Stocks, Mutual Funds, Etf's etc

December 2015

How to avoid investing in MisManaged Companies – Understand Balance Sheet

How to avoid investing in mismanaged companies, Misallocation of capital, Successful Investing Tips

Most investors keep looking for the magic investing mantra which can keep compounding returns. Many burn their fingers by getting into wrong companies. The first step of successful investing and to avoid investing in MisManaged Companies is to Understand Balance Sheet of a company.

A balance sheet, also known as a “statement of financial position,” reveals a company’s assets, liabilities and owners’ equity (net worth). The balance sheet, together with the income statement and cash flow statement, make up the cornerstone of any company’s financial statements. If you are a shareholder of a company, it is important that you understand how the balance sheet is structured, how to analyze it and how to read it.

Here is a great starting point from Investopedia to understand reading a balance sheet. Another article talks about the due diligence that should be followed before choosing a stock to invest is another checklist which the investors should always keep handy when doing a first cut analysis before giving a ‘pass’ and research further.

Bala writes about a wonderful article on Misallocation of capital  which gives examples of why to avoid investing in companies which misallocate capital.

When you start looking at a balance sheet, a quick first cut analysis can help you eliminate researching further if you come across these common account red flags…

The Indian stock market, in aggregate, carries a relatively high risk that a minority shareholder will not realize the value in a listed firm because the controlling shareholder (or promoter as they are known in India) will appropriate value for himself, leaving little on the table. The risk is higher relative to certain other stock markets mainly because of limited regulation. In addition, lax enforcement indirectly encourages such behavior. Kimi writes on how one can avoid such landmines in his elaborate article peppered with examples.

Successful investing is all about avoiding the companies/ sectors/ industries which are mismanaged and going aggressively after the good ones…As Charlie Munger famously said “Tell me where I’m going to die, that is, so I don’t go there.”…..

Happy Investing….

May 2015

Understanding Systematic Transfer Plan (STP) & Benefits !!!

Systematic Transfer Plan Benefits, Equity Investments, Strategy , Tactical Allocation

Systematic Transfer Plan refers to Mutual Fund investment method where an investor is able to invest lump sum amount in a scheme and regularly transfer a fixed or variable amount into another scheme. Transfers are usually made from debt funds to equity funds if the market is doing well and vice versa if the market is not performing well.     

Why should one opt for STPs?

  • Time-saving: Instead of selling equity mutual funds units first and then waiting for sale proceeds before re-investing into any other scheme, STP provides you smooth transfer of your funds from one scheme to another of the same fund house. Its saves you time and reduces the cost due on transaction front
  • Consistent returns – Money invested in debt fund earns interest till the time it is transferred to equity funds.                                                                                           The returns in debt fund are higher than returns from savings bank account and assure relatively better performance. (more…)

December 2014

What are Bonus Debentures?

NTPC Bonus Debentures, Stock Market, Nifty, Sensex,

NTPC has recently announced bonus debentures in a bid to improve it’s capital structure and hence ROE. What are bonus debentures?

As an equity investor you may also be entitled to regular interest payments. Wondering how? Welcome to the concept of bonus debentures.

Companies usually reward shareholders by sharing a portion of the profits with them.

Cash dividends or bonus share issues are widely used as rewards. While dividend payments mean cash receipt for investors, bonus issues usually mean free shares credited to your demat account. Like bonus shares, companies have the option to issue bonus debentures to shareholders too. Hindustan Unilever was the first company to issue them in 2001.

HOW IT WORKS

Bonus debentures are issued out of the accumulated profits of the company (reserves and surplus). Just like free shares are credited to you when a company makes a bonus share issue, free debentures are credited to you when it makes a bonus debenture issue. Investors holding shares of the issuing company on the record date will be allotted bonus debentures. As an investor holding the bonus debentures, you are eligible to receive interest payments, similar to other debt instruments, until the maturity of the instrument. On maturity, you are entitled to receive the principal amount (face value).

Even if you sell all the shares of the issuing company prior to the maturity, you will still continue to receive interest payments regularly and principal amount on maturity of these debentures. Companies may choose to get the debentures listed in the stock exchanges. In such cases, you can cash-in by selling the debentures through the exchanges even before they mature.

To understand this better, let us consider the bonus debenture proposal by Dr Reddy’s Labs.

For every 1,000 shares of Dr Reddy’s held by the investor in March 2011, the company allotted 6,000 bonus debentures with a face value of Rs. 5, carrying an interest rate of 9.25 per cent. The debentures are redeemable at the end of the third year (i.e. March 2014). The interest payment works out to Rs. 2,775. On maturity, an investor holding 1,000 shares will receive the principal amount of Rs. 30,000. (more…)