Do you know how to invest?

Posted by Mehul Kothari | Published on 14 Feb 2019
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Do you know how to invest?

Do you know how to invest? Take this quiz to find out

1) You are planning to buy a house in the next 10 years. The most efficient way to reach this goal is to:
a) Put your money in a bank savings account
b) Invest in the stock market

Correct answer: (b)
Buying a house is a costly affair. Investing in the stock market can help you earn much higher returns compared to a bank savings account. In addition, since this is a long term goal, the risks are also considerably reduced.

2) What is a prospectus?
a) It is a legal document that is issued by companies offering securities for sale
b) It is a document that lists out the future prospects of a company

Correct answer: (a)
A prospectus is a legal document that each company has to issue before at the time of an Initial Public Offering (IPO). It contains important information such as the company’s financial details, its risks, opportunities and future goals.

3) Your friend tells you that investing in stock X will double your returns in 3 months
a) Invest in the stock right away
b) Research the stock carefully before you consider investing

Correct answer: (b)
Unsolicited tips in the stock market are very common. That doesn’t mean they are right. Never invest based on tips. Always do your own analysis before putting your money on a stock.

4) Swati is a risk-averse person. It is better for her to invest in:
a) Mutual funds
b) Stocks

Correct answer: (a)
For a risk-averse investor, it is better to invest his/her money in mutual funds. The returns may not be as high as stocks but they offer greater security to invested capital compared to stocks.

5) The stock market has taken a major downturn. You should
a) Immediately sell all your stock holdings
b) Wait and watch before you take any hasty action

Correct answer: (b)
The stock market can be very volatile. But that does not mean you take out your investment every time the market sees a downturn. If you are a long term investor, it is best to wait and observe why the market crashed. If the reasons are only temporary, you can wait until the market regains its upward momentum.

6) Which of the following is false:
a) Diversifying your investment portfolio helps you minimize your losses
b) Short selling is a process of selling a stock first with the intention of buying it later at a lower price
c) It is possible to predict future price of a stock based on past price movements

Correct answer: (c)
The future price of a stock is not determined by its past performances. As a result, it is not possible to predict a future price based on past patters. That said, it can be useful to study the past performance to gain a better understanding of a stock.

7) Girish wants to create an emergency fund. He should consider investing in:
a) Short term debt funds
b) Stock market

Correct answer: (a)
For an emergency fund, it is best to invest in short term debt funds. These funds offer high returns and they are easily accessible. You can withdraw the money very quickly in case of an emergency. But most importantly, they offer higher degree of capital protection compared to stocks.

8) Geeta is retiring in 5 years. Currently she has 80% of her investments in the stock market.
a) She should retain her investments in the stock market
b) She should slowly transfer her funds to less risky investment avenues

Correct answer: (b)
Investments in the stock market offer high returns. But as a person nears retirement, it is safer to transfer the funds to more stable investment avenues such as debt funds. You don’t want to risk losing a major chunk of your investments when you are about to retire.

9) When you buy a bond issued by a company:
a) You become a part owner of the company
b) You lend money to the company

Correct answer: (b)
When you buy a bond, you are basically lending your money to the company. In return, the company promises to pay you a specific sum of money as interest. And at the time of maturity, the company returns your money.

10) The stock market in India is regulated by:
a) The Reserve Bank of India (RBI)
b) The Securities and Exchange Board of India (SEBI)
c) The Insurance Regulatory and Development Authority of India

Correct answer: (b)
In India, SEBI is the designated financial regulator body. It enforces regulation in the investment markets and maintains an efficient and stable environment in the financial markets.

Final score:
How did you score?
0-3: you may want to brush up on your knowledge on investments
4-6: Good start. You do have a fair bit of knowledge about investments. But try reading more on the subject to become an expert investor
7-9: Great going! You are nearly there.
10: Excellent performance. You are now a stock market superstar.

