Investing Rules – How to Invest in Stocks

Investment is defined as putting aside certain sum of money with the expectation of gain in future. We invest our money in various financial products like gold, real estate, bonds, stocks with the aim of getting better returns over this money instead of keeping it idle in savings account.

Before Investing we should Ideally

• Assess income and expenditure

Before investing we all should be aware of the total monthly income and total expenditure so that an estimated amount can be calculated. This amount can give an idea about the excess amount or the amount which can be saved.

•  Make Financial goals

It is advisable to jot down the financial goals on a piece of paper so that money can be invested accordingly basis the time horizon.

•  Know Oneself

It is essential to analyze one`s own risk taking capability and financial personality basis which amount can be invested in high risk or a low risk instrument.

In this article we shall discuss regarding rules of investing  and stock market basics some of which may be specific to stock market trading whereas other may apply to all investment products.

1. Diversify

There is a common Saying:- “ don’t put all eggs in one nest.”

This rule works with all investment products. Nobody can predict the future as there could be a sudden economic, political or any other change which may lead to huge losses if investment is done in similar products. Thus investing only in equities or investing solely in debt is not advisable.  In case of a mixed portfolio the impact of loss would not be enormous.

Example:-Mr. Ahuja had purchased shares of Satyam Computer services for a total value of Rs.50000 in November 2007 as he received a bonus from his company. He had invested the entire amount in 1 particular company. Everything was working fine in Mr. Ahuja`s portfolio till 2009 but suddenly things began to change as the scam came in place. After the scam, entire portfolio was in red due to excessive purchase of one particular stock.

CBI has confirmed that total loss to investors due to this scam is Rs.14, 162 Crore.

2. Make a Thorough Research

This rule also applies to all investment categories. Before investing one should make a detailed research about the quality of the companies selected. Quality signifies strong management team and a proven track record.

 3. Not To Panic

It applies particularly to stock market investing. It usually happens that in case of crash of a stock market, people get panic and they sell off their holdings the very next day. But instead of selling at the first stage itself one should review his portfolio and then decide if the stock has lost its attractiveness and if more attractive stocks are available in market.

4. Expect Corrections to Happen

It`s been observed that many investors believe in only one sided direction of markets like in case of downturn people loose faith in equity products and stop investing in these products. But in reality markets tend to return to the mean over time which means market extremes never lasts forever be it optimism or pessimism.

Also when there are no more buyers, the market turns lower and vice versa.

5. Know Your Risk Tolerance

As highlighted previously also it is very essential that the investors analyze their risk tolerance level and accordingly select the investment products as some of the products/ stocks are more risky than others. One should figure how much downside one can tolerate without selling

6. Portfolio Monitoring

It becomes very essential to keep a track on the portfolio regularly as nothing is permanent. High return generating products may lead to huge losses for the investors after some years if the company is going through a bad time.

Example:-the shares of Kingfisher Airlines which were attractive once upon a time no longer attract the investors due to crisis within the company.

7. Don’t Follow Others Blindly

When the prices are high a lot of people are actively buying the stocks. When price is low demand is also low as the people are pessimistic and also discouraged. Thus the entire market collapses. We should adopt an independent thinking instead of blindly following what other are following.

Benjamin Graham says” Buy when people are pessimistic and sell when they are optimistic.”

8. Avoid Fear and Greed

Greed and fear are human emotions which create obstacles in the path of successful investing. One should follow a disciplined approach to trading and should be able to figure out time to exit. There will be corrections as stocks go up and down.

9. Remain Flexible and Open Minded

There is no particular investment which remains best throughout. Depending on the situation one needs to switch to different investment avenues. If a planner suggests to shift the amount to bonds or other debt products looking at the volatility one should be flexible enough to support the advisor

10. Invest For Max Real Return

One should take into account the real return after taking into consideration the impact of taxes and inflation.

Real Rate of Return= {(1+ rate of interest)/(1+inflation rate)-1} *100

Example:-if inflation is 6% and rate of return is 10%, the real rate of return equals:-

{(1.10/1.06)-1}*100=3.77%

11. Learn From Your Mistakes

We should not be discouraged from the losses rather earlier mistakes should be taken as a learning experience. We should analyze and check what went wrong previously so that same mistake can be rectified in future.

