Money Blog

Mutual Funds
We make money from our business, vocation and jobs to support our family and we dedicate a portion of it to savings for future. Every one of us keeps some money out of our earnings aside, to secure our family’s future.

When the markets were not so advanced, people used to keep their savings with banks and used to be contented with whatever little the bank used to give them, not realizing that the interest, there bank was crediting to their savings was not even sufficient to beat inflation. In other words people used to somehow protect their savings. But in today’s world of informative and efficient markets we not only want to protect our savings but also expect a good return on them.

Now we have a number of options to invest viz. equity markets, real estate, commodities, bullion, exchange, bonds, debts, etc. and out of these investment options stocks and shares have lured investors from ages because of its potential to give you maximum returns. We have seen multi bagger stocks and we have seen stocks with turnaround stories and stocks with exponential growth.

But, the million dollar question is - can I find the stocks which are going to outperform the market or a multi bagger stock and invest my savings in that or can I manage my portfolio to get good returns? Well, the answer is certainly yes, but, it requires investment of time along with the investment of money. You would have seen a number of people losing their money in the stock market and who would have resolved not to enter the market again, take it from me that they would have invested money alone but not the time.

We dedicate our one hundred percent in our job, vocation or business, how can we get time to research stocks and manage our portfolio. Can I hire someone to do this job? And how do I pay him? The answer is mutual fund. The concept is that a number of people would pool in their money and a fund manager will be hired to research the investment options and make the portfolio outperform the market, a fraction of fund will be used to bear expenses and the balance shall stand available for redemption by the investing members.

Should I trust an expert and give him my hard-earned money, how do I know about his credentials, how can I be sure that he will not run away with my money? Of course not and this needs to be regulated otherwise it would not be feasible. And that is why SEBI(Securities and Exchange Board of India) regulates mutual funds in India.

Now let us see how our money is safe in the hands of a mutual fund. A company willing to setup a mutual fund does not start taking money in its own name but it has to set up a trust and the company which is called the Asset management company(AMC) shall act as a trustee of that trust. The money will be taken in the trust and the investors shall be the beneficiaries of the trust. These AMCs and mutual funds are then regulated by a government body SEBI so that they can not fraud with the money of investors.

Mutual Funds in India
UTI was the first mutual fund in India which started in 1963 and from 1987 onwards some PSU banks like SBI, PNB, Bank of India, Canara Bank and Bank of Baroda started their own mutual funds. Some financial Institutions like LIC and GIC also joined the list. With the advent of this the Assets under management increased dramatically. A new phase started in the history of Mutual funds when in 1993 Private Sector institutions were allowed to set up mutual funds in India. Kothari Pioneer was the first Private sector mutual fund. Thereafter Private sector Banks started their Mutual Funds joining with the experience of some foreign partners. ICICI Bank partnered with Prudential to launch ICICI Prudential mutual fund and then many others joined the list.

Types of Mutual Funds
Following types of mutual fund are currently prevalent in India.

Equity Funds
Equity funds are Mutual fund schemes which invest money in equity shares only. A pure equity fund can give you very high returns, but it carries maximum risk. Investors with very high risk appetite would invest in these types of schemes.

Sector Funds
Sector funds are Mutual fund schemes which invest in a particular sector such as IT Sector, Pharma Sector, Media and Entertainment, Banking, Infrastructure, etc. An investment can be made in a sector fund if the investor holds a view that a particular sector is performing very well or is expected to perform well in the near future. For example if an investor is very bullish on infrastructure sector in India, he may choose an Infrastructure fund to get maximum return on his investment.
A sector fund may be Small Cap fund, a Mid Cap fund or a Blue Chip fund investing in Small cap shares, Mid Cap shares and Blue chips respectively.

Debt Funds
Debt Funds are Mutual Fund Schemes which invest purely in Debt instruments which bear fixed rate of interest. In these types of schemes the risk is very low and the return is also low depending upon the prevalent rates of debt instruments. These are ideal for investors who do not want to take any risk on their investments.

Income Funds
These types of mutual fund schemes invest in such instruments so as to generate a fixed income.

Liquid Funds
In these types of schemes the money is invested in liquid instruments which can be redeemed any time. These types of schemes are suitable for investments of very short duration. Companies having excess cash for a short period of time generally keep it in liquid funds.

