Stocks, Mutual Funds, Etf's etc

June 2010

Beginner Investors : Investing with Index funds/ ETF’s is a good choice

Guide to Beginner Investors , Investing with Index funds, ETF's is a good choice, Financial Planning, Goal Oriented Planning, Understanding Risk.

What is Index Fund

An index fund is a a mutual fund which tries to replicate an index of a financial market. (For eg: Sensex or Nifty). An Index fund follows a passive investing strategy called indexing. It builds a portfolio with the same stocks in the same proportions as the index. The fund makes no effort to beat the index. The purpose of the Index Fund is to earn the same return as the index over a period of time.

What is ETF

ETF stands for Exchange Traded Funds — these are funds that trade on the stock exchange just like any stock. And they are stored in yuor Demat Account just like any Shares you purchase.

Why are Index Funds/ETF’s not as popular or not  advertised like other Mutual Funds ?

Expert Professionals / AMC’s don’t make enough fees from them, so they often go ignored. Just like Term insurance….. , Term Insurance is not promoted as much. Insurance companies do not benefit from them (You can see the correlation…., What is good for Investors and also available for cheap, is not often promoted enough. Because it does not pocket enough profits for the providers/agents…….)

What is the basic difference between Index Funds/ ETF’s  and Mutual Funds?

Mutual Funds try to beat the index over a period of time. This is active investing. Fund Managers are paid to beat the index over a period of time by generating alpha (The excess return of the fund relative to the return of the benchmark index is a fund’s alpha.).

Index Funds/ ETF’s on the other hand, try to mirror the index returns. This is known as passive investing.

What is the advantage of Index Funds/ ETF’s over Mutual Funds?

– Much Lower Expense Ratios (AMC’s are much lower)

– More Flexible

– Transparent

– Approximately 60%-80% of equity mutual funds underperform the average return of the stock market over a period of time. This is the price of “active management”.

On top of this the AMC charges 2-2.5% of the portfolio value annually.

So , you have to pick the funds carefully. This becomes just like picking Individual Stocks. Of course, if you pick up the right funds (or for that matter right stocks) , then you would be beating the Index handsomely. However this process requires good amount of time, effort and judgement on your part. It sounds simple but is not easy.

– On the other hand , investing in index funds in the beginning , you can start participating in the capital markets and once you have a substantial base, then you can start exploring “active”  investing options.

The writeup on Types of Investors will get you to understand more about different kinds of investors.

Mandatory 25% Free Float on Listed Companies

The Amendment details as promised by the Finance Minister , for minimum threshold of 25%, to the public shareholding is here

The salient features of the amendment are as follows:

a)The minimum threshold level of public holding will be 25% for all listed companies.

b)Existing listed companies having less than 25% public holding have to reach theminimum 25% level by an annualadditionofnot less than 5% to public holding.

c)For new listing, if the post issue capital of the company calculated at offer price is more than Rs. 4000 crore, the company may be allowed to go public with 10% public shareholding and comply with the 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum.

d)For companies whose draft offer document is pending with Securities and Exchange Board of India on or before these amendments are required to comply with 25% public shareholding requirement by increasing its public shareholding by at least 5% per annum, irrespective of the amount of post issue capital of the company calculated at offer price.

e)A company may increase its public shareholding by less than 5% in a year if such increase brings its public shareholding to the level of 25% in that year.

f)The requirement for continuous listing will be the same as the conditions for initial listing.

g)Every listed company shall maintain public shareholding of at least 25%.If the public shareholding in a listed company falls below 25% at any time, such company shall bring the public shareholding to 25% within a maximum period of 12 months from the date of such fall.

Effects of mandatory 25% free float —-

– Listed Indian companies have a free float of at least 25% as against the current minimum free float of 10%.
– Companies that have less than 25% free float shall have to sell at least 5% of outstanding equity each year and should attain the mandated level of 25% over a period of three years.
– Companies going to be listed can sell minimum 10% equity in the IPO if the market capitalization is Rs.4000 crore or above. However, they also should raise the free float to 25% over the next three years.
– Free float enhancement to 25% would lead to additional supply of stocks worth $ 31 billion from existing listed companies.
– Another huge round of equity flow could be expected if big PSUs like Coal India and BSNL are getting listed.
– Some companies would be re- rated upward while certain others could face a downward rating.
– Increase in free float leading to rising interest from large buyer, may act as catalysts for a positive rating. Stocks like SAIL, Power Grid, Power Finance Corporation etc.  can fall in this category.

