Investment Planning

August 2012

Investing process and costly mistakes to avoid

Investment Mistakes, Investment Planning, Life Goals, Successful Investing, Value INvestingJust yesterday, I was having a discussion with a friend who was keen on knowing about the markets and where they are heading. He is interested in investing for long term.

Instead of providing an answer ( Well!!! I myself do not know, nor does anyone else know where are the markets headed…. Anyone who claims he does should would just be sitting in Hawaii, enjoying the beaches and punching away his trades to glory isn’t it!!!! ūüôā )

OK so I probed hime further with a few questions about his financial goals, current assets and liability situation, savings etc and made him aware about the kind of questions he should be asking in order to achieve financial (investing) success over a long run.

Of course, he will have to devote some time towards understanding the products available to invest further… But diagnosing the current situation and having a clarity of financial / life goals is the important first step.

Here is a nice article in 4 parts which I had written quite some time back and wanted to bump up.

Life can only be understood backwards; but it must be lived forwards.

In the process of investing, one often makes mistakes. There is nothing wrong in it. However, repeating the same mistakes should be avoided. This is so much easier said then done. Never-the-less, we can always try. So, Here are some of the most common investing mistakes which investors generally make and some of which even I had made in the earlier part of my investment years.

I have been investing since 1997. Earlier part of the investment was when I was in US and then later after moving to India in 2005. I have been investing in both shares and real estate.

Of course, learning from the mistakes, continually, the investing experience has truly been rewarding experience. You can also cultivate good habits of investing by avoiding the following most common mistakes.

So here goes……..

#1. Investing without a Goal

If one does not know to which port he is sailing, no wind is favorable.

Beginning investors often begin by Casual Investing without any goals. This quite often leads to pain and heartburn because, without any goals, investments are treated as speculation instruments solely aimed at making more money in a shorter span of time, by chasing market performance and acting on market swings, something similar to get-rich-quick scheme. (Speculation is a different ball game and of course, many people do succeed at it. However as in Investments, there are different set of rules, full time efforts, and a different mind set and discipline which needs to be followed.).

Different goals require different strategies. Broadly goals can be divided into three types according to time frames.

Long term Goals Рtypically 7+ years (e.g.: retirement corpus, child education, child marriage etc.) should invest in Long term high risk/high return growth investment assets.

Medium term goal¬†– typically 2 ‚Äď 7 yrs (e.g.: deposit on house, planning a sabbatical from work etc.) ¬†Require balanced risk investment strategy,

Short term goals Рtypically less than 2 yrs (e.g.: overseas holiday, purchase of car, any major house improvement expense etc) require conservative investment strategy.

So, Some of the following questions have to worked upon and answered to full satisfaction before setting out for investment: What am I investing for (Goal)? How much do I need for the goal to be met? What is the time frame of the investment going to be? Where do I need to invest? Should I do lump sum investment or Periodic investment? And so on…

Remember, failing to plan is planning to fail

#2. Not Starting to invest Early enough

This is one of the most common mistakes made by investors. Most of us keep waiting for the right time, or the right price, or the right time to begin investing.¬†Remember, Time in the market and not timing the market is the simple way to success in investing.¬†Please read my earlier post on¬†Invest early, Invest Wise, Utilize the power of compounding.………..¬†You can read posts here. (Part I,¬†Part II¬†,¬†Part III¬†& Part IV)

6 key principles of persuasion by Robert Cialdini

Persuasion, Influence of Persuasion, Robert Cialdini, Branding, Marketing, Sensory Marketing, Perception,

6 key principles of persuasion by Robert Cialdini

This book (Influence :The psychology of persuasion ~  Robert Cialdini) is on my pending list of books to be read and noting this down in my blog. The book talks about psychology, persuasion and how and why we make decisions when we say Yes

The 6 principles are as follows :

Reciprocity – People tend to return a favor, thus the pervasiveness of free samples in marketing. Example of Ethiopia providing thousands of dollars in humanitarian aid to Mexico just after the 1985 earthquake, despite Ethiopia suffering from a crippling famine and civil war at the time. Ethiopia had been reciprocating for the diplomatic support Mexico provided when Italy invaded Ethiopia in 1935. The good cop/bad cop strategy is also based on this principle.