12. Don’t Buy Market Trends

We should not base our decision on what`s happening now.  The individual stocks can rise in a bear market and fall in bull market. Thus we should study all the factors before taking any decision.

Conclusion

Investors should carefully read all offer documents and do a detailed study about the various products available in the market and should know stock market basics before investing. These rules would also be helpful in making a right investment choice.

What is National Pension Scheme in India (NPS)

Regardless of how much one earns; all individuals try and create a pool of savings for their retirement. The government tries to promote this by adopting various measures like compulsory deduction of PF and EPF, encouraging savings by allowing tax exemptions or introducing schemes like National Pension Scheme 2012

Not many people in India know what is NPS?

National Pension Scheme in India (NPS Scheme) is amongst many investment options that are promoted (but not so well know so far) by the government of India but there is a major difference between NPS scheme  and other government scheme. National Pension Scheme website details arehttps://www.npscra.nsdl.co.in/

Unlike most government schemes where you get guaranteed returns NPS returns will depend on the efficiency those managing it. So is it a government promoted mutual fund? Read on to understand how the scheme works.

National Pension Scheme 2012 in India

National Pension Scheme details are mentioned below:

• Individuals between the age of 18 and 60 years are eligible to apply for NPS account
• A Tier I account where contributions are made and withdrawals are not permissible
• Later Tier II account can be opened from where withdrawals can be made
• There are 22 registered Points of Presence (PoP) (across the country) which serve as customer service centers.  A few banks and financial institutions have been designated to do so.
• Once you approach the PoP and complete the formalities you will be registered with the CRA (Central Recordkeeping Agency) and will be issued Permanent Retirement Account Number (PRAN).
• NPS form is available from PFRDA website i.e www.pfrda.org.in
• There is no cap on the maximum amount that a person can invest; the minimum investment size is Rs. 500/month or Rs. 6000 annually.
• Fund management charges are almost negligible at 0.0009% and there are some other costs which are quite low as compared to a mutual fund
• Other National Pension Scheme details includes that you could choose from a list of six fund managers which are State Bank of India, UTI, ICICI Prudential, Kotak Mahindra, IDFC and Reliance.
• The investor also has the option to invest in three different investment styles namely i.e high risk, medium risk and low risk. There is no cap on the amount you invest in low risk and medium risk fund styles, but you can invest only 50% of your fund corpus in high risk fund style. Further to your knowledge, the high risk investment option invest upto 50% in equity linked instruments or index funds which replicate Sensex
• There are two options available in NPS account i.e “Auto Choice Option” and “Active Choice Option”. If you are exercising the first option, the money of the investor would be invested in various asset classes as per the investor’s age. If you select the active option, you are required to select one of three investment styles mentioned above

NPS – Swavalamban Scheme

Swavalamban scheme under NPS was launched in September, 2010 under which the Central Government will contribute Rs 1000 per year to each NPS account opened in financial year 2010-11 or in the next three years i.e 2011-12, 2012-13 and financial year 2013-14. Also adding to it, all NPS account opened in 2009-10 will also be eligible under Swavalamban scheme. The eligibility criteria for this scheme is that the investor must contribute a minimum of Rs 1000 and a maximum of Rs 6000 to NPS account per year.

Withdrawals in NPS Account Post and Pre Retirement

If you are aged less than 60 – You are required to invest a minimum of 80% of your pension money accumulated to purchase a life annuity from IRDA. You may withdraw remaining 20% of your amount.

On attaining the age of 60 – You are required to invest a minimum of 40% of your accumulated wealth to purchase a life annuity from IRDA. You may withdraw the remaining amount in a lump sum way or in a phased manner till the age of 70

Death of Investor – In such a case the nominee of the investor can withdraw 100% of the wealth accumulated in the NPS account

Is NPS Scheme a Mutual Fund?

The answer is yes and no? It is like a mutual fund  basic philosophy of investment (where the pooled money is invested in different options) and there are professionals to manage of your money yet the scheme is very different operationally.