Investor Classroom…

Here is a good link — a classroom from morningstar – for all kinds of Investors.whether you are a novice or an experienced investors. It talks about Stocks, Bonds, Mutual Funds and Portfolio etc.  The classroom is from Morningstar US site. However the concepts are applicable in India as well.

It also delves into the financial rations and basics of valuation.

http://www.morningstar.com/Cover/Classroom.html?t1=1173112294

Pretty Useful.

May 2010

Investing in Mutual Funds because they are less risky?

Investing in Mutual Funds because they are less risky, Investing in stocks, Risk , Return, Sharpe Ratio, Treynor Ratio, .

Most of the investors begin investing using Mutual funds.

I am surprised when many people come to  me and ask my advise for investing in Mutual Funds rather than equities because they perceive investing in Equity oriented Mutual Funds to be much safer than investing in equities directly. If you think so, Think again!!

This is an incorrect understanding.

Equity oriented Mutual Funds are as good (or as bad) as the investments made by the Mutual Fund Manager, the underlying assets which the fund manager  invests etc.

The risks and returns are linked to the funds holdings (In case of Equity oriented mutual funds, it is the underlying stocks, their performance and the overall performance of the stock markets). The returns and risks are also linked to the the ability of the fund managers performance in trying to time the entry and exit and generating the ‘ALPHA’ returns .  [[  From Investopedia — Alpha is one of five technical risk ratios; the others are beta, standard deviation, R-squared, and the Sharpe ratio. These are all statistical measurements used in modern portfolio theory (MPT). All of these indicators are intended to help investors determine the risk-reward profile of a mutual fund. Simply stated, alpha is often considered to represent the value that a portfolio manager adds to or subtracts from a fund’s return.]]

If the Stock Market tanks or crashes, the mutual funds NAV also comes crashing down.  Near term performance of Mutual Funds is virtually linked to the vagaries of the market movements. Long term performance depends on the fund’s objectives, fund manager’s performance etc.

So, please understand that if you wish to invest in mutual funds….. go ahead. But please remove the perception that they are less risky than investing in stocks directly.

If one is a saver kind of investor, a Systematic Investment Plan (SIP) in either A-Category stocks or Mutual Funds  will meet the returns expectations over long periods of time. In fact considering the annual expenses of the Mutual Funds involved, investing in stocks and holding over long period of times might even beat the returns of the Mutual Funds handsomely.

Conclusion
Whether picking stocks or Mutual Funds , you need to stay up to date on the sector or the stock in order to understand the underlying investment fundamentals. You do not want to see your investments go down the drain as time passes.

You can SIP in stocks – The 10 Steps

You can SIP in stocks , Systematic INvestment Planning, The 10 Steps, Dollar Cost Averaging, Rupee Cost Averaging, .

SIP or Systematic Investment Planning is a concept. It means that you periodically invest your money. It inculcates discipline, takes out the emotional part of decision making and allows you to seamlessly participate in investing.

However, many people associate or assume that Sipping is available only with Mutual Funds. Thereby, they miss the whole essence of what SIP is all about. Indeed, mutual funds offer automatic withdrawals from your bank account to be invested in Mutual funds. And they promote SIP (albeit, not aggressively, you see, they want you to make the payments upfront and not by SIP).

However, it is to be noted that SIP is a concept and can be applied while purchasing shares or equity as well. Yes, you heard me right, you can SIP in stocks.

There are many cases, when you would want to SIP in equities like – (a) You want to build your own portfolio of stocks with a tilt towards a particular sector (b) You are a Buy-and-Hold type of Investor (c) You are interested in investing in good Dividend Yielding Stocks (d) You do not want to incur the annual AMC charges in the range of 1.75 -2.5% on your portfolio value year after year which all the actively managed Mutual Funds charge. Check this post. (e) You are interested in investing in ETF’s (Exchange Traded Funds) etc.

There could be ‘n’ number of reasons where you are interested in investing in stocks. Once you have made up your mind that you want to invest in equities, you can go about doing a Systematic Investment Plan for your equity investment.