Commitment and Consistency РIf people commit, orally or in writing, to an idea or goal, they are more likely to honor that commitment because of establishing that idea or goal as being congruent with their self image. Even if the original incentive or motivation is removed after they have already agreed, they will continue to honor the agreement. For example, in car sales, suddenly raising the price at the last moment works because the buyer has already decided to buy. Cialdini notes Chinese brainwashing on American prisoners of war to rewrite their self image and gain automatic unenforced compliance. (Read on cognitive dissonance.)

Social Proof – People will do things that they see other people are doing. For example, in one experiment, one or more confederates would look up into the sky; bystanders would then look up into the sky to see what they were seeing. At one point this experiment aborted, as so many people were looking up that they stopped traffic. ( Read on the Asch conformity experiments.)

Authority – People will tend to obey authority figures, even if they are asked to perform objectionable acts. Cialdini cites incidents such as the Milgram experiments in the early 1960s and the My Lai massacre.

Liking – People are easily persuaded by other people that they like. Cialdini cites the marketing of Tupperware in what might now be called viral marketing. People were more likely to buy if they liked the person selling it to them. Some of the many biases favoring more attractive people are discussed.

Scarcity – Perceived scarcity will generate demand. For example, saying offers are available for a “limited time only” encourages sales.

~ source wikipedia

Transcript of 2008- Berkshire Hathaway Shareholders meeting with Warren Buffett

Transcript of 2008, Berkshire Hathaway Shareholders ,meeting with Warren Buffett, Value Investing, Equities

The following is a transcript of 2008- Berkshire Hathaway Shareholders meeting at Omaha, Nebraska

It is worth a read … Wonderful thoughts from the Oracle of Omaha, Warren Buffett
============ ====

What does it take to become a successful investor? Brilliance or Smartness?

Neither, Success in investing doesn’t correlate with I.Q. Once you¬†have ordinary intelligence, what you need is the temperament to¬†control the urges that gets other people into trouble in investing.

When do you deicide to invest in a firm?

The best thing that happens to us is when a great company gets into¬†temporary trouble. We want to buy them when they’re on the operating¬†table. (Mr. Buffett bought Coke when it had its biggest fiasco after¬†launching New Coke; he bought American Express when it went through a¬†loss making phase in the early 60’s)

What do you look for in people when they come to sell their firms to you?

I don’t look for the usual credentials such as an MBA, a pedigree¬†(Harvard, Wharton), or cash reserves or market cap of their firm.¬†What I look for is just a passion in their eyes; I think that’s the key.¬†A¬†person who is hungry will always do well. I prefer it when people evenafter selling stay on and work for the firm; they are people who can’t¬†wait to get off their bed to get to work.¬†Passion is everything; there is no replacement for innate interest.

Mr. Buffett, you told us that¬†Berkshire¬†Hathaway has $ 45 Billion in¬†cash. Why aren’t you investing?

Up until a few years back I had more ideas than money. Now I have more money than ideas.

When do you plan to retire?

I love my job; I love it so much that I tap dance to work. Mrs. B, the¬†founder of Nebraska Furniture Mark worked until she was 104, she died¬†within 6 months of her¬†retirement, that’s a lesson to all my managers,¬†don’t retire!¬†I personally am going to work 6-7 years after I die, probably that’s¬†what they mean when they say- “Thinking out of the Box”!!

Why do stock market crashes happen?

Because of human nature for greed and insecurity. The 1970s were¬†unbelievable. The world wasn’t going to end, but businesses were beinggiven away. Human nature has not changed. People will always behave in¬†a manic-depressive way over time. They will offer great values to¬†you.”

What are the things that are taught wrong in Business school and the corporate world?

I like such open ended questions, I think Business schools should refrain from teaching their wards about profit making and profit making alone, it gives a sense of 1 dimensional outlook to the young students that loss is a curse. In reality, in the corporate world, failure and loss making are inevitable. The capital market without loss is like Christianity without hell. I think they should teach the student on how to buy a business, how to value a business? Not just on how to determine the price of a business. Because price is what you pay, value is what you get.

Do you still hate Technology stocks?

With Coke I can come up with a very rational figure for the cash it¬†will generate in the future. But with the top 10 Internet companies,how much cash will they produce over the next 25 years? If you say you¬†don’t know, then you don’t know what it is worth and you arespeculating, not investing. All I know is that I don’t know, and if I¬†don’t know, I don’t invest.”

How to think about Investing?