First let us understand how is NPS like a mutual fund; first things first the returns are not guaranteed just like in a Mutual Fund.  Mutual fund provide an option where in you could invest in equity or debt instruments and also in different company stocks indirectly; NPS allows you to do the same.

Now for the differences: If you choose an Infrastructure mutual fund then all your money gets invested in stocks of infrastructure companies. If you choose a balanced fund then you get a mix of debt and equity but the proportion is decided by the fund manager which means that you have no say in it. So in case after some years you want to change your mix of investment you cannot do so. Well the NPS scheme gives you a choice to do so; the investor can choose a mix of different type of asset classes and can also change it as time goes by.

You can create your own portfolio by choosing between Equity(E) which is high risk and high return, fixed income instruments( C)  that offer medium returns at medium risk and pure debt instruments (G) with have almost no risk and offer lower returns. Since the idea is to promote stability post retirement the government has decided the equity limit has 50% in any portfolio. This aspect also differentiates it from a mutual fund where if you want all your money can be invested in equity.

Currently the equity part goes to index funds; the fixed income portion constitutes liquid funds, fixed deposits, infrastructure bonds and corporate debt instruments. Pure debt options are central government securities.

Another interesting aspect of the NPS pension fund is that you can change this mix as your age progresses. Just consider this example; Ashish starts the NPS investment at 25 and below is an illustration of how he varies the portfolio mix depending on his age

When Ashish is younger his risk taking capacity is higher and he would like to invest more in Equity and create wealth. As his age progresses he moves away from equity to safer options but does not do away with equity completely. This is just for example sakes many people might want to completely avoid equity by the time they turn 55.

In case the investor does not choose an investment mix himself/herself then the money is invested as per the default option created by the government. This default option has been designed keeping in mind the individual’s risk taking capacity at various stages in life. At the age of 18 the default option will invest 50% of the funds in equity, 30% in fixed income instruments and 20% in pure debt instruments. This remains static till the person turns 36 after which the equity and fixed income contribution decreases and pure debt increases. When the person reaches 55 then  80% will be equity and 10% each for rest of the two.

As stated above there are six fund manager to choose from so if you are not happy with one you could switch to another fund manager unlike a mutual fund where you will have to exit the fund in case you are unhappy which would mean more charges and more formalities

Performance of NPS

Though the scheme is not very old and judging it will be a little premature however certain things can be concluded from its performance in the last few years.

• Due to the low fund management cost banks etc are not pushing it.
• All funds performed much lower as compared to their benchmark in the Equity allocation segment.
• In the C and G options the performance of all funds was way above the benchmark.
• For an aggressive investor the NPS will not be a good option as the low return on equity lowered the overall returns but for a conservative or balanced investment it is a good option.

Though not advertised aggressively the NPS pension fund scheme is gaining momentum albeit a little slowly. The NPS scheme despite its differences is pitched against the mutual funds for comparison. If you are looking at investing in a niche fund like like infrastructure, IT or gold gold ETFs or you are an aggressive investor then this scheme is not for you. But for a safe kind of player National Pension Scheme in India 2012 is an option worth exploring due to its low charges and the government backing

How to Invest in Gold – 6 ways explained !

Gold recently crossed its Rs 30,000 per 10 gm mark . This is a historic moment and I am sure a lot of people want to get into gold investments for their own set of reasons. But how to invest in gold,  given there are so many ways of gold investing these days, most of the people are stuck with so much of choices . More than the price , the bigger deterrent the confusion of “best option to invest in gold”.

6 ways to invest in gold

In this article we will see how to invest in gold in different ways and what are the pros and cons of all the options. The main focus of this article is to make the options more clear to you and help you take decisions.