 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

PREVIOUS STORY

Risk and time: All you need to know

Posted by Mehul Kothari | Published on 14 Feb 2019

Risk and time are two important considerations in any investment decision. They are the ingredients that help you reach your financial goals. Therefore, it is important to know how they play off each other. Understanding their relationship can help you achieve financial goals over time. So, let’s get down to understanding the jugalbandi between risk and time in the investment world.✓ Short-term goals Every investment carries different types and degree of risk. Investments like short-term bonds carry minimal risk for an investor with a short-term goal. With a shorter span of time available to achieve goal, you would prefer an investment with less risk and more stability. Capital protection would be more important than a high return expectation here. On the other hand, investing in less riskier investments like short-term bonds or cash would be a riskier option for someone who is saving for retirement, a goal that has a longer time horizon. Such investments may not deliver inflation adjusted return. ✓ Long term goals Goals with a longer time horizon need you to take considerable amount of risk to get the potential return expected. Aggressive investment vehicles like stocks, equity mutual funds and real estate are some of the investment vehicles that can help you in the long run. Yes, aggressive investments are more volatile and risky. But historical data suggest that the risk element usually wears off over longer term. Basically, a longer time horizon can help your investments ride through many market cycles. The reasons for this are manifold. Some of them are:1. Rupee Cost Averaging: High the volatility, higher the advantage. Higher the time, higher the chances of averaging the cost. It works in both rising as well as falling markets.2. Higher risk can be taken with longer tenure so that there is time to make up in case of loss of wealth in the interim.3. Risk can also increase with time for debt funds:    a. Interest rate risk- Duration funds have higher risk than accrual ones    b. Credit risk    c. Reinvestment risk-     d. Liquidity riskThis simply means that each investment has some inherent risk attached to it which gets affected with time.
 Bank fixed deposits (FDs) have reinvestment risk that comes at the time of maturity of the FD and not before that. So, in a falling interest rate situation like now, FDs need to be booked for a longer tenure to gain in the long run. Similarly, even interest rate risk and liquidity risk need to be evaluated over time. For properties, there is an element of liquidity risk in an emergency situation when money is needed immediately and there is little time. That’s when you may face problems of finding the right buyer. Investment and risk are two sides of the same coin and accepting one means accepting the other. However, most people think risk is only market risk but actually each and every investment has some risk associated with it. For instance, bank FDs carry reinvestment risk and interest rate risk, equity has a market risk, while Public Provident Funds (PPF) can have interest rate risk and liquidity risk To sum up, the investment’s timeframe and risk management need to be calibrated deftly to achieve long-term financial goals.   Disclaimer: "Investment in securities market are subject to market risks, read all the related documents carefully before investing."

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Forming your portfolio: Things to keep in mind

