in terms of the period of investment, Returns and risk capacities. This requirement should be matched with the respective schemes of MFs available. It should also be seen that the portfolio is neither getting concentrated to any sector or capitalization (say Mid cap Funds) nor inclined towards more of equity/debt instruments. This should be calibrated accordingly to ones situation in life.

2. Scheme Objective

There thousands of MF schemes available in the market, with different objective of investment and returns. One should ensure that his investment objectives are justified by Scheme objectives. This is essential, as to achieve the set portfolio returns.

3. Scheme Options & types : Investing in MF is advantages as an investor get varied alternative avenues to invest .Basic category of MFs schemes are

1. Equity Schemes
2. Debt Schemes
3. Hybrid Schemes
4. Money Market Schemes

One should get a clear understanding of the nature of the scheme by reading the scheme related documents and invest accordingly .MF equity schemes give options namely, Growth option, dividend reinvestment option /pay out option. The Investors who wish to get capital appreciation over the period should opt for Growth option. The investors, who wish to get intermediate cash flows in form of dividend, should opt for the dividend option. The investor may also opt for dividend reinvestment option, if they want to invest their dividend at those prevailing NAVs in the same fund.

4. Reputation of the AMC. The Asset Management Companies(AMCs) are the companies which are formulated by the trust , which in turn established by the sponsorer s. One had to ensure that the sponsorer of the Mutual fund House are reputed and have good standing in the financial industry. This will result in ultimate safe keeping of the invested sum by the unit holders.
5. Past performance of schemes: The performance of the MF schemes is based on the returns of the underlying Assets, and these assets may give varied returns over a period. So just investing in funds seeing a particular period return would be unfavorable. Long term past performance of the Mf schemes over 3- 5 years should be seen while finalizing a MF schemes for investment. This ensures that the fund has performed in all market conditions. One should also see that the MF schemes have outperformed their respective benchmarks indices over the period under study.
6. NFO trap: Most of us think that it is prudent to invest money in every NFO , as the units are available at lowest value(face Value). This Belief is not true , one should only invest in a NFO if there is specific requirement of the portfolio. For the first Time investor a exposure in international or sector funds is not advisable.
7. Exit Loads & Tax benefit. In case of the investor withdraws the invested sum before the stipulated time period as decided by the Mutual Fund House; fraction of sum is deducted, which is called the exit load. One should be aware of such deductions, and lower Exit load funds should be preferred. Where the investor wants to invest in mutual funds to gain a Income Tax deduction, he should only invest in Equity Linked Saving Schemes (ELSS), if invested otherwise, the very purpose of investment is defeated.

Recently the entry Load on the Mutual funds was abolished and online transaction of the MFs was flagged off, paving way to increase retail participation. This has also made MFs the accessible to investor in every corner of the country .Mutual funds are ideal instruments for those who want sizeable returns on their investment but lack adequate knowledge of the Markets. So, don’t ignore any phone calls from your Financial Advisors.

The less talked; Non Convertible Debentures (NCDs).

For those who want to avoid the nail biting volatility of stock indices and want a fixed income earning instrument, NCD is the one of the option to look at. The term non convertible debentures (NCDs) would sound, as a hard to gulp finance jargon. To put simply, NCDs are type of bond whos repayment is secured by Companies assets, earning a fix coupon. NCDs are the one of the soughted route of financing by the corporate. NCDs are debentures, that don’t get convert into equity shares. The main reason to opt for NCD route of financing is availability of funds to corporates at a reasonable cost. Secondly, lesser regulations and compliances with the regulatory bodies as compared to IPOs.

In the year 2009, many of the Indian companies issues NCDs and mopped up a large corpus. To name a few ,Tata capital, HDFC, L&T finance, Shriram transport issued NCDs .The risk associated to the NCDs would be higher as compared to the Bank FDs as the repayment of the capital is not guaranteed fully. The NCDs are lesser risky when compared with the company FDs as Company FDs are not secured by any asset of the issuing company.