Hybrid or Balanced fund
These types of funds try to strike a balance between risk and return. A portion of money is invested in equity shares and rest of the fund is invested in debt instruments. The hybrid may be 80% in equity and 20% in debt or any other combination that the Fund manager may deem prudent depending upon the risk to be taken in the portfolio. If an investor wants to take a limited risk, he can choose from these funds with equity mix of his risk appetite.

Index Funds
These schemes invest in index stocks. These funds would give similar returns as the index would give. If an investor is generally bullish on market and is expecting the index to go up, he may invest in an index fund.

ELSS (Equity linked savings scheme)
These schemes are generally devised to give tax benefits to the investors. These schemes generally have a lock in period of at least 3 years. Which means the units once purchased under these schemes, to obtain tax deductions under section 80C of the Income Tax Act of India, can not be redeemed for at least 3 years. A deduction of up to a maximum cap of Rs. 1,00,000/- is allowed under the above mentioned section 80C as per the current provisions of Income Tax Act.

Arbitrage Fund
Under this scheme the fund manager benefits from the difference of rates quoting in different exchanges or the difference in rates of a stock in cash and futures market. Here the returns are less, but the chances of negative portfolio are very rare. A slow and steady growth is expected.

Open-ended and Close-ended
These funds may be open ended or close ended. An open ended fund remains open for purchase or sale of units after the close of New Fund Offer scheme whereas in a close ended scheme the units cannot be purchased after close of New Fund Offer, however in some schemes the units can be sold with an exit load at any time after the close of scheme.

What is SIP?
Systematic Investment Plan (also known as automatic investment plan) is a process by which instead of investing in one go, investment is made in installments. The installments may be monthly or quarterly and it may be through post dated cheques or ECS (electronic clearing scheme).

It is an easy way of planning investments, it is always easy to invest a small amount every month than to pull out a big sum of money. Then there are benefits of averaging the cost price of the investment. It inculcates a habit of investing. Early you start more returns you can have on your investment portfolio.

The average cost factor
Now let us analyze the purchase price of the investment in three scenarios, one when the markets are going up, two when the markets are going down and three when the markets are volatile and fluctuating.

CASE I (The Stock Markets are going up)

CASE II (The Stock Markets are going down)

CASE III (The Stock Markets are fluctuating)

From the above illustrations it can be safely concluded that the systematic investment plan helps in averaging the purchase price of the investment resulting in hedging against the risks of unpredictable market behavior. In case II where the markets are coming down you would have noticed that the total loss sustained is much less than the loss sustained by the scheme during the period of investment, besides this we can not overlook the fact that we have got the maximum number of units in this case and markets being cyclic, whenever they will bounce back, our returns will multiply with the number of units held.

But generally, the markets are fluctuating and they are seldom seen to be going in one direction, therefore in an SIP we always stand to gain due to averaging the purchase price and there is always an ease of paying in installments.

Zero entry loads
SIPs generally have no entry loads, but they have exit loads if you exit before a specified time period. If you are a long term investor, and you are not willing to redeem your investments before the specified time, then you also benefit from the zero entry loads. Equity based mutual fund schemes generally have an entry load of 2.25%, which can be saved in an SIP.

Downside of SIPs
However, there are some disadvantages of SIP too. In an ongoing bull market you would not benefit from an SIP and the returns would be lesser than in case you would have invested in one go in the beginning as seen in case I above. However history shows that the markets generally do not tend to go in one direction. They would go up and down. Secondly the SIP would invest your money on specific dates, for which you have given the mandate. It may be possible that on that particular day, because of some good news or euphoria the markets close very high and you get units at very high NAV and which is offset on the next day or next few trading sessions. Or you might some times think that on a bad day when market sheds 2-3% or when there are small corrections, you would have bought some cheap investments, but your SIP will trigger on the specific day.

Still I would maintain that no one is able to time the markets, and the advantages of SIP weigh much heavy on its disadvantages.

Where to Invest - Real Estate or Stock Markets -  The Difficult Question?