Posted by Mehul Kothari | Published on 14 Feb 2019

For an artist, a portfolio is a collection of his paintings. And for an investor, a portfolio is a collection of his investments. You may think that investing and painting have nothing in common. However, the ability to pick the right investments for your portfolio is an art in itself. Here are some things you should keep in mind so that you can create a profitable portfolio:1) Identify your investment goalsYou can create an investment portfolio by simply investing in a bunch of different investments. However, that may not be the ideal way to reach your financial goals. Don’t invest just for the sake of investing. It is important to have a list of goals you wish to achieve. And your portfolio should work towards helping you reach these financial goals. You need to ask yourself: a) When do you require money in the future? b) How much money do you need at the time?c) How much can you invest right now to achieve those goals?Identifying the capital amount that you can invest as well as your future goals is the first task of creating a portfolio. From this, you can identify which investment avenues are the best options for you. 2) DiversifyWhen you talk about investments, the first two options you hear are stocks and bonds. Sure, stocks and bonds are popular investment options but they are not the only options. For example, if you invest all your money in stocks, you can risk losing the entire amount in case of a market crash. And by not considering other avenues, you might miss out on the opportunity of getting better gains. Alternative assets like commodities, real estate and gold are viable options too. You need to spread your investments across different assets in order to minimise your losses and maximise your returns. 3) Create a portfolio strategyWhen you create a portfolio, it is necessary to have a sound portfolio strategy. There are two strategies commonly used by investors in the market:a) Active portfolio strategyb) Passive portfolio strategy If you have the financial means and the ability to digest the risk, the active portfolio strategy might be suitable for you. Otherwise, it is better to stick with the passive approach.4) Have a long-term focusDon’t make hasty investment decisions based on peer pressure or current market trends. Identify your investment goals and stick with your investments. This can steadily help you achieve your goals in the long term. But if your funds don’t perform as per your expectations, it may be necessary to reshuffle the portfolio. There is no point in investing your money in a fund that does not perform well. Your money can be better deployed in a fund that offers higher returns. In such a scenario, you can strategically rebalance your funds. 5) Maintain an optimum number of investmentsHow many investments should you have in the portfolio? Should it be five, 10 or more? To this question, there is no single correct answer. There is no perfect magic number. Having very few funds can be risky. At the same time, too many funds can be pointless. Many investors assume: more the number of funds, better the diversification. This is not always true. In fact, after a certain point, there can be an overlap in funds. However, experts recommend not more than ten funds for optimum diversification. To sum upIt is good to maximise the returns of an investment but better to maximise the returns of the entire portfolio. Keep the above points in mind when creating your portfolio to achieve financial success.   Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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  • Share Buyback – Meaning & Upcoming Buyback of Shares
    Posted by Mehul Kothari | Published on 14 Nov 2019

    “XYZ company announces a buyback of its shares”. You must have seen or read this headline multiple times in the last couple of years. Especially by companies from the IT or technology industry. According to reports, in the financial year 2018, buyback offers worth Rs. 50,000 crores were made in the Indian markets. Have you wondered what is share buyback and what are the technicalities involved with it? Or if you should give up your shares during buyback offers? Then read on and get all your queries resolved. What is share buyback? Buyback of Shares – Meaning:       A share buyback is a process through which a listed company uses its money and repurchases its own shares from the market. It is the opposite of an IPO (Initial Public Offer). Stock repurchase is also seen as a way for the company to re-invest in itself. Once        the stock buyback is complete, they are absorbed and cease to exist. There are two ways in which stock buyback can take place: Tender Offer: In this buyback channel, the company offers to buy back a certain number of stock at a quoted price. The buyback is done directly from the shareholders. Open Market: The open market buyback takes place through the secondary market (stock exchange). The resolution (special or board) needs to specify the maximum price for the buyback.       