Prajna Capital - An Investment Guide

INVESTING in equities is riskier than and definitely demands more time than other investments. However, it can probably be more rewarding than you can imagine and certainly very exciting! World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably your best bet against inflation too. If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities. Step 1: Understand how the stock market works When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares. Before you embark on your journey to invest in equities, teach yourself how the stock market works. Step 2: Learn how to choose a stock Having understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversificati...

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

When it comes to investing, there are two styles to it. They are: 1) Active 2) Passive Lets discuss these in detail: 1) Active Active investing is a strategy in which the fund manager is highly involved in buying and selling of stocks (in case of mutual fund). Here the aim of the manager is to beat the returns generated by the corresponding benchmark or an index. 2) Passive On the other hand, in the passive style of investment, stocks are bought with a long term perspective. Here the portfolio is not as frequently churned as it is in active investing and the manager does not resort to profit booking based on short term price fluctuations. Indexing is an example of passive form of investing. An index fund invests in same stocks, in the same proportion, as in an index like Sensex or Nifty.

If you have lost money, then have a hard look at your holdings. It is time to be patient ULTIMATELY, you cannot really lose money in the stock market! If you have, then either you have not been in the stock market long enough or you are in the process of getting the most expensive education. In the last 15 years, I have portfolios earning about Rs 5 lakh from share dividends alone against others who started with Rs 5 lakh and today owe the broker about Rs 3 lakh. When the markets, Sensex moved from 4,000 to 7,000 points, people thought it was a bubble and many sold out by the time it reached 12,000 points. A huge majority lost the run from 9k to 16k. Seeing their folly, many entered around 17-18k levels and in two months, saw their portfolios doubling. Greed peaked, speculation peaked and the fall shattered millions of dreams. Is there someone sitting on profits today? The answer is a resounding yes! Here are examples. HDFC was quoting at Rs 300 in 1999 and touched about Rs 3,000 earl...

IT WAS greed that got the BSE Sensex to 21,000 points. Investors were willing to pay any price for a stock expecting that stocks would go up forever. They turned a deaf ear to any sane advice. Now, this greed is replaced by fear. There is so much of fear that the investors have become loss averse. They want to get out of stocks. Why a sudden change in sentiment? First , it is due to margin trading. Investors had become so greedy that they bought beyond their capacity through the futures and options. The brokers encouraged this and now when the client cannot pay the margin calls and they are liquidating the positions at a substantial loss. Second , investors borrowed from banks against shares. Now, since the value of shares is going down, banks are selling stocks in the market to reduce their losses. Third , investors are stuck with declining or non-saleable stocks. To nurse their losses, they need to liquidate. Most of the stocks being unsaleable due to price circuits, investors are fo...

From over confidence, to over-enthusiasm to panic selling, there are many mistakes that an investor should avoid while playing in the stock market. Investing is not just about picking winners, but also about avoiding mistakes. Retail investors can be better off if they avoid making the following mistakes. • Overconfidence — Don’t be unrealistically optimistic A bull market makes retail investors believe that they are geniuses — after all, anything they put money into goes up. This overconfidence in their own abilities leads to a complete disregard of the risks involved. Every new generation that invests in the market ignores past experience. These new investors wrongly believe that stock prices only go up. Don’t be overconfident and don’t start believing that you have superior skills compared to the market. Recognize that in a bull market you are benefiting because the whole market is going up. If those around you are getting unrealistically optimistic, start managing your risk accordi...

A considerable proportion of people investments are in the form of the stock options. As it happens, this company is prone to periodic rumors about being in trouble of one kind or the other. In recent weeks, just as all of peoples' investments have fallen, those of his employer (and other potential employers) have fallen the most. Then there are many couples who both work in a large IT company. Predictably, a good amount of their investments are in the form of their own company's stock options. They are now coming to grips with the possibility that if the rupee keeps gaining strength, employment growth in the IT industry could slow down and perhaps even sharply reverse. That's a double problem . 1) Realization dawns that the permanently bright future that their industry was supposed to have may not exist. 2) And, at the same time, their investments in their own employer have declined to less than half in about an year's time. Like many IT stocks, their employers' st...

