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

Important Lessons from Financial Crisis

There is a talk of US Crisis and European Crisis on every financial street. When we talk about India, the financial crisis of 2008 and slowdown in 2011 has made us taught how to behave while taking investment decisions. While understanding the various reasons for financial crisis, there is urgent need to take lessons from the financial crisis of 2008 and slowdown in 2011. The various learnings from financial crisis can be:

You can’t expect a secular bull run

Period of 2003-2007 was a period of secular bull rally for Indian stock markets. Markets went from 4000 Sensex levels to 21000 levels in just 4 years. Everybody was expecting a further rise at that point of time. But just the opposite thing happened and markets fell to 7700 odd levels in next 8 months. An important point to learn here is you can’t expect a secular bull rally in equity markets for years together. There would be periods when markets will be in an uptrend zone and numerous periods when markets would be in a downtrend zone. Avoiding panic during downtrend and greed during uptrend is the key learning here.

Avoid Fear of Markets Becoming Almost Zero

Whenever a financial crisis takes place, a lot of people become over bearish about the economy as a whole and tend to sell their investments in extreme panic. But what I learnt from financial crisis is that one should not expect his investments to become almost zero. After the effect of global financial crisis in 2008, a lot of investors sold their investments at rock bottom prices in a fear that their investments would become nil if they hold it for more time. But the stock markets gave more than 100% returns in a year after that and some stocks rose by almost 400%. I also want to make my readers remind of “Great Depression of 1929”. Even during those times the stock prices didn’t become zero.

You must have debt in your Portfolio

One of the important learnings from financial crisis of 2008 was that one must have debt component in his/her portfolio which will save an investment portfolio during adverse times like f 2008 and 2011. If you are maintaining 70:30 as equity to debt component in your portfolio, it means 30% of your investment portfolio would keep getting 7-8% annualised returns as against getting hit by 50-60% in financial recession

Invest in Quality Stocks only

Don’t take the risk of investing in penny stocks or stocks with the value of less than Rs 20 as these companies are the worst hit stocks during any financial crisis. If you are not good at researching stocks, look forward for the option to invest in equity mutual funds where near to 100% of your capital is invested in stocks under the guidance of professional and experienced fund manager who understands market better than you. Invest in a portfolio of stocks across various sectors rather than investing in a single stock.

Don’t try to time the volatile markets

Every retail investor expects the markets to fall further during the falling markets during financial crisis. In such a time, don’t try to time the market by delaying your investment decision and in the end losing out on an opportunity to invest at lower levels. Try to invest in parts at every fall of the market and average out your investments

Stock Markets Over React to Bad News

As we can see during 2008 crisis in US, the stocks over reacted to the bad news in United States and the stocks fell more than expected and thus offering ample opportunities to investors to invest at lower levels and make good money.

Benefits of Mutual Fund

Almost all financial Investment available today are in the from of Mutual Funds. Mutual Funds, as we described are basically on OUTSOURCING AGENCY where we give them our money to manage as they are more specialized and they charge a free to manage it.

Now there are certain advantages when we deal with Mutual Funds:

1. Professional investment management

Fund Managers handling your money are those people who have through knowledge and immense experience in the field of financial Market. There is always a team of people who look after investments. There are processes and  research based investment is done both in bond/ Debt and Equity market.  If you were to look at the average return based various Equity Funds and the return generated by overall market, you will find that Fund Managers have done their job well and they have given better return that the overall market in long run.

2. Diversification

Diversification is needed for the safety and stability of your investment portfolio. Since Mutual Fund is pool money and through this pool, a manager invest in various stock and securities, it gives benefit of diversification to common investor. He/ She just to invest in the common pool and thru this pool, diversification can be done. For Individual investor. it is not possible to have diversification in real sense as the amount of investment is often too small to buy different securities.

3. Low Cost

Going by train is going to be always cheaper than going by your own vehicle. The same rule applies to Mutual Funds as well. Since they deal with huge amount of money pooled by thousand of investor, their cost of handling comes down. Economies of Large scale pulls the cost of handling money to much low levels.

4. Convenience

Investing in Mutual Funds is like 123.

1.Choose a Scheme

2. Fill the form which would take less a minute.

3. Remit a cheque in favor of scheme.

Also after you have invested, the post investment activities like withdrawal, changes etc are much easy to operate.

5. Flexibility

Since the investment in Mutual Funds are denominated in terms of UNITS, there is lot of flexibility that you carry. You think of any permutation and combination of adjustment that you require, it can be done. For example, you can invest in parts, you can withdraw in parts, you can switch in parts to other scheme as well. In fact, there is no flexible investment tool than Mutual Funds available for investors.