2. Buyback of Shares – Regulations:       SEBI has laid down the following guidelines for buyback of shares: It cannot be more than 25% of the total paid-up capital value and free reserves held by the company. It needs to be approved by the shareholders through a special resolution. If the buyback value does not exceed 10% of the total paid-up capital value and free reserves held by the company, it necessitates only a board resolution. Why do companies offer stock buyback schemes?1. Surplus cash but lack of investible projects This is one of the primary reasons behind stock repurchase by companies. Idle cash reserves come with a cost. Matured businesses do not need to invest exorbitantly in research, development or other such aspects. Also, holding on to unused equity funding results in ownership dilution without any good reason. Hence, companies prefer to buy-back their own shares.2. Tax-efficiencies Buybacks usually happen at a premium as compared to the market price. Companies prefer this route to reward shareholders rather than paying our dividends due to the tax implications. Dividends attract 15% DDT (Dividend Distribution Tax) for the companies as well as 10% tax in the hands of shareholders if the dividend income exceeds Rs. 10 Lakhs. Hence, earnings through buyback become more tax efficient for both the parties, even after considering the taxes applicable.3. Enhanced valuations Buybacks are associated with enhanced share valuations as a result of an improved PE multiple. Stock repurchase leads to a reduction in the number of outstanding shares and hence, capital base. This, in turn, improves the value of EPS (Earning per Share) as the same amount of dividend is now divided between lesser shareholders. The ROE (Return on Equity) also goes up as the cash assets on the Balance Sheets come down.4. Signal to the market Stock buybacks are also used to send indicators to the market. It signals that the company has great confidence in itself. Hence it is ready to repurchase its own shares (mostly at a premium) as it feels that the company is undervalued currently in the market. For instance, when the company management is highly optimistic about the future prospects but the stock price still reflects bearish sentiments based on past performance only.  In some cases, promoters can also use the buyback channel to tighten their hold on the company. This is especially true when the shareholding is highly diluted or is in the hands of individuals or investors who do not have the best interest of the company in mind. How to evaluate stock buyback offers? Now you know what is share buyback and the reasons why companies offer them. But the fundamental question remains – what should be your stance in case of buyback offers? Should you hold your stock or give them up? These pointers can help you take the final decision:1. Offer Price and buyback quantum Buybacks are lucrative only when they are offered at a significant premium amount. The offer price must be substantially above the current market price to make it worthwhile for the investor. Also, the quantum of the share repurchase amount should be substantial.  2. Look at the tax implications Till recently, shareholders had to pay capital gains tax on their buyback earnings. However, with the introduction of buyback tax for listed companies, investors are now exempted from the same. Companies will now have to pay 20% buyback tax. This move has been done as the Government observed that more companies were distributing their profits through the buyback channel rather than dividend as the latter attracted DDT (Dividend Distribution Tax). Note: The buyback tax is not applicable to companies who had announced their buyback schemes prior to 5th July 2019.3. Promoter Participation Promoters cannot participate in the buyback process if it is being done through the open market. However, they are allowed in case of tender offer. In case of participation by the promoter, there is usually a positive movement for the stock price in the long-term.    Final Words Buyback can be rewarding for both parties (company as well as investors). As an investor, it is important for you to understand the implications of each buyback offer and decide wisely. You should keep an eye out for the upcoming buyback of shares in 2019 and corporate news around the same. In case you feel that you are not able to decide on your own, you can always reach out to an expert like IndiaNivesh. Indiaivesh has been providing excellent financial solutions to investors since the last 11 years. It offers a wide range of products – broking, distribution, equities, strategic investments, investment banking as well as wealth management. With its “client-first” approach, skilled and experienced team members and state-of-the-art research and technological capabilities, you can be rest assured that your financial interests are in safe hands.  Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • SIP vs. RD - Systematic Investment Plan (SIP) Vs Recurring Deposit (RD)
    Posted by Mehul Kothari | Published on 18 Oct 2019