While Investing in NCDs, one should consider the following points as NCDs inherit certain risks.

1. Background of the issuer:

The reputation & goodwill enjoyed by the issuer is the foremost important point one should see while investing in NCDs .It should also be noted how the issuer is perceived amongst the corporate world. Better the standing; lesser the general risk.

2. Object of the issue:

The capital should be raised for the main purpose of the business, i.e., capital expansion, retiring high cost debts, partial working capital financing etc.

3. Credit standing of Issuer Company:

One should enquire about the credit worthiness of the company, so as to know, has there been any default in payment of interest or capital on the instruments previously issued by the company. This would be thoroughly evaluated by the rating agencies before assigning rating to the NCD instrument.

4. Rating of the NCDs:

The NCD instrument is required to be rated by the rating agencies. This helps investor to decide amongst the similar NCD issues open for subscription. One should ensure the rating should be of high grade, as per the legends followed by the respective rating agency.

5. Financial position of the Company:

It is prudent to lend money to the company, which is growing at a healthy rate in its sector. The top as well as bottom line should show a positive trend; this will ensure that there would be less possibility of capital or interest payment default.

6. Debt servicing capability:

The issuer company should have enough of surplus profit left after meeting the operating expenses to meet its obligation on the Interest payment of the all of its loans and debt instrument issued.

7. Repayment terms: If you are considering NCDs to fulfill specific financial goal, it should be noted that the repayment of the NCDs match your requirements of funds in future. If it doesn’t then the whole purpose of investment is defeated.

8. Interest rate: The Issuers of NCDs will pay a period fixed interest on the face value of the instrument. There are numerous options like, Monthly, Quarterly, and half yearly or cumulative payment of interest. The investor should decide on these option keeping in mind his need and financial goals to meet.

9. Quality of asset secured:

It’s not sufficient that the NCD are backed by security of the asset, the quality of the asset also counts. The reason behind this is that, suppose the company is liquidated, the sales proceeds of the assets secured would be available for the repayment of the NCD subscribers.So the worth of the asset is also very important. Charge on Fixed Asset is considered more secure than a charge on just Current Assets.

10. Put and Call options:

The Issuers of the NCDs gives a Put Option to NCDs holders to demand back there lent money. There is a stipulated period after which the investor can exercise this option. Similarly The Call Option gives a right to the issuer to repay the amount, to the subscriber before the predetermined redemption period. The Subscriber should be aware of these options, as they would be exposed to the reinvestment risk and subsequently disruption in achieving ones financial aim.

11. Tax incidence:

Mostly the interest paid on the NCDs is not applicable to TDS. However, NCDs allotted to NRIs are subject to TDS under Section 195 of the Income Tax Act. Fixed Interest income received is applicable to normal Tax rates as prescribed by the Income tax Act. The liability of capital gains tax also arises on the sale of the NCDs.

To sum up NCDs is one of the excellent options available for the investors seeking fixed returns. NCDs are usually listed on stock exchanges to provide liquidity and secondary purchases. The risk attached to NCDs shouldn’t be ignored. NCDs are the best instrument for those Investors having a moderate risk appetite.

Path to Equities….

Have you ever envied your friend for making that quick Buck in Equity shares? Have you ever wished to make returns more than your bank FDs? Once in our life time we all have encountered these questions. Most of us get tempted by the overnight multi return baggers stocks, and get into such stocks. Suddenly we find that we are left with our investments halfed .We swear to our self that we won’t invest in equity markets ever again. But equities are more than making just quick money .The value of our saving is getting diminished day by day by inflation. This makes it very essential that our investments yield returns over and above the rate of inflation. We have various financial commitments to be satisfied over our lifetime, and their cost is on upsurge. So this is where Equity Stocks returns take main stage. Equities are said to be the ultimate hedge against inflation. The average returns of the equity over long term period is around 13% -15 %( see graph).