1. Physical gold

The oldest and most widely used way to invest in gold is in the form of physical gold. I would say this is form with which most of the people are comfortable with . From centuries, physical gold is the only way to invest in gold . Now coming to the point , there are two ways to invest in physical gold

a) Jewellery – This is the most famous way of investing in physical gold. This is mostly done for consumption rather than “investment” .  Obviously jewellery is also an investment product in itself , but most of the people buy it for consumption purpose. The best part of Jewellery is that its very easy to invest in it , all you need to do is cash or cheque and that’s all , you can buy it . Also the whole family is more comfortable with this option. However the sad part is that you do not just pay the market price of gold , but also making charges for jewellery . As its in physical form , there are chances of theft also . One more problem with jewellery is that there are chances of fraud at times , you can be sold a inferior quality of gold in the name of “high quality” gold. So its very important from where you buy it.

When should you buy ?

Its advisable that if there is some marriage going to be there in your house in near future, you can invest in physical gold . Also note that you are very clear that it will not be required for emergency in short term. It might also be a possibility that you are more attached to physical things and do not believe in online option , that’s another reason you can go for it.

b) Gold Bar/Coin

Gold Bar and Coins are another good way to invest in physical form of gold. Gold bar/coins are sold by all the banks and jewelers . Its a good way to invest in gold if you want to do it for pure investment purpose or for some distant future marriage like your sister or daughter marriage. The good point about bars/coins is that depending on the requirement you can either buy more (bars) or less (coins) and easily available at Banks and jewellery shops , but banks only sell it , do not buy it back. Also generally there is no consumption done on regular basis so a person can keep it in locker or some safe place for long time. The bad part of gold bar/coins are that its always available at a premium price of 5-10% and at the time of selling them , you again will get a discounted price of 5-10% , so overall your returns will go down .

When should you buy ? 

You can buy a gold bar/coin if you are too attached to physical gold and can not go for online option . You can buy it for investment purpose also , but note that returns would be compromised because of the discounted price you get at the time of selling and at the time of buying . In case you have some marriage at home in coming future (not very near) , then also you can buy it . 

2. Gold ETF

Gold ETF’s are just like stocks , you can invest in these if you have a demat account . An ETF a online version of physical gold . The best of gold etf is that its convenient to invest in Gold ETF if you already have a demat account and can start with a small amount (1 gm value) and as and when you want you can invest from time to time. However the sad part is that you have to pay the brokerage and you do not get a feel of gold in your hands which you get with physical gold . The gold ETF can also be illiquid at times if you have not chosen the right one . Also there are high chances that you will sell your gold ETF in the time of small emergencies which you will not do with physical gold. Gold BeeS from Benchmark and Kotak Gold ETF are one of the biggest gold ETF’s in India right now and they are highly liquid. We recommend Gold ETF’s to our Financial Planning clients as their expectation is liquidity + some exposure to gold for investment point.

When should you buy ? 

You should buy gold ETF if you already have a demat account and would like to invest from pure investment perspective , You can consider them as liquid as you can sell them on any day in the stock market . 

3. Gold Fund of Funds

Gold Mutual funds are those mutual funds which invest in another parent mutual fund which finally invests in stocks of gold mining companies and companies which are related to gold related activities . They also buy physical gold , but in very small quantities . This is not the suitable investment for those who want to track gold prices , because these funds do not invest most of their money in gold , but gold related companies . So its mainly a equity fund which invests in companies. For example AIG World Gold Fund , which does nothing but invests in its parent mutual fund AIG PB Equity Fund Gold, which finally invests in different companies . The good part of these funds is that if you are optimistic about the future of those companies involved in gold, these are good funds , but the sad part is that you will pay expense ratio two times because it is fund of funds. A lot of people invest in these funds by mistake thinking that they invest in real gold.

When should you buy ? 

By now you will be very clear that these are actually like a sectoral fund which invests in only those companies which have their work in gold related things like mining gold etc. So its extremely risky or rewarding . So if your criteria is to invest in gold companies and not gold , these are the funds to invest in 

4. Gold Saving Funds

These are the mutual funds which invests in real gold . They pool in money from people and buy gold and you can buy the units of these mutual funds . The best part of these funds is that you can systematically invest in gold per month through SIP route . The best part of this is that you dont need to have a demat account to invest in gold saving funds . You also can invest regularly in gold through SIP through this funds.  But the sad part is that you pay administrative charges and expense ratio just like any other mutual funds.

When should you buy ? 

