Prajna Capital - An Investment Guide

WE ARE all aware of the term personal financial planning as we have heard about it either on television, read in newspapers or had our advisers use it before us. Earlier, we could afford to ignore it as “earning returns” was not that complicated. But in the prevailing times, when economies world over are struggling to overcome recession, boost demand and accelerate growth, financial planning gains much prominence. It is more a need and necessity than being a matter of choice. While financial plans differ from individual to individual and situation to situation, one recommendation that is uniformly maintained is the need for maintaining an emergency fund, a contingency reserve that can come in handy if situation demands. It was a common trend to find most people take this part of the plan lightly and not abide by this recommendation, thinking that they could always swipe their debit/credit cards and access liquidity as and when required. But times have changed. There is an incr...

You need to invest money and time to build and maintain a portfolio that yields high returns John Maynard Keynes said, 'Don't try to figure out what the market is doing. Figure out a business you understand, and concentrate' . Investing in stocks is more a science than an art. There are certain ground rules which investors must follow to be successful. Even before you decide to invest in stocks of individual companies, it is pertinent to have a proper asset allocation plan, that is, what portion of your portfolio should be dedicated to equity. If you belong to the category to investors who do not have the time to monitor investments closely, you would be better off investing in an equity mutual fund rather than picking up individual stocks. If you want to design you own portfolio, here are some points to help you get started: Identify your comfort zone Are you an investor who would likes to be defensive or are you an aggressive investor? The choice of stocks would ...

Almost all the investment advice that is given out to retired people is wrong. In fact, not only is it wrong, it is downright dangerous. Instead of securing their financial future, it tends to push them towards poverty. The longer a retiree lives, the more severe are the ill effects of such advice. I know that's a very strong set of statements that I have started out with but if you bear with me for a few more minutes, I'll show you where the problem lies and why it is so serious. The central premise of almost all the post-retirement investment advice I've ever heard is that retirees' money should always be entirely in guaranteed fixed-income instruments like post office deposits, RBI deposits, bank FDs etc. It is said that retirees should not have any stocks-based investment because they can't tolerate any risk. The problem with such advice is that it completely ignores a big risk that retirees face, that of inflation. None of the fixed-return instruments provide r...

Investing for long term goals needs patience, commitment and more importantly, tenacity Finding the right investment option is always a tough exercise. The challenge gets tougher when it comes to long-term investment planning. An investor needs to take into account a number of factors such as inflation, risk, liquidity and more importantly, needs to sustain the investment process over a long period of time. While such an exercise gets simpler when an investor has a long tenure at his disposal, it is not easy if the tenure is less than a decade. While it may be wrong to use the word long-term planning in such a scenario, many investors end up thinking about long-term planning only when they have less than a decade at their disposal. The classic example is retirement planning which gains focus for many just prior to retirement. Start early: Needless to say, the entire process of long-term planning turns easy when an individual starts thinking about it early in life. While long-term is a ...

What is an FMP? FMP stands for Fixed Maturity Plan . These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as two years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you. FMPs do not invest in equity. The portfolio is generally invested in debt and money market instruments maturing in line with the tenure of the scheme. The objective is to lock-in the investment at a specified rate of return thereby immunizing the scheme against market fluctuations. Liquidity In most open-ended mutual fund schemes, one can redeem one’s units anytime. However, the structure of the FMP does not lend itself to this kind of liquidity. Invest money you are more or less sure you are not going to need during the tenure of the plan. If you withdraw before the scheme closes, generally a steep exit load is imposed. The reason for this steep load is...

IT IS a blend of value investing with aspects of behavioural finance . It tends to be bearish when the market is bullish and vice-versa. Welcome to the world of contrarians — who believe in going against the wind. Although it is never easy, remember what doesn’t kill you makes you stronger . The-60 year-old (a contrarian investor) is a firm believer that to be successful, you should invest in out of flavour stocks or sectors that are not of prime interest to most investing community. Rather than investing in then popular sector stocks such as realty, banking and others invested a large chunk of money in sugar stocks in January, when the market was at its peak. His intellectual independence with a healthy dash of agnosticism about consensus views reaped dividends. Unlike the other sector stocks, which are bleeding right now, His decision to invest in sugar, stock saw his portfolio’s worth increasing by almost 30-40%. Here’s an insight into the contrarian world of investing, what...

Sundaram BNP Paribas AMC has an impressive line up of equity funds which are good performers at that. The bulk of this AMC's assets are in equity. Despite putting up a fairly comprehensive product offering on the equity front and delivering on the performance side too, this AMC has not got the attention it deserves. Currently it ranks at No. 13 in terms of assets under management. The funds have a disciplined approach with a focus on risk management. From being an average performer, Sundaram BNP Paribas Growth has put up a better performance in the past two years. This could be the result of changes within the fund house. The AMC has been laying a lot of emphasis on solid research and fund management. They have a team of one economist, seven research analysts and four portfolio managers, not including the head of equity. Though the AMC has much to offer by way of equity funds, it has not been too impressive on the debt front. Sundaram BNP Paribas Bond Saver has not managed to beat ...