Equity share are instrument whereby the investor gets an opportunity to participate in the affairs of the company and enjoy the share of profits (or losses) in the form of dividends and increase in share prices .There are many types of Equity shares, but we will limit our scope to the listed equity share on Stock exchanges.

There are different means by which an investor can get exposures to equity shares, some are enumerated below.

1. Direct trading through Share Brokers.
2. Equity oriented Mutual Funds.
3. Portfolio Management Services (PMS) Schemes
4. Unit Linked Insurance Plans (ULIPs) of insurance companies.

Here is a simple guide to Invest in equities.

1) Thumb rule: The basic thumb rule followed for deciding the portfolio allocation to the equities is the Age of the investor.The portfolio percentage exposure to equity should be 100 minus the age of the investor. For e.g. Mr. Wise is 45 years old; he should take an equity exposure of 100-45 =55, i.e. 55%.while calculating this percentage, exposure to equities through all instruments should be considered. This thumb rule is based on the logic of age and risk relationship. As your age increases the risk taking capabilities decreases.

2) Risk Element: Investment in equities entails certain risk. There is no guarantee of fixed returns and the capital may also get eroded to any percentage. Investor should be completely aware about the kind of the risk he is exposed to.

3) Mode of entry :It is suggest for the first time investor to invest in diversified equity Mutual Funds(MFs) to ride the equity returns, as the MFs are managed by experienced professionals and advantage of portfolio diversification can be taken. The well informed investors, who can comprehend the company prospects, can take help of the Stock brokers. Stock broking firms are always in competition to provide wide spectrum of value added services to their clients. They offer services like Portfolio Management Services, Life & General Insurance, Commodity trading, Mutual Funds, Forex trading etc.One may shortlist the most efficient & convenient Broker for his investments.

4) Stock selection: This is the most difficult part of investing in Equities. The basic rule one should remember here, is select companies which have shown consistent growth in profitability and sales. Ensure the company’s Management is in the hands of experienced professionals. One can also subscribe to an Initial Public Offer (IPO) of the companies and benefit from the growth of companies expanding with capital inflow.

5) Diversify: In case you have opted to invest in equities directly through a stock Broker. One shouldn’t be biased to particular sector or capitalization. Again, as the rule says, “You shouldn’t keep all your eggs in One Basket”. Diversification will help to reduce the risk concerning that particular sector or capitalization .The average return of investment will be preserved from sudden downside. The FMCG companies are considered as defensive stock, having less volatility in stock prices. Such defensive stock will act as return stabilizers to the equity portfolio.

6) Long term investing & Book Profits: While investing in Equities the investor should look at an investment horizon of more than 3-5 years, as sizeable returns can only be seen in long term investment in equities. During short term the equities can also show negative returns. Markets are never seen still, sometimes up and sometimes down, just like a roller coaster ride. One should keep in mind a fixed target returns which he is looking from his portfolio. Once these returns are achieved, he should exit from the stock. Don’t let the greed of earning more overcome you.

7) Don’t time the markets: Its always desirable to purchase stocks at low price and sell at highest high, its less possible one might get it right . Its advisable to purchase your target stocks at every downfall of prices and do not deploy total funds at one go. One can give a standing instruction to his broker to buy certain quantity of shares or certain value of shares periodically. This will ensure average of prices.

8) Do not panic: Stock markets depict the reactions of masses. It need not always true ,that masses would be right. Even when markets were scaling to 21000 levels no one talked about down fall. And surprisingly when markets reached 8000 levels people expected more downside. The best way when your portfolio is in Red, is to stop viewing it for a while.

9) Portfolio Review: One should take a review of the portfolio at regular intervals, taking into consideration the returns, company financials and corporate actions. It is a very important process as the underperforming stocks would be weeded out from the portfolio. This will help to maintain the average returns of the portfolio as decided. When a certain stock is sold as it has earned as decided returns or as it underperformed, proper diligence should be done for any new stocks added to portfolio.