This is really a great way to invest in Gold if you do not have a demat account and would like to regularly invest on monthly basis . This is highly liquid option also because you can anytime sell the gold fund units like any other mutual funds unit . 

5. e-Gold

e-Gold was launched some time back in India from the exchange called NSEL , which also has other commodities like Silver and Platinum in e-format . Its very much like Gold ETF , where you can invest in Gold in online format . For investing in E-Gold you still need a demat account, but with one of the companies authorised by NSEL (list here)  . The best part of this option is that you can also take physical delivery of gold with some terms and conditions. But the sad part is that not all big broking houses demat account can be used to buy this, you need to open another demat account for this and this option is not too much popular with retail investors .

When should you buy it ? 

You can buy this if you need physical delivery of gold at some future point of view , but you also want to benefit from the online advantages like the market price and no storage cost at your side.Read more about this in detail here

6. Gold  Futures

One more option to invest Gold is through Gold Futures, but I would like to call it more of a trading activity and not “investment” because its short term in nature. You can use Gold Future to protect the pricing . If the price of gold today is Rs 30,000 and a 3 month gold future price is 30,500 , then you can lock the price at this moment to 30,500 , so that when you want to buy the gold after 3 months, you get it at 30,500 only . This would require a little bit of knowledge on how future’s work .

When should you buy ?

This option is bit more technical and one should only use it if you have decent amount of knowledge . Do this if you want to lock the price of gold which you want to buy in future, if you fear that prices can go very high . 

Which option are you going to choose and why ? Are you now clear on how to invest in gold as per your condition ?

Advantages and Disadvantages of Mutual Funds

Before investing in mutual funds an investor should understand if it suits his requirement of not . Therefore one should go through all the advantages and disadvantages of mutual funds .

Advantages of Mutual Funds

Management: One of the biggest advantage is that in very low cost the investor gets his investment managed by experts. If they want to get the services solely for their investment , it can be very expensive but by investing in MF they can take advantage of the scale.

Scale Advantage : The transaction costs of a single indivisual is very less because mutual funds buy and sell in big volumes.

Diversification : With mutual fund investment your money gets diversified in a lot of things, which helps in minimising the risk factor. Also if one particular sector does’nt perform well the loss can be compensated with profits made in other sectors.

Liquidity and Simplicity : You can sell or buy mutual funds anytime. So mutual funds are good if you want to invest in something which you can liquidate easily . Also MF are very simple to buy and sell .

Disadvantages of Mutual Funds

Risks and Costs: Changing market conditions can create fluctuations in the value of a mutual fund investment. Also there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

No Guarantees: As Mutual funds invest in debt as well equities , there are no sure returns . Returns depends on the market conditions .

No Control: Investor does not have control on investment , all the decisions are taken by the fund manager. Investor can just join or leave the show.

Mutual Funds Vs Direct Investing

Investing directly in the market is better than going to "Mutual Funds" since the mutual funds pay heavily to the mutual fund managers and also pays brokerage to the brokers. The cost of purchase for a mutual fund also goes up since they have to buy huge quantities rather than small lots from the market which significantly influence the price of the share. Information leakage from mutual funds resulting in front running also significantly affects the cost of buying the stock though SEBI and other government bodies trying to prevent it. 

There is also a chance to hold some junk stocks. Also if you look at the holding of top mutual funds they hold none other than Nifty stocks which is known to everyone. The timing of the purchase is very important. You can ask that I do not know anything about stocks and will I not burn my fingers if I invest directly. No even people who know everything about stock market lose money. People who does not understand stock market can make more money than people who do.

Pick the top fifty stocks from the nifty and use your common sense to time the market. The best time to buy is when everybody sells. So whenever there is a drop of more than 5% in a single day for a particular stock buy the stock. Also buy one tenth of what you intend to put and keep on buying the nifty stocks and build a corpus for your retirement.

When to exit – When everyone says india is shining and stock markets are the only place to invest get out. Never forget the simple thumb rule BUY WHEN EVERYONE SELLS AND SELL WHEN EVERYONE BUYS.

Look at the returns yourself. Start small and you will be surprised that you are the best investment manager.