The first investment primer was written by Aesop in 600 B.C. He said,¬†‘A bird in the hand is worth two in the bush.’ Aesop forgot to¬†saywhen you get the two in the bush and what interest rates are;¬†investing is simply figuring out your cash outlay (the bird in the¬†hand) and comparing it to how many birds are in the bush and when you¬†get them.”

How do you feel after donating $ 40 Billion to the Bill and Melinda Gates foundation? You are a hero to us!
I feel nothing. I haven’t sacrificed anything in life. I have had a¬†good life. I donated after I turned 75. I think I admire those people¬†who sacrifice their time, share their food and home, as the people to¬†be emulated not me.¬†Besides, what is money before a man’s life?

What do you think are the pitfalls in donation?

I have never donated a dime to churches or other such organizations; I need to believe in something before I end up doing that. I have beenobserving the Bill & Melinda Gates foundation for years now and I am confident they will do a fantastic job of making use of the money. I am a big believer in Outsourcing, others believed in me as an Investor and gave their hard earned money to invest. I believe in Bill Gates, he is a better donor than me.

Why do you work from Omaha and not Wall Street, New York?

Wall Street is the only place where people alight from Rolls Royce to get advised by people who use the Public transportation system.

You seem to be so well read, tell us how it all started.

My father was a stock broker, so we had all these financial books in our library. He introduced me to those classics and I got into them. Iam lucky that my father was not a fan of Playboy! Reading is the best habit you can get. Well, you can learn from teachers too, and have mentors but there are so many constraints attached- they will talk fast, talk slow, they might talk like a pro or they might be terrible communicators. Books are a different animal altogether, I love reading! The beauty about reading and learning is that the more you learn the more you want to learn.
(more…)

July 2012

Top 10 Books ~ Value Investing

Top 10 Investment Books, Warren Buffett, Benjamin Graham, Mckinsey, Jeremy Siegel, Philips Fisher, Charles Munger, Robert Schiller, Peter Lynch,

Here is the list of the top 10 books for value investing :

 If you are interested in value investing, then these 10 books should form a part of your library. They are gems and contain pearls of wisdom. Enjoy (The listing in no particular order):

1. Security Analysis ~ Benjamin Graham
2. The Interpretation of Financial Statements ~ Benjamin Graham
3. Common Stocks & Uncommon Profits ~ Philip A Fischer
4. Stocks for long run ~ Jeremy J Siegel
5. The Intelligent Investor ~ Benjamin Graham
6. Valuation ~ Measuring & Managing the Value of companies ~ Mckinsey & Company
7. Poor Charlies Almanack ~ The wit & wisdom of Charles Munger
8. Irrational Exuberance ~ Robert J Schiller
9. One up on Wall Street ~ Peter Lynch
10. The essays of Warren Buffett

Some other books of interest : 

~ Financial Shenanigans : Howard Schilit~Jeremy Perler
~ The Little book of Valuation : Aswath Damodaran

June 2012

Understanding Options Vega : What is it

Options, Vega, Delta, Gamma, Greeks, Basics, Trading Strategies, Volatility, Stock MarketsOptions Vega is the change in the value of an option for a 1-percentage point increase in implied volatility.
 
Vega of a long option position (both calls and puts) is always positive.  At-the-money options have the greatest vega
An option goes in-the-money or out-of-the-money, the smaller is vega. As time passes, option vega decreases
 
Time amplifies the effect of volatility changes. As a result, vega is greater for long-dated options than for short dated options
 
As the above graph indicates, As volatility falls, vega decreases for in-the-money and out-of-the-money options; vega is unchanged for at-the-money options
 
Find Basics of Options Delta Delta ; Gamma.
 
‚ÄúThe greatest ignorance is to reject something you know nothing about‚Ä̂ĶIf you are invested in Markets, it makes sense to be aware of & have an idea about¬†Options.¬†

