Prajna Capital - An Investment Guide

THE EVENTS of the last few days have caused almost everyone to reflect on the security provisions that are available in the country. In retrospect, the sheer lack of preparedness to cope with acts of terror like that experienced in Mumbai hits you in the face. The realisation, however, has only come after the dastardly event took place. Retrospection on your portfolio may not be the first thing on your mind currently but in a sense, investors need to be reminded that preparations need to provide a certain degree of stability to your portfolio. And diversification is clearly the mantra that financial experts recommend. One step towards achieving this diversification could be by investing in Exchange Traded Funds ( ETF ). WHAT ARE ETFs? Technically speaking, ETFs are collective investment funds , which have underlying assets such as gold, stocks etcetera. However, what is significantly different about ETFs is that they are traded on the stock exchange in the same way that a share is t...

Beta is a statistical term ; it measures the volatility of stock (or fund) relative to the market (or the benchmark). The value of beta of a stock or mutual fund is always stated against its benchmark. The beta of benchmark or market is always equal to 1. If a stock is benchmarked against Sensex and has a beta value greater than 1 (say 1.5), this indicates that the stock is 50 percent more volatile than the market as the beta of Sensex is 1. The stated stock will deliver 15 percent return if the market has delivered a 10 percent return in same time period. Its opposite is also true if Sensex delivers 10 percent negative return, then the stated stock will fall by 15 percent in the same time period. A beta of less than 1 implies lesser volatility. The desirable value of beta depends upon the individual risk bearing capacity. So while you can expect a high return from a stock that has a beta of 2, you will have to expect it to drop much more when the stock market falls.

You may not be always right with debt, as some products require timing just like equity While debt has always had its relevance for investors, its performance in the last one year has sent many rushing for it. Equity's under-performance in the last one year has only further made its case stronger with the equity market's weakness wiping out a few years' good performance at one go. While debt gives the comfort of capital safety and assured returns, not all debt options are safe in the real sense. In fact, debt can be a negative earner in a real sense if the choice of product is wrong. Hence, choosing the right debt product is as important as choosing the right stock, and in some cases, could be tougher too. Interestingly, the challenge for many is when to allocate for debt rather than how to choose it. While the bad performance of equity automatically forces everyone to debt, it need not be the case if the investor resorts to asset allocation. If you go by the principl...

IF you want to invest in equities, there are only four things you need to remember. 1. Choose the right company Look for superior and profitable growth. The company should earn at least 20% return on its shareholders’ capital. Ideally a long-term investment perspective (more than five years) allows you to participate in the company’s growth. At the short end (3-6 months), share performance is driven more by market sentiment and less by company fundamentals. In the long run, the relevance of the right price diminishes. 2. Be disciplined Stock investing is a long, learning experience. You will make mistakes, but also learn from them. Here is what you can do to ensure a smooth ride. --Diversify your investments. Do not put more than 10% of your corpus in one stock, even if it’s a gem. On the other hand, don’t have too many – they become difficult to monitor. For a passive long long-term investor, 15-20 is a healthy number. Use this asset allocation tool to find out if you need to invest b...

How you can gauge volatility of a stock and evaluate stock value The stock market movements over the past few weeks can be best described as unpredictable. It goes a few impressive points up, only to slide back after a few days. The upward and downward fluctuations can create panic among investors. Returns on stocks become increasingly difficult to predict over the short term. It may be a reaction to global market conditions, high oil prices, world economy and soaring inflation. Volatile markets torment investors. How do you measure market stability? A measure of volatility gives ample information for an investor to base his decisions. The time to enter, buy or sell, are critical decisions that depend on market moods. Shrewd investors find volatile markets or crashes an ideal time for picking value stocks at bargain prices. Since these are purchased at discounted rates, it gives a sufficient cushion for the long-term investor. Though scouting for bargain stocks may appear a lu...