Where should you invest - Stock Market or Realty
Who wants to keep his money in the bank any more when there are so many investment options to make your money grow exponentially? Well you have to put that minimum amount to those standard post office instruments, provident fund and insurance to save that 30 percent tax allowed by the taxman, and will you be interested in putting even a single penny more than that in those instruments? With its robust and booming economy India has become one of the favorite investment destinations in the world. Almost all sectors are witnessing strong growth, per capita income and spending is at all time high levels. Disposable income in cities is increasing and finding its way to spending and investing. A lot of investment is being pumped in stock markets and real estate. Both are high risk high return markets and have witnessed tremendous growth in the past five years.

The risk factor
The stock markets are definitely more risky than the real estate market and therefore have the potential to give you more returns than the real estate market. You won’t see many multi-baggers in the real estate, I mean to say that in bullish markets stocks are seen to be rising 3 to 4 times in a year where as the increase in property prices is more or less secular in a particular area. But at the same time the stocks can also reduce to half or one third of their value which is rarely seen in real estate. Further you can easily find stocks on upper or lower circuits of 20 percent which means that they can increase or decrease up to 20 percent in one single day and in real estate it takes months to increase or decrease 20 percent. Therefore, of the two we can safely conclude that the real estate investment is safer than the stock market investment.

The information and knowledge factor
As discussed above stock market is a high risk high return game, but if you play it professionally you stand to make a lot of money out of it. Unlike real estate markets stock market investments require a lot of information and in depth knowledge of the companies you are going to invest in. The stock prices are a mirror of the performance of the company which is reflected through quarterly results announced by the company and on the positive and negative news flows. Further these prices also depend on other factors like overall market trend, performance of the particular sector and industry, macro economic factors, global factors and announcements and policies of Government. Therefore, investment in stock markets will require beforehand knowledge of the company you are going to invest in and you will have to keep yourself informed on all other price sensitive factors.

Minimum investment
One good thing about stock markets is that you can make an investment of as low as Rs. 500 and more importantly you can plan your investments like you can put some money every month or you can invest in small tranches and you can have a portfolio of many stocks. In real estate I think a small investment would not make sense and even the smallest investment would not be less than Rs. 10 lacs considering the investment to be made in a metropolitan city.

Transaction costs
The transaction costs of buying a property would be much higher than buying a stock. On purchase of stocks you would be charged a brokerage of about 0.5 percent plus service tax and the security transaction tax (STT) is 0.125 percent. In all you pay about 0.75 percent of the value of security as transaction cost. Whereas in case of a property the agent’s commission would be about 2 percent and the stamp duty on registration of property would be about 8 percent plus some other documentation and incidental charges would take it beyond 10 percent. Since the transaction costs are high, you cannot buy and sell property as soon as you can buy and sell the stocks. Thus you can rotate the money in stock market more frequently than in real estate.

Power of finance
One good thing in real estate investment is that you can buy a property by investing only 10 percent of the total value and rest will be financed by the bank. The interest rate charged by the bank will be fixed and any appreciation over and above the interest rate will be your gain. The finance term can be as long as 20 to 25 years. In the stock markets also margin trading is allowed and further you can buy stock futures in the derivatives market by giving a 20 percent margin of the value of futures. However a position can be built only for a period of one month and can be rolled over every month till the position is settled with rollover costs involved but there is no interest charged. Again, as discussed above, the trading in derivatives market requires a lot of information and knowledge.

The stock exchange advantage
When you have invested in stock markets, you know the exact value of your portfolio on any given day because the prices of stocks are quoted on stock exchanges and you can exit the market any time you decide. Whereas in case of real estate investment you only have an estimate of the value of your property and it takes considerable time to sell the property when you decide to exit the market. Therefore your investments in the stock market are more liquid than in real estate.

Initial allotment
Whether real estate or Stock markets, initial allotment route is always safe. In real estate the allotment is generally made by the State level Urban Development Authorities at prices which are lower than the prevailing market prices, therefore these investments have a very low risk of depreciating. In stock markets also the initial public offerings are made under strict guidelines of SEBI and other governing bodies which control malpractices in the stock markets. Secondly the companies offering equities to public do it at reasonable prices to make the issue fully subscribed. The IPOs are generally listed at a premium and good IPOs can be said to be a safe investment.

Lastly, I would say that investment in stock markets require investment of your time as well. You need to spend time to track your portfolio and the news flows on your stocks. If you have time to invest and if you have an appetite for taking risk, you can go for investment in stock markets and if you just want to invest and forget for a long term, go for real estate investment.