Relative Valuation ~ Primer

relative valuation, multiples, PE Ratio, EPS, EBIDTA, ROE, ROI, WACC, Cost of equity, researchRelative Valuation is Valuing an asset by comparing with prices of similar assets in market. In relative valuation the value is relative to how the market is pricing comparable firms
.
There are three basic steps
‚ÄďIdentify comparable assets
‚ÄďStandardize – price of the asset or the value of equity
‚ÄďAdjust for differences ¬†
.
Why popularity of Relative Valuation in analyst circle?
.
‚ÄĘIt is Easy to sell a story based on comparables
‚ÄďPebble beach golf ‚Äď Japanese paid 750$ mn in late 1980‚Äôs
‚ÄďAt that time All of Tokyo real was estimated to be cost more than all of US real estate put together
‚ÄďBusiness potential did not justify the price
‚ÄďImagine selling a DCF based valuation!!!
.
‚ÄĘMost ¬†Assumptions and inaccuracies are hidden
.
‚ÄĘIf you mess up so would have others
‚ÄďYou don‚Äôt want to be wrong all alone on the street
.
Is there widespread use ?? Of course …
.
‚ÄĘMajority of research reports are based on Relative Valuation
‚ÄĘMergers and Acquisitions derive valuations based on a ¬†multiple based prices of comparable firms.
‚ÄĘMany investment strategies ¬†are based on multiple (eg: Venture Capital/PE fund investing in entrepreneurial ventures)
‚ÄĘTerminal Value in DCF often calculated using¬†Relative Valuation
‚ÄĘDCF used to justify Relative Valuation¬†quite often
.
More on Common Multiples later….

May 2012

Investing in Real Estate : How is it different from other alternative Investments?

Investments, Alternative investments, Stocks, Bonds, Gold, Real Estate, Risk, Returns, Diversification,
 
Here are some successful people talking about investing in real estate :
 
‚ÄúNinety percent of all millionaires become so through owning real estate.‚ÄĚ
-Andrew Carnegie
‚ÄúThe major fortunes in America have been made in land.‚ÄĚ
-John D. Rockefeller
‚ÄúI would give a thousand furlongs of sea for an acre of barren ground.‚ÄĚ
-Shakespeare
‚ÄúBuying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.‚ÄĚ
-Marshall Field
‚ÄúThe best investment on Earth is earth.‚ÄĚ
-Louis Glickman, American business executive
 

So, obviously, real estate can be a good investment, provided the investment is planned properly.

How RE is different from any other form of alternative assets?

– There is Low correlation with equities in the short run only

– However, Both equities and RE are adversely affected in a recession

– RE investments produces apparent low volatility

– Location specific investments – The local factors affect the real estate prices a lot more than global factors (unlike commodities, stocks, gold etc which are impacted by global macro economic factors)

– Interdependence of land uses

– Large transactions which are typically leveraged by use of substantial amount of debt.

– RE investments typically habe long gestation period

Here are some of the reasons for Including RE in Investment Portfolio :

– RE investments can produce high absolute returns

– It is a Hedge against inflation

– Portfolio is diversified to reflect overall investment universe

– It provides tax benefits – may not be available in any other alternative investments

– Suitability to various investors

– Risk tolerant investor

– Risk-sensitive investor

– Inflation sensitive investor

But as Raplh Waldo Emerson says ‚ÄúFear always springs from ignorance‚ÄĚ…. The first thing is to obvious do a lot of planning and become aware about the purpose of investments.¬†

 

Warren Buffett Tips for Investors.. Worth a read..

Warren Buffet, Buffett, Tips, Investment, Stock Market, Success,Trading, Bull Market, Value Investing

Here are 5 valuable tips for investing from Warren Buffett –
The Master of Value Investing.
 
1. “Look at stocks as parts of business. Ask yourself, ‘How would I feel if the Stock Exchange was closing tomorrow for the next three years?’ If I am happy owning the stock under that circumstance, I am happy with the business. That frame of mind is important to¬†investing.”
 
2. “The market is there to serve you and not to instruct you. It is not telling you whether you are right or wrong. The business results will determine that.”
 
3. “You can’t precisely know what a stock is worth, so leave yourself a margin of safety. Only go into things where you could be wrong to some extent and come out OK.”
 
4. “Borrowed money is the most common way that smart guys go broke.”
 
5. “The stock doesn’t know you own it. You have feelings about it, but it has no feelings about you. The stock doesn’t know what you paid. People¬†shouldn’t get emotionally involved¬†with their stocks.”
 
Happy Investing…
 

February 2012

October 2011

Analyzing Financial Statements — What is your perspective?? — Part2

Analyzing Financial Statements ,What is your perspective, Auditor, analyst, Risk Analyst.