6. Liquidity

The investment done in Mutual Funds are always available for withdrawal expect in case of Tax Saving schemes and schemes that carries mandatory lock-in as its feature. the money can be withdrawn or redeemed just by singing a redemption from and , money gets credited to your bank in 1-3 working days.In fact, we keep guiding investor that unless you require tax savings, don’t get into any schemes which locks your money. The fact of the matter is that manufacturer of financial products like insurance etc. comes whith lock- in products more for their benefits or for benefits of agents.

7. Transparency

Transparency is the key benefit of investing in Mutual Funds. You as an investor would know where your money is invested, what is the value of their investment on closure of each working day. The regulator SEBI, has also mandated various other clauses which makes mutual fund investment crystal clear. The charges levied are also clear which is the main concern for most of the investor.

8. Variety

There are plenty of  options available for an investor to choose from. Depending on his time horizon, his needs, his return expectation, he can choose as  per his per his objective. you have option in Debt, Equity , money market, Gold, ETF, International Market and what not   markets.

9. Tax Benefit

Tax benefits on Mutual Funds keep changing time to time. According to taxation on mutual fund in financial year 2010-2011 few of the tax benefits are:

• No long term gain tax on sell of equity mutual fund(long term here means 1 year plus)
• Tax free dividend
• No dividend distribution tax in case of equity mutual fund
• Benefit of indexation in case of debt mutual fund
• Lower long term gain tax in comparison to any other interest bearing product

Everything that you want to know about ETFs (Exchange Traded Funds)

ETF as an investment concept has failed in India. The introductory stride has been lost. Even with 10 years of existence in Indian markets they have not able to make any space in investor’s portfolio. If we talk about Indian Mutual Fund industry ETF share is less than 1% & if we remove Gold ETFs which were or are in fancy these days picture is even worse. But let’s first understand basics about ETF & then see why I started with a negative statement.

What is ETF?

If we talk about the structure of the ETFs, it is same as Mutual Funds – basket of few stocks. If we talk about category it is just a replica of index funds which is made to replicate an index. Eg Gold ETF, Nifty ETF, Bank Nifty ETF, Hangseng ETF etc. ETF stands for Exchange Traded Fund because they are listed on stock exchange. In most of the case these are passive funds where fund manager’s role is negligible.

How ETF Works?

ETF Comparison with Open-ended Mutual Funds & Close Ended Mutual Funds

Open Ended Fund Closed Ended Fund Exchange Traded Fund Fund Size Flexible Fixed Flexible NAV Daily Daily Real-Time Liquidity Provider Fund Itself Stock Market Stock Market / Fund Itself Availability Fund Itself Through Exchange where listed Through Exchange where listed / Fund itself. Portfolio Disclosure Disclosed monthly Disclosed monthly Daily/Real-time Intra-Day Trading Not possible Expensive Possible at low cost

Source – Benchmark AMC

ETF Benefits

As we have seen that ETFs work like Mutual Funds. so basic benefits of both are same like Diversification, Transparency, Tax benefit etc. Few more advantages:

Any time NAV: In mutual funds whenever you put your investment/redemption you will get closing NAV of that particular day but in ETF you can buy it anytime during the trading hours.

Low Asset Management Cost: As ETF are passive funds they don’t have to incur fund management charges, plus they are sold without intermediaries that keep total cost low.

International Exposure: If you would like to invest in international markets, ETF is a better way as it gives you diversification benefit in that marked & you also know much about those countries active funds. Globally there are many ETFs which focus on Indian Markets – you can check India ETF List at Onemint.

 Why ETF Failed in India?

The reason should not be performance because most of the ETFs are passive funds in India and try to mimic performance of some Index. Performance wise certain ETFs like Gold have given more and consistent returns than the broad market in the last 2-3 volatile years. But main reason looks…

Index Vs Diversified Funds: If we compare equity ETFs performance with diversified equity mutual funds in longer horizons, ETFs looks far behind.

Expense Ratio: Biggest benefit an investor seeks in ETF is lower expenses but even on this aspect Indian funds scores low. Internationally ETFs average charges are close to .53% but in India most of the equity related ETFs are charging more that this – some even charging 1%. Vanguard which is one of the biggest ETF players charges just .16% & in some cases as low as .07%. This is possible due to economies of scale but still difference is huge.

Other incidental Charges: Over & above the basic fees investor has to pay brokerage & other charges relating to manage his equity account. Many investors who just wish to invest in MF find it inconvenient to maintain a demat account with a broker.