Simplicity - Warren Buffet Warren Buffet, who has donated billion to charity. Here are some very interesting aspects of his life: 1. He bought his first share at age 11 and he now regrets that he started too late! 2. He bought a small farm at age 14 with savings from delivering newspapers. 3. He still lives in the same small 3-bedroom house in mid-town Omaha , that he bought after he got married 50 years ago. He says that he has everything he needs in that house. His house does not have a wall or a fence. 4. He drives his own car everywhere and does not have a driver or security people around him. 5. He never travels by private jet, although he owns the world's largest private jet company. 6. His company, Berkshire Hathaway, owns 63 companies. He writes only one letter each year to the CEOs of these companies, giving them goals for the year. He never holds meetings or calls them on a regular basis. He has given his CEO's only two rules. Rule number 1 : do not lose any of your ...

It sounds a little odd. Thirty-year-old person is yet to get a receding hairline, but is already talking of retiring. Just five years ago, he did his post graduation from a reputed B-school in India, and is already a vice-president in a large entertainment company. He has had a successful career till date, earning a seven-digit salary. Now, he is planning to throttle his career life even more for he doesn’t see himself working after the age of 50. For that’s the time he is planning to pursue his life-time passion of wildlife photography. This person is not the only one who aspires to retire early. But could that be a reality for this person and many other people? While the idea of a retired life could be a permanent good bye to all the work-related stress, the fear is of outliving your savings. Financial planners, therefore, advices a proper retirement plan to target a kitty that could earn enough income to sustain one’s lifestyle. Take the case of this person who is planning to retire...

“When the going gets tough, the tough get going” That really sums up what it takes for a retail investor to survive in these volatile times – nerves of steel and lots of courage. If you have poured in a substantial amount of your savings in equity shares or equity mutual funds, and are crumbling under the pressure of the falling markets, all’s not lost. It’s unanimous: Stay put for the long term Equities are for the long term. Anyone who has been investing for the long-term should not be affected by the market fluctuations. By long-term I mean 7-9 years. People should continue holding their investments. The current fall has been too sharp and it will take some time for the market to recover. The pain will be longer this time but the market will recover. Remember that a loss is not a loss till you sell. So don’t panic simply looking at the notional loss. Hold on to your investments and watch them turn to profits in the long run. Why long term pays A little bit of number crunching suppor...

The First Major Axiom: ON RISK Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough. The Second Major Axiom: ON GREED Always take your profit too soon The Third Major Axiom: ON HOPE When the ship starts to sink, don't pray.Jump. The Fourth Major Axiom: ON FORECASTS Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly. The Fifth Major Axiom: ON PATTERNS Chaos is not dangerous until it begins to look orderly . The Sixth Major Axiom: ON MOBILITY Avoid putting down roots. They impede motion. The Seventh Major Axiom: ON INTUITION A hunch can be trusted if it can be explained. The Eighth Major Axiom: ON RELIGION AND THE OCCULT It is unlikely that God's plan for the universe includes making you rich. The Ninth Major Axiom: ON OPTIMISM AND PESSIMISM Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic. ...

A professor of mechanical engineering has been a regular investor in traditional investment products for the last 30 years. His investment portfolio includes instruments like LIC, public provident fund ( PPF ), national savings certificates ( NSC ), fixed deposits ( FDs ) and infrastructure bonds. For him, investment in equities was never a priority. He thought they were risky. More recently, he ran into a wealth m a n a g e r who told him that investments in traditional products are important but it shouldn’t occupy a major chunk of his portfolio. Now he is beginning to invest a little in mutual funds and equities. Everyone hates losing money. But by playing too safe, you could also lose money by earning negative real returns (after taxes and inflation). Traditional investments were hugely popular 20 years ago. They were safe, gave decent returns and were easy to invest in. However, they have not borne the onslaught of private investment options very well. Today, most of Sunder’s c...