Analyzing and trying to get insights from Financial Statement is one of the most interesting aspect. A Financial Statement can be dissected in many ways. We had looked at three angles or lenses thru which these statements can be looked at: Here are three more ways to look at these statements :

4. AUDITOR

An auditor’s primary objective is an expression of an opinion on the fairness of financial statements according to generally accepted accounting principles.  As auditor, you desire assurance on the absence of errors and irregularities in financial statements.  Financial statement analysis can help identify any errors and irregularities affecting the statements.  Also, this analysis compels our auditor to understand the company’s operations and its performance in light of prevailing economic and industry conditions.  Application of financial statement analysis is especially useful as a preliminary audit tool, directing the auditor to areas of greatest change and unexplained performance.

5 RISK ANALYST

Accounting risk results from the need for judgments, estimates, and impression inherent in the accounting system.  Accounting risk increases our uncertainty in decision making.  Accounting risk also involves accounting conservatism.  Assumptions play an important role in accounting measurements, and these assumptions can be too conservative or optimistic.

6. YOU ARE THE ANALYST/FORECASTER

More persistent earnings reflect recurring, stable, predictable, and operating elements.¬† Your estimate of earnings persistence should consider these elements.¬† More persistent earnings comprise recurring operating elements. Finding 40% of earnings from unusual gains implies less persistence because its source is no operating.¬† You can also question classification of litigation gains as ‚Äúunusual‚ÄĚ ‚Äď they are sometimes better viewed as extraordinary.¬† The extraordinary loss component also implies less persistent.¬† In this case you need to assess whether environmental costs are truly extraordinary for this company‚Äôs business.¬† Together, these components suggest less persistence than suggested by the stable and steady growth trend in aggregate earnings.¬† This lower persistence should be reflected in both the level and uncertainty of your earnings forecast.

Gaining Insights into an organization’s financial statements is also a matter of perspective. Thus analyzing a company from one of the lenses makes a huge difference!!!!!

September 2011

Analyzing Financial Statements — What is your perspective?? — Part1

Analyzing Financial Statements ,What is your perspective,Banker, Investor,Director

.

Analyzing and trying to get insights from Financial Statement is one of the most¬†interesting¬†aspect. A Financial Statement can be dissected in many ways. Here are 6 different lenses from which the financial statements can be looked into…..

1. BANKER

A banker is concerned about the company’s ability to satisfy its loan obligations.  Concern about the composition of company’s financing sources is twofold.  First, the greater is owner financing, the lower is a banker’s credit risk.

Second, creditors are also concerned with Adaptec’s other current and future creditor financing.  Creditors often write debt covenants to restrict a company’s future lending, or require collateral in case of default, or limit the amount of dividends payable to shareholders.

2. INVESTOR

As an investor, your review of financial statements focuses on company’s ability to create and maintain future net income.  All the statements are important in your review.  The income statement is especially important as it reveals management’s current and past success in creating and sustaining income.  The cash flow statement is important in assessing management’s ability to meet cash payments and the company’s cash availability. The balance sheet shows Adaptec’s asset base from which future income generated, and reports on liabilities and their due dates to creditors.

3. DIRECTOR

As a member of a company‚Äôs board of directors, you are responsible for oversight of management and the safeguarding of shareholders‚Äô interests.¬† Accordingly, a director‚Äôs interest in the company is broad and risky. To reduce risk, a director uses financial statement analysis to monitor management and assess company profitability, growth, and financial condition. Because of a director‚Äôs unique position, there is near unlimited access to internal financial and other records.¬† Analysis of financial statements assists our director in (1) recognizing causal relations among business activities and events, (2) ‚Äúseeing the forest through the trees,‚ÄĚ that is, helping directors focus on the company, and not on a maze of financial details, and (3) encouraging proactive and not reactive measures in confronting changing

—- Continued in Part II

September 2010

Top Performing Balanced Mutual Funds

Top Performing Balanced Mutual Funds, India, .

I was looking up for good Balanced Funds to help a friend and thought of putting this up for my own reference.

Balanced mutual funds invest in both equity and debt. Here is the list of some of the good ‚Äď balanced mutual funds in India, based on the 5 year returns.

Balanced mutual funds are treated as equity funds for tax purposes when the fund allocates at least 65% into equities on an annual average fund amount.

There are various kinds of  Mutual funds for Investors to choose from. Balanced Mutual Funds is one category where there is a mix of Equities and Debt. These mutual funds take care of the asset allocation between equities and debt for the Investor.