Skewed Indexes: Top 3 stocks in Sensex Reliance, Infosys & ICICI make 27% of the index even nifty which is having 50 stocks – top 3 contribute more than 24%. This is even worse for sector index – in bankex top 2 stock weightage is more than 50%.

Liquidity: Liquidity is not very good in most of the Indian ETFs. So, sometime when you want to buy the units are not available and when you go for sell, there are no buyers.

How ETFs can become popular in India?

ETF are traded through stock exchanges & are suggested by brokers – not by mutual fund advisors. ETF are meant for passive long term investors & that’s not a good thing for a stock broker. Stock brokers earn on volumes rather than if somebody holds it for long term so there is clear conflict of interest. So I don’t think much can be done on this but if investors are made aware about the benefits there is a chance that things can be better in future. One more thing that can be done is bringing the variety right now. Most of the ETF are either Gold or large cap equity funds. Only 2 ETF are there which give you international exposure – so there is still scope to bring variety which can increase the interest. Even on commodity side there is a big scope but there is no clarity who will govern them – due to conflict between Securities and Exchange Board of India (SEBI) and Forward Market Commission (FMC) even Silver ETFs are stuck.

ETF in India Vs US

In US ETF are there from last 20 years – as a segment is growing at a pace of 32% every year & biggest reasons that comes out is the lower cost, fund managers ability to beat broader index & the variety of ETF available. Indian ETF fails on all these criteria’s. Biggest ETF in US is $89 Billion which is more than half of the Indian Mutual Fund Industry Size. And total ETF assets in US stands at $1 trillion which is close to 2/3 of total Indian Market capitalization. In US there are more than 2000 ETFs listed & in India number is less than 30 – another 13 are with SEBI for clearance. So one can clearly see the difference but this is the same case if we talk about Indian Mutual Funds – in US 39% of the households invest more than 50% of their financial assets through Mutual Funds but in India less than 1% have ever invested a penny in it. This can be blamed to poor Financial Literacy in India, lack of distribution facilities, higher operational cost and quality manpower.

Is there some hope for ETF

India is a fast growing economy & with kind of demography we have a big scope for newer & better financial products. Goldman Sach who is a big player in ETF has signaled regarding the growth of ETF by buying India’s Benchmark AMC which was a niche ETF player. Even IDBI AMCs is focusing on Index Funds &  Motilal Oswal AMC trying something new with ETFs shows it’s a beginning towards passive investing. Hope for a better picture of ETF in future.

In Last

tough to Control Emotions: When you have a demat account it is very tough that you will only be holding ETFs – someday you will also be tempted to buy or trade in direct equity. Which may turn out dangerous for your financial health.

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 ?

Primary Markets (IPO) – Basics

Introduction
Career Point Infosystems Limited almost doubles on listing!!! Coal India IPO to hit the markets with a plan to raise as much as $3 billion!!!! Is this the kind of news that makes you wonder what this is all about??? Then look no further. This article throws some light on the concept of Initial Public Offerings (IPO). Naresh is a MBA working in a MNC with little or no knowledge of stock markets but has surplus funds ready for investment. Like many other people he is fascinated by the spectacular gains offered by some of the new companies on the very first day of listing. He would like to invest in an IPO but he does not know how to go about it. So let’s get started.

What is a Primary Market?
Whenever a Company wants to raise funds for expansion or other corporate purposes or when the promoters decide to offer shares of the company to the public they decide to list the company on the stock exchange. The company approaches the stock market regulator Securities Exchange Board India (SEBI) with its intent to list on the stock exchange. The company has to file all the financials and other details with SEBI in a specified format which is known as Draft Red Herring Prospectus (DRHP).
The Company may issue shares at Par Value or at a Discount or at a Premium.
At Par Value: For example if the Face Value of the shares is Rs 10 and the shares are issued to the public at Rs 10 then it is said that the company is issuing shares to the public at Par Value.
Premium: If the Face Value of the shares is Rs 10 and the shares are issued to the public at a price above Rs 10 say at Rs 70 then it is said that the company is issuing shares to the public at a Premium of Rs 60 over the Face Value of Rs 10.
Discount: If the Face Value of the shares is Rs 10 and the shares are issued to the public at a price below Rs 10 then it is said that the company is issuing shares to the public at a Discount to the Face Value. Most of the companies issue their shares to the public at a Premium to the Face Value.
The primary purpose behind issuing securities (shares) in this manner is to raise Capital for the Company for expansion, working capital, paying debt, acquisitions or for any other corporate purpose.

What are the different kinds of Public Issues?