Background There are mainly two approaches to asset allocation — The Bandwagon Approach and The Contrarian Approach. In the bandwagon approach - one chases the best performing assets and broadly follows the crowd. In the contrarian approach one focuses more on core value and enters assets that may be out of favour. The contrarian approach to asset allocation, if followed judiciously, can be rewarding. It combines a full range of fundamental and technical analysis, evaluating assets continuously — in the search for assets that are likely to reverse its past trend . It is not about just blindly doing the opposite of what the market is doing. It is about identifying assets that offer true value . Rationale One of the key reasons for using a contrarian approach to asset allocation is the cyclicality of asset classes. There are also some asset classes that are complementary to the others. For instance, when interest rates go up, it hurts the bottom line of companies and hence equitie...

The yellow metal is a good avenue now for short-term investors Every time equity and other markets turn bearish, investors turn to the yellow metal to park funds. It has been no different this time as gold has turned the new safe haven for many. As would happen in every boom market, investors chase an instrument even if it is on the rise on a continuous basis. In fact, it has happened with various other instruments like equity, property, crude oil, and it seems to be the turn of gold which has been scaling a new peak at regular intervals. Expectedly, new highs are being projected for the yellow metal. Needless to say, investors need to be slightly cautious with their investment strategies as it is easy to get carried away by the current environment. While gold is definitely an option for the next 12-24 months, the instrument too carries its baggage of risks at the current levels. More importantly, rather than demand, other factors such as growing comfort of investors and increasi...

The macroeconomic factors world-wide have been quite shaky over the last couple of quarters. As a result, the stock markets have been quite volatile with a negative bias all over the world. In line with market conditions, the performance of equity based instruments remained quite subdued. As uncertainty prevails in stock markets, investors are not keen on putting their money in equity-based instruments. The meltdown in the equity markets started with the slowdown in some countries. This coupled with several other negative developments like a sharp rise and fall in commodity prices (crude oil, metals, food items etc), fall in the global inflation rate and meltdown of some of the large financial houses kept triggering negative sentiments in the markets. Analysts believe the negative sentiments will continue in the stock markets for a few more quarters, and therefore, the stock markets will remain volatile in the medium term. Therefore, it will be risky to invest in equity-based ins...

The past few months have been difficult for investors who reposed complete faith in the stock markets. Millions of rupees of investors in the stock markets were wiped away as the index plunged. Global crisis, the foreign institutional investors' ( FII ) large-scale withdrawals and the economic slowdown affected the market performance adversely. Investors in mutual funds weren't spared either. It was a horrible fall for equity funds where as much as half of their worth was eroded. Mutual funds were considered a safe and solid investment that yielded good returns over the past few years. But this time the gains over the last two years were almost completely washed away. High interest rates and slowing economy left a huge dent behind. But some investors believe it is the right time to fish in the stock markets for value picks. For other investors who do not want to shun the markets altogether, yet play it safe, mutual funds are the only alternative. Mutual funds can be class...

Mr & Mrs Achar, both in their early thirties, have a long list of want to-do things post-retirement. While Achar, a private banker, wants to travel a lot and write a book, Mrs Achar wants to look after their children and do some social work. The interesting part, however, is that they want to do this after 10 years, when they plan to retire! Yes, you are right, they do want to retire in their early forties and wish to pursue their passions. Wait a minute... did we hear similar voices from you too. Alright, so let's see how this can be achieved with systematic planning that includes having reasonably aggressive investment plan, regular savings and may be a slight change in lifestyle to ensure a better and safe tomorrow. Early retirement is essentially a lifestyle issue and is proportionate to one's income and consumption pattern. To retire early one needs have to do careful planning and calibrated thinking. Before making any retire plan, one should first prepare a balance sh...

A RIGHTS issue is a way by which a listed company can raise additional capital. However, instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings. For example, 1:4 rights issue means an existing investor can buy one extra share for every four shares already held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount. Why does a company go for it? The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resorts to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out. Since a rights issue results in higher equity base for the organisation, it also prov...

The domestic investors are increasingly realising that it takes a combination of timing, patience and probably little bit of luck to make money from the stock markets. Those who missed the opportunity of booking profits during the earlier boom run are regretting, and even those who made an entry less than a year ago are not a happy lot. That is sure to make many wonder what it takes to be an investor in the stock markets. Check out if you have these traits. Risk appetite Equity sure lets you earn more money but not all your investments can turn into a goldmine. This is particularly true when you bet on stocks. As a result, an equity investor needs to have the ability to take risks which could be in the form of negative returns. While the prospects of loss of capital are much lower when the investment horizon is long, there are chances that some stocks may not recover even in the long term due to a change in their business prospects. In such cases, 'stop loss' becomes a st...