Fund 5 Year Return (%) Inception Date Expense Ratio
HDFC Prudence 17.02 Jan-94 1.82%
HDFC Children’s Gift-Inv 12.08 Feb-01 2.10%
HDFC Balanced 13.7 Aug-00 2.15%
Reliance Regular Savings Balanced 16.06 May-05 2.22%
Birla Sun Life 95 15.54 Feb-95 2.33%
Canara Robeco Balance 11.57 Jan-93 2.39%
DSPBR Balanced 14.13 May-99 2.08%
Tata Balanced 12.75 Oct-95 2.50%
FT India Balanced 11.85 Dec-99 2.35%
Principal Conservative Growth 13.32 Aug-01 2.50%

(Source: Valueresearchonline.com)

Reliance – 2nd among world’s largest value creators

There is a report in Business Standard which mentions many Indian Companies amongst the world’s largest value creators in this decade. The report is here :

Mukesh Ambani-led Reliance Industries has been ranked second in the list of world’s 10 biggest ‘sustainable value creators’, companies that have been successful in creating the most shareholder value over the last decade, prepared by Boston Consulting Group.

Reliance Industries again comes second in the ‘Large Cap firms’ for 2005-2009 of 112 global companies with a market valuation of more than 35 billion dollars.

In the chemicals industry, Reliance Industries has been named the second biggest value creator of 53 global firms during the period behind South Korea’s OCI.

However, the stock has virtually not given any¬†returns over the past 2 years….. Many investors are losing patience now and
letting go¬†of the stock in favor of Banks, Pharma and FMCG Companies…. which have outperformed…
If you compare the returns of Reliance with the BSE Index, the result is quite glaring….Sensex is up almost 40 % in last one
year……Whereas Reliance has not given any return at all ……
So , What is next …….. Well a relief rally should be on cards till 1200 at least if the¬†stock holds above 960 levels. …. And this will definitely bring smiles to the investors… and the markets as well.

August 2010

What is Mutual Fund Service System (MFSS)

Mutual Fund Service System (MFSS) is a new online order collection system (to be noted, not live trading of MF….)¬†for placing subscription or redemption orders on the¬†Mutual funds based on orders received from the investors.¬†¬†This has been implemented by the both Exchanges, NSE and BSE.

MFSS Eligibility criteria for Investors:

One should have a Depository and Trading account with a Broker and should also sign the relevant  agreements for MFSS.

Investors already having a Demat account :  Will have to sign additional terms and conditions for MFSS in order to activate this facility in addition to the existing equity account.

This is how the system works:

You can buy or sell Mutual Funds using the MFSS system (the same way in which you buy or sell shares). MFSS is available between 9.00 am and 3.00 pm on all the working days of the Exchange.  All are  settlement happens on T+1 (working days). (Trade Date + 1 working day)

An order confirmation slip is sent to the investor by the Broker and is the conclusive evidence of the transaction.

The pay-in of funds for subscription shall be through¬†the Broker’s Clearing Bank Account¬†but¬†Pay-out of funds (redemption proceeds) will be directly sent by RTA to investors¬†through appropriate payment mode such as direct credit, NEFT or cheque as decided by AMC from time to time, as per the bank account details recorded with the RTA.

As of now, SIP/STP/SWP is not available in¬†MFSS. ( I am not sure how this can be implemented… Will have to wait and watch)

Please note that all other scheme characteristics mentioned in the KIM remain the same.

Conversion of Existing Mutual Funds into Demat :

The following needs to be done

1. You need to Collect Conversion Request Form(CRF) from your broker, duly fill it up and submit along with latest Statement of Account evidencing the holding of MF units.

2. You need to Ensure name and pattern of holding of your account are same as in the Statement of Account.

3. You might be required to use separate CRF is required for each folio number, free units and for locked-in units

4. You need to Ensure from your broker (or you can refer to the list below)  that the MF units submitted for conversion is eligible to be held in demat and ISIN is allotted.

5. Your Broker might charge you a minimal amount to get the Mutual fund units converted into demat.

Advantages of MFSS : Convenience !!!!!! All equity related assets are in one place. It is easier monitor. Easy to transact.

Disadvantages of MFSS : Costs !!!!!! Brokerage Costs may be involved when buying or selling mutual funds through demat.  At present there are no entry and exit loads on equity mutual funds. (Please talk to your broker for more information,  most of the brokers are offering free transactions costs for couple of months )

Funds List of Schemes of following AMCs are eligible in MFSS. Please find the attached excel file containing the eligible scheme list of various Asset Management Companies (AMCs).