10 Steps to SIP in Stocks :

1. Decide on the intervals (or periods) in which you would like to SIP. eg: Monthly 25th of every month

2. Decide on the periodic SIP amount you would like to invest e.g.: Rs 14,000/- every month

3. Use a Calendar to set reminders. (I am a google addict You can use google calendar) or use whatever means (Physical Calendar, tell your wife etc.)so that you will receive a reminder call about the periodic investment. And you can set aside the funds to be allocated for investments.

4. Decide on the asset classes to invest. e.g.: ETF’s like Goldbees, NiftyBees, Stocks like HDFC, Cipla, BHEL, ITC etc. Debt ETF like Liquidbees (can be used for the for the debt component)

5. Decide the amount to be allocated to each asset e.g.: Rs 2,000/- each.

6. And that’s it you are all set to start sipping. Execute the Plan. Once you get a reminder Just go ahead and buy the assets.

7. Do a periodic review of your purchases every quarter in order to assess the performance.

8. Have a performance yardstick. Aim for good returns (Hey, there is no harm for trying to beat the index by a couple of percentage points year on year).

9. Measure your performance against the returns. Review.

10. Apart from TIME-WISE SIP, you can also go a step ahead. You can also do a PRICE-WISE SIP as well intelligently. If there is a > 10% drop in price of a stock between your two planned purchases, you can go ahead and pick up the stock and skip the next installment of that particular stock.

Eg: You pick up Rs 2000/- worth of Cairn India @ Rs 200/- on 25-Jan-2010. You have plan of picking up Rs2000/- worth of Cairn India on 25-Feb-2010. However , if Cairn India were to drop by > 10% or more in Jan itself , then go ahead and pick up in the stock in Jan and skip the Feb-2010 installment.

There are many Index ETF’s which are available and which are a good, low cost alternative to mutual funds which you can (or rather should) avail.

Understand what type of Investor you are, if You are the Saver Kind of Investor, go ahead SIP in Stocks. Step-by-Step over a period of time you would have created a portfolio of stocks which will generate income for you in form of dividends and which will also appreciate with time to generate wealth over a period of time.

Mutual Funds – Be Aware of the Charges and it’s Impact

Mutual Funds ,Costs Associated, Charges and it's Impact, Entry load, NFO, Distribution fees, Index funds, Exist Load, AMC, .

Most of the investors begin investing using Mutual funds. I am surprised when many people come to  me and ask my advise for investing in Mutual Funds rather than equities. The reason for the surprise is not because i prefer investing in equities over mutual funds (which I do!!!).

The surprise is  because they perceive or rather believe that investing in Equity oriented Mutual Funds is much safer than investing in equities directly.

This is obviously a very incorrect understanding.

Equity oriented Mutual Funds are as good (or as bad) as the investments made by the Mutual Fund Manager. The risks and returns are linked to the funds holdings (underlying stocks and to the performance of the stock market) and also the fund managers experience and performance. Most of the mutual fund managers try beating the index (because that is what they are paid for). They try to time the entry and exit and outperform the other funds in their category. Even the so called fund managers do end up buying high and selling low.

It has been historically proven that around 80% of the mutual funds UNDER PERFORM the Indexes over long periods of time.

If the Stock Market tanks or crashes, the mutual funds NAV also comes crashing down. Many mutual funds performed worse than the Index in the fall of the stock markets from 2008 through March 2009.

Most of the Mutual funds have Annual recurring costs like AMC Charges, Operational Expenses, Marketing charges. (Entry Load is no more charged, However some mutual funds do have Exit loads). Even if the fund under performs, these charges are deducted from your holdings. Most of the investors do not pay attention at all to these Recurring charges. There are many mutual funds which have been performing really badly in the markets over the past. Most of the New Fund Offers (NFO’s) which have been launched in the past 2 years have grossly underperformed the markets.

You should Get to know of the various expenses involved (Management Fees, Administrative Charges, Distribution fees). There are also other costs involved like Brokerage Costs, Interest Costs, Redemption fees etc.

Another important aspect which you need to aware of is the Turnover Ratio. The turnover ratio measures the number of times that holdings are sold within a specified period of time. It also indicates how effectively the cash is being utilized or how frequently assets are being converted to cash.

The idea behind this post is for you to become aware of the facts before investing into mutual funds and help in investments. All these charges are in the range of 1.5% – 2.5% , and have an impact on your returns over a long period of time. Different funds have different expense ratios. Securities & Exchange Board of India (SEBI) has stipulated an upper limit that a fund can charge. Not more than 2.50 % for equity funds and 2.25 % for debt funds.