1. Initial Public Offering (IPO): When an unlisted Company offers its securities (shares) to the public for the first time it is termed as IPO.
2. Follow On Public Offering (FPO): When a listed Company makes subsequent offer of securities (shares) after the 1^st issue, to the public it is termed as FPO.
3. Rights Issue: In a rights issue a listed company decides to issue shares only to existing shareholders (as on a record date). In a rights issue the shares are allotted in a ratio related to the existing number of shares already held by the existing shareholders.
4. Preferential Issue: An issue of shares made to specific designated buyers is known as a Preferential Allotment. Preferential Allotment can be made to Promoters or other set of investors.

 
Merchant Bankers
The company coming out with an IPO generally seeks the advice of a Merchant Bank (Book Managers). The Merchant Bankers help in determining the type of security to issue, the price at which the securities will be offered, the best time to hit the market, marketing of the issue, collecting the money, the allotment of shares and the refund of excess money collected. In return for this service the Merchant Banker charges a fee. The price of the IPO may be determined by the Company Management in consultation with the Merchant Bankers or arrived at through the process of Book Building. In an IPO offering a certain percentage of shares are reserved for each category of investors like Qualified Institutional Bidders (QIBs), Foreign Institutional Investors (FIIs), High Networth Investors (HNIs), Mutual Funds, Retail Investors and Employees of the Company. People applying for an IPO could be divided into two categories:
Short Term Investors: These investors are the ones looking for Listing Gains and sell the shares of the company in the initial few days after listing.
Long Term Investors: These investors are the ones who invest for the long term keeping in mind the long term fundamentals and financials of the company for capital appreciation over the long term.

How to select an IPO?
The following points could serve as guidelines to pick up an IPO for investment:

1. Start with analyzing the background of the Company/Promoters, their past track records, core competencies and credibility.
2. The Company financials also help you decide on various factors such as past sales growth, profit growth, profit margins, Order Book status and comparison with similar companies in the same business.
3. Also read the prospectus (DRHP) for any risks that might be involved.
4. Make sure the Issue Price is good enough (reasonable) for investing. This can be determined by studying the Price Earning (P/E) multiples and future growth prospects of the company.

 
How to Apply for an IPO?

1. To apply for an IPO one needs to fill out an Application Form readily available outside Stock Exchanges, Stock Brokers, Banks etc.
2. You need to fill the form specifying the no of shares applied for, the price to be paid, the demat account number and other details. The applicant needs to make the necessary funds available to the Bank designated as IPO’s collection center. Alternatively you can also apply online through the broker’s website.
3. ASBA (Application Supported by Blocked Amounts) is the new investor friendly way of applying for IPO’s which ensures that investor’s funds leave his bank account only upon allocation of shares in the IPO. The ASBA process also ensures that only the requisite amounts of funds are debited to the investor’s bank account on allotment of shares. In this mechanism, the need for refunds is completely obviated.

 
What after you apply for an IPO?

1. After you closure of the book building process the company, merchant bankers and the registrars decide the allotment of shares.
2. Depending upon how many times the IPO is oversubscribed you get a proportional allotment of shares in your Demat Account on a prorate basis. The higher the oversubscription the lesser the allotment.
3. In case you get less allotment than applied for you get a refund of the remaining money in round about a week’s time from the allotment process of the Issue.

 
Conclusion
So through this article we have learnt about the Primary Markets and IPO’s and ways of investing in them. Hopefully people like Naresh can now look at the Primary markets as a good investment option. Please do let us know your views and comments. In the next article we will be exploring the Secondary Markets where Majority of the Action takes place. Till then Happy Investing!!! 

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.

Ulip vs Mutual Funds

I am not writing one more word on should you buy a UL or a MF product. Enough has been written in the world about this, right.

I was just trying to see how both the regulators are looking at the products.

1. ULIP sellers can make a policy illustration: It is mandatory that the person selling a UL plan MUST make a policy illustration – how the fund will look 30 years later.

The Mutual fund industry thinks it should NOT make projections in order to sell the product. So mutual fund agents will give you vague answers.

Of course the MF industry’s approach is correct. When a policy illustration is made, it is ACTUALLY a cost illustration, NOT a projection – but who has the time to explain all this?

2. Amitabh Bachhan, Sachin Tendulkar, Rahul Dravid can all sell life insurance – and fairly obviously ULIP but the SEBI says celebrity selling of mutual funds is not allowed. Period. No great reason, but not allowed.

3. The ulip commissions are still in double digits, and has recently become a value based trail – just like the mutual fund industries. However it is far, far more profitable to sell life insurance vis-a-vis  mutual funds.

The regulators frankly do not care how the sales happens…

there could be more…will do as and when…