List of Eligible scheme for MFSS (Refer latest NSE Circular for updated list)
AIG Global Asset Management Company (India) Private Limited
Benchmark Asset Management Company Private Limited
Birla Sun Life Asset Management Company Limited
DSP Blackrock Investment Managers Private Limited
FIL Fund Management Pvt. Ltd.
Franklin Templeton Asset Management India Pvt Ltd.
HDFC Asset Management Company Ltd
ICICI Prudential Asset Management Company
IDFC Asset Management Company Ltd.
JP Morgan Asset Management India Private Limited
Kotak Mahindra Asset Management Company Ltd.
Morgan Stanley Investment Management Private Ltd.
Principal PNB Asset Management Company Pvt. Ltd.
Quantum Asset Management Company Pvt. Ltd.
Reliance Capital Asset Management Ltd.
Religare Asset Management Company Ltd.
SBI Funds Management Pvt. Ltd.
Sundaram BNP Paribas Asset Management Company Limited
Tata Asset Management Ltd.
UTI Asset Management Company Ltd.

Selling Options : Sometimes it can be made to good use.

Selling Options , Calls, Puts, Tutorials, Options Strategies, Butterfly, Straddle, Strangle,  What Investors should know.

Options, by definition, are a wasting asset. The time decay, declining volatility etc. eat away into the premiums of the options.

Many option buyers learn this fact the hard way by watching their option contracts expire worthless many times. The majority of options expire worthless (estimates are somewhere > 80%). Given that the majority of option buy positions are worthless at the time of expiration, some investors decide that they will sell options and collect the premium. Prima Facie, this sounds like an easy way to make money.

However, there is no free lunch in the investment field as well. There are stories of how some of the brightest people in the world have blown up their accounts while selling ‚ÄėNaked‚Äô options. Selling options, when there are no underlying holdings to support in case of adverse move is known as ‚ÄėNaked‚Äô Selling.

Nevertheless, Options selling, when used intelligently, can be used to complement/protect your portfolio holdings to a certain extent and also make income in return.

Investors earn a premium for every put and call option which they sell. This premium is paid by Option Buyers.

Selling Short

When you sell shares of a company which you do not own, then it is called short selling. Selling a stock short is taking a view that the shares will keep going down. One way of doing this is by selling Futures. And another way of doing this is by selling Call Options.

In a short sale you have to buy back the shares at some point. And thus, short selling exposes you to unlimited risk, if the price of the stock starts to increase.

There are numerous strategies in Options. I will present just one example of how the selling of call options can be used by investors :

 

Covered Call Strategy

A covered call strategy is strategy for bullish investors to make some money and benefit from a stock that will move little over the short term.

This is often employed when an investor has a short-term neutral view on a stock or when the Stock has made a decent up move in a relative short period of time, and is expected to be range bound in the near term.

Let us take the example of Larsen and Toubro (LNT) recent price action again.

Assume, Investors bought the stock @ 1400 or Traders bought it at the breakout above 1660 in early June. Next, the stock made a decent up move in a month’s time frame and touched almost 1900. Investors could have written an options contract selling one call option of LNT Jul 2010 strike price 1900 at Rs 40. (However, Remember that one call option gives an investor the right to buy 125 shares).

You would earn income because the buyer of the call option has to pay you a premium for the option. If the stock’s price drops stays below the strike price (In this case , LNT did close well below Rs 1900 by Jul end) , the call buyer will never exercise the contract and the entire premium is yours to keep (Remember one lot of LNT is 125 and that makes the premium monies Rs 125 * 40 = Rs 5000).

If the stock’s price increases above the strike price, the call buyer may choose to exercise the contract. You would then either have to buy shares on the open market or deliver your shares to the buyer.

This is one of the common ways in which large institutional players generate income on the basis of their large holdings which they can always use to hedge in case of any adverse move against their options position.

Again, the intention of this article is to arouse interest and make aware of Options Selling. It does not advocate that you start selling options. Please understand, when selling options, remember that although your profit potential is limited to the amount of the premium that you receive, your losses can be rather large.

Also, My personal view is that selling PUT Options carries higher risk than Selling CALL options. This is because , in general, stocks generally use the stairs when going up (Sellers of Call Options can manage risk here ….) , But Jump out of the window when coming down. (Sellers of Put options can run out of exit options or get trapped …)

LNT has indeed made a good move from 1660 to 1900 and which I have been tracking since Early June …

You might be interested to know about Buying Options here…