Fundamentals of Stock Markets for beginners

What are Shares?
As the meaning of the word denotes, Share, in the context of stock market, means a portion of the ownership of the company or in other words having invested in shares of a company means that you have brought in a part of the capital of the company and you become an owner of the company to the extent of your holding. A person holding more than 50 percent shares of a company is able to exercise control over the affairs of the company as he has the maximum proportion of shares as compared to other shareholders.

Every company has a share capital and the persons who contribute that share capital are called shareholders. Initially the company starts its operations as a closely held company with the capital contributed by its promoters and as the company progresses, it may require more funds. The available options are to raise further equity or share capital or raise debt by securing loan from various banks and financial institutions. In the case of debt the principal as well as interest is payable and the transaction may also require the company to pledge its assets. On the other side if the company decides to raise further equity, it is not required to repay the principal and no interest is payable either. But the promoters have to share their ownership and profits with the new shareholders. Now when the company decides to raise further capital, again, it has two options. One, to raise capital through private placement and two, to raise capital through an IPO (Initial Public Offer). In the former case the equity is issued to a few large investors who buy stake in the company and in the latter case the equity is issued to public at large where a number of retail investors subscribe to the issue and a small portion of capital is contributed by each of them. A company can have two types of share capital. Equity share capital and preference share capital. In case of preference share capital a fixed rate of dividend is paid on the shares every year out of the profits of the company but the preference shareholders do not have voting powers exercisable at the General Meeting of the company. Equity share holders are paid dividend out of the profit left after distributing fixed dividend to the preference shareholders but they can exercise their right to vote at the General Meeting of the company where all the important decisions are taken.

What is share market?
Putting money in an investment is useless unless it is saleable. Shares once issued remain afloat until the company is running and the life of a company is perpetual, it never dies. But a person having shares of a company might not hold them for life; he would like to sell them for profit. To provide liquidity to the investments made by retail investors in shares of companies, stock markets were evolved. Stock market is a place where buyers and sellers are provided with a platform called an exchange where they can buy and sell shares of the companies listed on that stock exchange. In India two popular stock exchanges are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

Trading on a stock exchange
Stock markets are organized markets controlled and regulated by various governing agencies and regulatory bodies. Trading on stock exchanges is done through stock brokers who are regulated by SEBI (Securities and Exchange Board of India). All trades on stock exchanges are done in the electronic form, the trading is completely paperless. The shares are also held in electronic form at various depository participants and deliveries are given and taken through these depository participants. Depository participants are like banks, you can hold your shares in the accounts maintained by depository participant. To put it simple let us take an example. Let’s see how a beginner can enter the stock markets.

The first step to buy shares is to open two accounts. One with a depository participant and one with a SEBI registered stock broker. All you need to have to open these accounts is a Permanent Account Number (PAN), a passport size color photograph, an address proof and an identity proof. After opening these accounts you can place your bids on the terminals of stock exchanges maintained at the trading premises of stock brokers. Live trading can be seen on the terminals, buy and sell bids can be put online and the trades are done on matching bids of buyers and sellers. You may buy a stock either at the prevailing market price or you may put a bid of your choice and wait for the price to come down to your target. Bids once put in the system remain valid for the whole trading session. However these can be modified or cancelled at the option of bidder. Similarly orders can be placed to sell the stocks.

Once the orders are executed, settlement is done by the exchanges and all those who have sold the shares, have to give deliveries of the shares sold and all those who have bought the shares, have to make the payments as per the price at which the shares were bought. Both NSE and BSE follow T+2 rolling settlement systems. It means that settlement of trades executed shall be made on the second day from the Trading day. For example trades executed on Monday will be settled on Wednesday. Payments and deliveries are to be given to the stock broker where the bids were executed and he will then settle the trades at the stock exchanges on behalf of all his clients on the settlement date. Payments can be made by check to the broker and deliveries can be given by issuing delivery instruction slips to the depository participant, where you have your account, in favor of the clearing member (your broker’s pool account). The depository participants would take a maximum of 24 hours to execute your delivery instructions, therefore you have only one day to give delivery instructions to your depository participant after the trading day and before the settlement day.

Now you can open an account and start trading. But be careful, stock markets are risky, be informed about the company you are going to invest in, track the progress of the companies on your portfolio, have an expert advice and remember that a stock price can come down as much as it can go up. Happy trading.