Range bound trades, whipsaws and false signals All technical indicators will fail in range bound stocks / markets and will generate whipsaws and false signals. Whenever you can get a buy / sell within 10 days (order is immaterial), it means the stock is range bound. At this point, one should visually check the chart and identify areas of support and resistance. Only a break above these levels will create a new trend. Support and Resistance levels / targets This is nothing but a "peak" and "trough" based on 5% change. These levels form the basis for calculation of targets. A break above a "peak" gives a resistance break. Similarly a break below a "trough" generates a support break. Oversold and overbought stocks Interpretation of this is difficult and should be done in the context of the prevailing trend. Overbought means great strength. It does NOT mean stock will correct immediately. It is normal for a stock to remain overbought for conside...

Sharp Correction Provides Good Value Buys For Investors With A Long Horizon. So how an investor can identify the good stocks to by for long term. In this article we discuss a method to do it. THE stock market is known to over react on the way up as well as down. So, it should come as no surprise that the market price-to-book value of many fundamentally-sound companies has slid to its lowest level in many years as a result of the recent turmoil. An analysis reveals that 181 companies (with strong fundamentals) are currently trading at a discount to BSE-500 index average price-to-book value (PBV) of around 4.75. And stock prices of 70 companies are trading at a PBV of less than 2. Such a sharp correction provides good value buys for investors with a long-term horizon. To give a fair picture, only those companies whose revenues and net profit grew at a CAGR of 15% or more in the past three years have been included in the study. Companies with 3-year average return on capital employed o...

What are derivatives? Derivatives are financial instruments, which as the name suggests, derive their value from another asset — called the underlying. What are the typical underlying assets? Any asset, whose price is dynamic, probably has a derivative contract today. The most popular ones being stocks, indices, precious metals, commodities, agro products, currencies, etc. Why were they invented? In an increasingly dynamic world, prices of virtually all assets keep changing, thereby exposing participants to price risks. Hence, derivatives were invented to negate these price fluctuations. For example, a wheat farmer expects to sell his crop at the current price of Rs 10/kg and make profits of Rs 2/kg. But, by the time his crop is ready, the price of wheat may have gone down to Rs 5/kg, making him sell his crop at a loss of Rs 3/kg. In order to avoid this, he may enter into a forward contract, agreeing to sell wheat at Rs 10/ kg, right at the outset. So, even if the price of wheat falls ...

What are stock splits? A stock split simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. This in NO WAY affects the intrinsic value or past performance of your investment, if you happen to own shares that are splitting.A typical example is a 2-for-1 stock split. A company will announce that it's splitting its stock 2-for-1 in one month. One month from that date, the company's shares (having traded the day before at, say, $30) will now be trading at half the price from the previous day (so they'll open at $15). The company, which had 10 million shares outstanding, now consequently has 20 million shares outstanding. The price has been halved in order to accomodate a doubling of the share total. The most common splits are 3-for-2, 2-for-1, 5-for-4, and 3-for-1. But they can happen any which way: 5-1, 10-for-9, etc. They can even happen in "reverse": 1-for-10, etc. But why the heck would a...

Go for equity or MF based on risk appetite Some tips for investors in these volatile times when it is difficult to choose between equity investing and safer options The domestic stock markets have seen a historic bull run over the last four years. From the beginning of 2008, the markets are in a correction phase due to weak investor sentiments in the local as well as global markets. We have witnessed unprecedented volatility in the markets in the last few months, especially over the last 4-5 months. In fact, the domestic markets are among the most volatile markets in the world (volatility in the Indian stock markets is much higher than markets in developed economies like Dow Jones , NYSE, Nikkei, FTSE etc). There were many days when the Sensex recorded more than 1,000 points (above five percent) intra-day swings. The rise and fall of share prices (market direction) depend of various market forces. In fact, the factors that affect stock markets have increased significantly over the la...

Last few years have been very easy for the investors to make money out of markets. Thanks to solid bull run. But situation has changes both globally and locally as well. This all started with US sub prime issue. This market correction has bought many of the investors back to basics and class room to review their stock selection strategy Set a ceiling for exposure to a particular stock You must set a maximum limit for exposure to a stock as over exposure can prove disastrous in a struggling market. In your portfolio, the value of RIL shares is around Rs 1.58 lakh, that's an upside of 108.7 per cent from your cost price. The rapid appreciation of the stock's price has resulted in it cornering 32 per cent of your portfolio. Consequently, one-third of your portfolio is dependent on just one stock. It would be great if you could moderate your risk by reducing your exposure to RIL. Avoid small holdings The price movement of the stock should never be the sole reason for buying it. You...