Today , we have hundreds of news channels, making information explosions every second and analyst giving their extended views on Stocks and Markets .This has made the viewers more aware, but less knowledgeable. The investors should understand the rational on which the Equity experts recommend to Sell or Buy. There are the Bull phases and Bear phases in equity markets, one should learn how to survive in all phases. The attempt to overpower Bulls or Bears will not be profitable. There are “N” number factors affecting the Market directions, that aren’t possible for an individual investor to comprehend, so don’t shy away to take a professional help.

Investment & Current trends.

The word investing brings to our mind a crude process of extended meetings with the financial advisors, understanding the heavy jargons and praying that it yields the returns to meets your objective.

For some of them investing would only mean to dodge the tax net, like capital gains, or meeting the Investment declarations made to the HR. Seldom all understand the real purpose of Investing .The fundamental principal of investing is to set aside a sum from your cash inflows, so that it grows over and above the rate of inflation and meets your financial goals.

Most of us treat savings as the balance amount which is remaining after we have met our expenses. Instead, savings should be treated as a expenditure head, to put it simply, a specific amount should be set aside from the earnings as savings. However setting aside such sum of money will also not serve the purpose of meeting the future financial goals, it has to beat the increasing cost of money. Hence it is very essential to direct such savings to the channels which serve that purpose. The other thoughts supporting regular & appropriate investment are given by the insurance companies. They say , if you are a salaried person, there would be a end to your earning life, i.e. retirement, but if you want to be financially independent & maintain your current lifestyle you must allocate certain sum to a pension fund. Life is very uncertain, if you want that after your demise, your family shouldn’t face any financial turbulence, you should get a life cover of a sum assured of X times of the current salary. These justifications are more than sales gimmicks.

In today’s scenario the investment options available to grow your money are numerous. The products has varied characteristics and has different risk & return combination. The Thumb Rule is that, higher the returns of a investment product offered, higher is the risk. There may be a possibility of losing the principal sum invested. This inverse relationship of risk and returns makes it necessary that we choose the right investment. Investment should be according to the financial goals and risk bearing capacity of the investor. It’s always good to trust a professional for this activity, as it will ensure that the financial goals are met to most extent possible.

The financial markets have host of investment products. If we take example of the Mutual funds, there are more than 6000 schemes available. There are some hundred schemes of Insurance. Equities and debt markets are flooded with offerings. Until recently an investor was unable to get a exposure to the Crude Oil futures, agriculture commodities. We had very lately in Mutual funds, a fund based on foreign equities. The wealth managers are always busy exercising their brains developing unique structured products link to the Indices. With thousands of investment options available, the investor often fall prey to the aggressive and luring marketing stints opted by the companies selling the same. Investors are stuck up with highly illiquid, risky products and the ultimate purpose of the investment is defeated.

The right way to choose the products is to seek professional advice, say a Certified Financial Planner (CFP). As a professional, he is updated with the products available and the risk associated with it. The main advantage is that he would recommend the products which are capable of meeting your financial goals and risk appetite. It’s same as, when you are seeking a solution about your illness, you would rather prefer to seek an expert advice.

The regulators of the financial industry have show their far sightless in implementing the best practices in terms of procedure, operation and regulations to bring it to an international level. Recently SEBI announced scraping of the entry load applicable to the Equity Mutual funds. The objective of the SEBI was very clear so as to stop mis-selling, reduce the cost of units to the investors and promote professional advisory of the products. The IRDA, regulator for Insurance Industry, has also put a cap on the charges to be levied in case of the Unit linked Products. As from this month Mutual fund units are available for trading via the share brokers terminal, the concerns of the penetration of the MFs in Tier 3 and Tier 4 cities would be well taken care of. This initiative of SEBI will make MFs available to more than 2 lac share broker screens and 1500 cities across nation. This will put the investors in a win-win situation, as the investment making would be more convenient and cost effective.

In this internet age, there is an information overload. The investors have to be vigilant regarding the investment they choose. Happy investing!!