A good fund is the one which gives good returns with minimal expenses and ideally with low turnover ratio. You can refer to the following sites to research further valueresearchonline.com or www.mutualfundsonline.com

You should also seriously explore investing in Index Funds or the Exchange Traded Funds (ETF’s)here

Index Funds and ETF’s , try to mirror the index rather than trying to beat the index. And hence they carry much lower costs than mutual funds. This post on Overview of various types of Mutual Funds gives a pictorial view of various mutual funds available for investments.

March 2010

Understand charges other than Brokerage when Buying and Selling Shares

Understand charges ,other than Brokerage ,when Buying and Selling Shares,STT, Service Tax, Education Cess, Exchange Levy, Stamp Duty, DIS Charges, Interest ChargesMost of you must have bought and sold shares through intermediaries. Most of you are aware of the brokerage costs. However there are various other charges levied by Exchange. These charges are on top of brokerage costs and they kick in whenever you buy or sell shares or trade in Futures and options.

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It makes sense to be aware of these charges, understand the calculation of these charges and how it impacts the cost of purchase.

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Whenever you buy or sell shares, make sure you check the contract note. The contract note contains details of the purchase or sell you have made with the intermediary. Ensure that the quantities and the shares are correctly mentioned. You will see the following charges in addition to Brokerage charges – Securities Transaction Tax (STT), Stamp Duty, Exchange Levy, Service Tax, Education Cess etc.

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The below mentioned table provides a quick overview of the various charges involved when buying or selling shares or trading in Futures and options.


Cash Market Delivery

Cash Market Intra-day

Derivatives Futures

Derivatives Options

Brokerage *

* Approx costs taken – pls check with your intermediary.

.50%

.05%

.05%

Rs 100 per lot

Service Tax on Brokerage

10% of Brokerage

Education Cess on Service Tax

2% of Service Tax + Secondary and Higher Education Cess 1% of Service Tax

Securities Transactions Tax (STT)

(Charged on Volume)

0.125% of Volume

0.025% of Volume on
SELL transactions

0.017% of Volume on
SELL transactions

0.017% for Option Premium * Qty on SELL transactions and 0.125% of Settlement Value where Option is exercised

Exchange Levy

(Charged on Volume)

0.0034% of Volume in BSE and 0.0035% of Volume in NSE

0.0034% of Volume in BSE and 0.0035% of Volume in NSE

0.002% of Volume

0.05% of Premium * Qty

Stamp Duty

(Charged on Volume)

0.01% of Volume

0.002%of Volume

0.002% of Volume and closeout

0.002% of Premium and Notional value for Exercise / Assignment

Miscellaneous Charges (* Assumptions) — can Vary.

Pls check with your Intermediary

Physical Contract Note charges

Rs 20 /- per contract note. In case of digital contract notes , charges still apply, albeit they are less say Rs 10/- per contract note.

Delivery Instruction Slip Charges

Rs 10/- per transaction

Cheque Bouncing charges/ Cancellation Charges

Rs 300/-

Interest on Delayed Payments

20% pa

There are some other charges involved like SMS alert facility monthly charges, Processing Charges, Minimum Brokerage per day etc. which you should be aware of.

Here is a quick example to understand the impact of other charges.

Let us take the case of Cash Market Delivery Shares purchase of Reliance shares

BUY 100 QTY RELIANCE SHARES @ 1000/- per share.

Volume = Qty * Price = Rs 1,00,000/-

Brokerage = (Using the above assumption of .50%)

= .50% of Volume = =(.05/100) * 100000

= Rs 500/-

_______________________Other Charges__________________


Service Tax = 10% of Brokerage = Rs 50/-

Education Cess = (2 % + 1 %) of Service Tax = 3 % of Rs 50/- = Rs 1.5/-

STT = .125% of Volume = Rs 125/-

Stamp Duty = .01% on Volume = Rs 10/-

Exchange Levy = .0035% of Volume (NSE) = Rs 3.5/-


Total Cost= Rs 690.5/- This is Rs 190.5/- more than only the brokerage cost.


The Securities Transaction Tax (STT) is a second biggest cost after the brokerage. STT was introduced by Mr P Chidambaram in the union budget of 2004-2005. Securities Transaction Tax is applicable on purchase or sale of equity shares, derivatives, equity-oriented funds and equity-oriented mutual funds.

It makes sense to be aware of these costs and use them in your calculations.