We are at the end of this financial year. Some tips in case your tax planning isn’t complete The financial year 2007-08 is coming to an end in the next couple of weeks. This is the last chance for investors who have not planned their tax savings this year to invest and save taxes. There are certain investments and expenses that are exempt from income tax under the Income Tax Act. Investors can review their tax planning and see if they missed out on something good. This can lead to a 33 percent savings on the amount invested through the reduction in their tax liability. Here are some ways for an individual to reduce tax: Tax rebate under Section 80C Section 80C of the Indian Income Tax Act allows income tax exemptions to individuals on certain investments and expenditures. The maximum exemption allowed under this section is Rs 1 lakh. Investors can invest Rs 1 lakh in one or more of these instruments to avail tax rebates under Section 80C: Provident fund or public provident fund ( PPF ...

Here are seven simple ways to survive a stock market correction as an investor: 1. Stop Listening To Analysts Most analysts in the media instead of providing you with a solution will just confuse you. Somebody will say everything is doomed while others will say things are great in the long term. Forget listening to analysts- most of them won’t be of any help. The reason people listen to analysts is because they are looking for peace and hope. In reality, you will get none of that by listening to somebody else. Peace and hope are all within you. 2. Stop Staring At Your Portfolio Every Thirty Minutes Another mistake people make is that they get up every morning and wait for the markets to open. Once markets open they start staring at their stock prices. A fall makes you feel worse and small rise makes you feel a little better. This won’t help either. Instead keep track of the fundamentals of your company every time the results are out. If your company is profitable and growing - be happ...

Should you put your surplus into real estate or financial instruments? SO YOU are a young Indian who earns well, has spent wisely and drive your own car, live in your own house and are able to meet daily expenses without too much effort. Now you are concerned with the surplus that you have in hand and are confused whether to put it into financial instruments such as mutual funds and unit-linked insurance policies ( ULIP ) or whether you should buy a second house to capitalize on the current real estate boom. Anybody looking at real estate as an investment option is currently at least in the post 35 year age group. In the current scenario, other financial instruments score over real estate as a long-term investment option. The returns in the short and long term are more attractive. Portfolio advisor too agree. Investment in mutual funds and stock markets is liquid. But investments in the property market are not. Mutual funds yield at least 40% year-on-year returns. If a investors puts ...

Why Do I Need Life Insurance? You need Life Insurance because typically the need for income continues for those who are financially dependent on you, but there is no guarantee of your ability to earn consistently and for the rest of your life. Life insurance can help you safeguard the financial needs of your family. This need has become even more important due to steady disintegration of the prevalent joint family system, and emergence of nuclear families. The need to protect your family's ever growing needs is why you need Life Insurance. Life insurance is designed to protect you and your family against financial uncertainties that may result due to unfortunate demise or illness. You can also view it as a comprehensive financial instrument – as a part of your financial planning offering you savings & investment facilities along with cover against financial loss. By choosing the right policy as per your needs i.e. customized solutions, you will be able to plan for a secure futu...

Life Stages Your insurance need will change as your life does, from starting to work to enjoying your golden years and all the stages in between. Each one of these stages may pose a different insurance need/cover for you. In this section, we have drawn up the basic life stages and help you analyze various insurance needs accordingly. STAGE 1 : Young and Single An important stage where one lays down the foundation of a successful life ahead. Take advantage of the time and power of compounding to ensure that you build up your dreams. Start saving early. Your needs: Save for a home and wedding Tax Planning Save for Golden years STAGE 2 : Just Married Marriage brings about a significant change. New dreams and new opportunities also bring in additional responsibilities. While both of you look forward to a happy and secure life, it is equally important to ensure that eventualities don’t come in the way of shaping your dreams. Your needs: Planning for home / securing your home loan liability...

5 points that matter while buying MF More often than not meritocracy of investments is often decided by the returns. Quite simply then a fund generating more returns than the other is considered better than the other. But this is just half the story. What most of us would appreciate is the level of risk that a fund has taken to generate this return? So what is really relevant is not just performance or returns. What matters therefore are Risk Adjusted Returns. The only caveat whilst using any risk-adjusted performance is the fact that their clairvoyance is decided by the past. Each of these measures uses past performance data and to that extent are not accurate indicators of the future. As an investor you just have to hope that the fund continues to be managed by the same set of principles in the future too. Following are the 5 Points: 1. STANDARD DEVIATION 2. BETA 3. R-SQUARED 4. ALPHA 5. SHARPE RATIO 1. STANDARD DEVIATION The most basic of all measures- Standard Deviation allows you ...