You can find more information on some of the terminologies related to Demat at  http://www.sebi.gov.in/faq/faqdemat.html

Costly Investment Mistakes to avoid at all Cost – Final Part – IV

Costly Investment mistakes Part 4, Investment Planning, Financial Advise, Stocks, Mutual Funds Investing, Life Planning, Goal Oriented Planning.

In the process of investing, one often makes mistakes.

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

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 mistakes.

This series is in continuation to the earlier 3 posts which contains the first 7 common mistakes committed by investors. You can read posts here. (Part I, Part II and Part III)

This post (Part IV) will throw light on the following common 3 mistakes generally committed by investors:

#8. No proper grip on Diversification – If Too little is bad , Too much is no good either

Don’t put your all your eggs in one basket.

There is wisdom is this old saying. Diversification is essentially spreading out investments across different types of asset classes.  (Different kinds of asset classes like Equities, Debt, Gold, and Real Estate etc.)

Even within one asset class – say, equities / mutual funds, portfolio has to be diversified eg: having stocks spread across sectors like Power, Banking, Oil, Telecom sectors, FMCG etc.

Example of over diversification: Having 20 different mutual funds, 50 different stocks and portfolio size is say 5lacs.

Example of under diversification: Having 2 stocks each of 2.5Lacs and both are from Oil sector.

Now, Great investors like Buffet and Munger of Berkshire Hathway, do engage serious money in specific stocks. However, you need to understand that they do intensive research, have access to top management of companies and are into serious investing business.

But for people , looking for investment avenues with the objective – that over a period of time it beats inflation, generates sufficient retirement corpus, provides emotional security, beats the debt instruments by couple of percentage points annualized, which does not provide sleepless nights —- for all such investors,having an optimal diversified portfolio is the way to go.


#9. Not paying attention to Fees, Expenses, Commissions, Taxes involved

If you think education is expensive, try ignorance.

Do you know that themajor earnings source of Mutual fund Providers(Players) are not via entry load (which is now banned by SEBI) , or via exit load (Incidentally these costs are the most advertised). They make their money thru thejuicy AMC charges, which each mutual fund charges you annually. So if you own around 10lacs of mutual fund. You are paying around 25,000/- Rs annually just for holding the units(Assuming highest expense ratios of 2.5% pa). The expenses get factored into the NAV (Net Asset Value) of the Mutual Fund Units. It is intangible and most investors do not feel the pain.

Do you know that over a period of 10 years, or 15 years what kind of negative impact this annual expense ratio business can have on your portfolio? This is over and above the widely known fact that around 80% of the mutual funds worldwide areknown to underperform the Indices. And the fund manager is also subject to performance pressures from the fund house and so has to keep churning his portfolio in order to keep up with the pressure of performing leading to further expense costs. This is one of the reasons I personally do not like mutual funds which do a lot of churning. (You can get the information on portfolio turnover and various expenses of mutual funds from websites like www.valueresearchonline.com or www.mutualfundsindia.com.)

Do you know that ULIP’s (an Investment+Insurance product) carry various expenses which ca be as high as 45 – 60% in the first year. There are umpteen number of charges like (premium allocation charges, mortality charges, admin charges, fund management charges etc, service tax) However the same is never explained by agents.

Do you know the various types of charges associated when you buy/sell shares? There are brokerage charges, service tax, education cess, securities transaction tax (STT), Stamp Duty, Exchange Levy etc.

It makes sense to be aware of these and various other charges involved so that you can make informed choices towards your way to successful investment.

#10. Stop trying to Copy others and Understand your self

Always be a first rate version of yourself instead of a second rate version of somebody else.

Please understand that there is no one-size-fits all solution in the field of investments. Needs and Wants, Risk taking capabilities, vision, emotional quotient, varies from person to person. Many investors make a mistake in simply copying a friend’s (or a relative’s) strategy. Please understand that the strategy might work for him or her. But you need to assess your own situation before jumping into investments and regretting later.

Example: You friend might be doing Futures and Options and Speculation and he might be perfectly all-right with it. He might be having a substantial portfolio base (maybe a good ancestral inheritance) and would be willing to take the additional risk in search for higher returns. However the same strategy of jumping into F&O might not be good for you, if you are basically looking for investments to fulfill your child’s education needs.

Avoid the above common investment mistakes mentioned in this series and become a aware, intelligent and wise investor.

February 2010