    Financial planning plays an important role in today’s time. For your money to grow into wealth, it is required that you invest it in good avenues. Many individuals set aside a fixed amount every month for investment purpose. The two most popular investment avenues for investing a fixed sum of money every month are Systematic Investment Program (SIP) in Mutual Funds and Recurring Deposits (RD). In this article, you will learn about the difference between RD and SIP. Let us begin by learning the meaning of the two terms. What is SIP? Systematic Investment Plan or SIP is an investment scheme where you can invest a fixed sum of money on a monthly or quarterly basis. It is a disciplined approach of investing your money because you set aside a fixed amount of money for investment purposes. You can start SIP by selecting a mutual fund scheme. The best part of SIP is that you can start it with an amount as low as Rs. 500. Let us now learn the meaning of recurring deposit. What is Recurring Deposit? Recurring Deposit or RD is a term deposit scheme offered by the banks. In this scheme, you have to select the duration of time and amount of monthly deposit. Upon the start of the plan, you have to deposit a fixed amount of money every month during the tenure of the scheme. In general, the duration of the scheme is minimum 6 months and on completion, 3 months of addition can be made up to maximum tenure of 10 years. Recurring deposit schemes are easy on the pocket because in this scheme you get the option to select the amount and tenure for which you want to continue the scheme. Let us now learn about the SIP vs. RD. Scheme of Investment SIP is about investing in mutual fund plans where you have the option to select between debt or equity funds on the basis of your risk-taking capability. Whereas, RD is a deposit scheme that can give you a fixed rate of returns. If you are looking for more flexibility than you can opt for a flexible recurring deposit scheme.  Frequency of Investment SIP can be started with a small amount. It is your choice to invest in SIP on a weekly, monthly and quarterly basis. In the case of recurring deposits, you can invest a fixed amount on a monthly basis. Choice of Investment SIP gives you the option to invest as per your risk appetite. Based on your risk-taking capability you can invest in different mutual fund schemes like equity, debt, hybrid, etc. On the other hand, a recurring deposit has no investment options. To earn a fixed return, you have to invest a fixed amount of money on a monthly basis. Tenure You can opt for SIP investment for any tenure or duration of time. The minimum period of investment is 6 months. Whereas, in the case of recurring deposits, they have a fixed maturity date. The minimum period of investment is for 6 months and the maximum period up to which you can do a recurring deposit is 10 years. Return The rate of return in SIP is not fixed because their performance is linked to the market. In general, over the past 10 years, the equity mutual funds have given return of 12% to 14% per annum and debt mutual funds have given a return of 8% to 9% per annum. On the other hand, when you start investing in RD, the rate of return is already known to you. Liquidity SIP is highly liquid in nature i.e. they can be withdrawn whenever you want. However, you must remember that you would be charged an exit load on redeeming within 1 year of investment. Just like SIP, RD is also liquid in nature. RD attracts pre-withdrawal charges in case you make a withdrawal before the end of the tenure. Risk Investing in mutual funds is risky because the performance of the fund is dependent on market performance. Poor market performance can even lead to capital erosion. However, in comparison to the equity mutual funds, the debt mutual funds are less risky. On the other hand, RD is a safe investment option. This is because the funds are directly deposited into the bank and they have a fixed rate of return. Hence there is no risk of capital loss in RD. Tax Benefit The SIP investments and returns generated on it are exempt from tax only if the investment is made in Equity Linked Savings Scheme (ELSS) funds. Whereas, an investment made in the form of recurring deposit or interest earned on it is not exempt from tax. Investment Goal SIP acts as a one-stop solution to all types of investment goals. In SIP, depending on the frequency of your investment and funds selected, you can invest for short, medium or long term. On the other hand, RD investment, in general, is done for short term purposes. It cannot generate wealth like SIP. The above mentioned are a few differences between the SIP vs. RD scheme. Now the next important question that would arise in your mind is, SIP or RD which is better? Well, the answer to it is very subjective and will vary from person to person. Both the investment schemes are very different from each other and have their own benefits. Depending upon your risk appetite and tenure of the investment, you can select the right scheme for you. You can also refer to the difference between the two schemes and understand which investment option is ideal for you. The beginners or inexperienced investors often find it difficult to take the investment decisions on their own. To assist them in financial planning, IndiaNivesh Ltd. is always at their assistance. We understand your financial goals and risk appetite before suggesting you any investment plan or scheme. We provide our clients with innovative and customised financial solutions. Our aim is to exceed the expectation of client in all our endeavours. You can even open a demat account with us and trade or invest in the stock market on the basis of our regular research reports.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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  • Gold Exchange Traded Funds (Gold ETFs) - Overview & how to invest in it
    Posted by Mehul Kothari | Published on 16 Oct 2019

    Gold Exchange Traded Funds (or Gold ETFs) combine the two passions of many investors – stock trading and gold investments. They provide a channel through which you can be a part of the bullion (gold) market. The investor’s funds are invested in gold stocks but there is no physical delivery of the yellow metal. They are often referred to as open-ended Mutual Funds that invest the corpus in gold bullion. Key highlights of Gold ETFs: Gold ETFs in India started in the year 2007. Slowly but steadily they have started gaining momentum. Some of the key benefits offered by Gold Exchange Traded Funds are:1. Transparency: Transparent pricing is one of the USPs of Gold ETF. Like stock prices, information about gold prices are easily available to the general public. You can easily determine the value of their portfolio by checking the gold prices for that time or day.2. Ease of trade: Just like shares, Gold ETFs can be easily traded on the stock exchange. You need to buy a minimum of one gram of gold which is equivalent to one unit of Gold ETF. Investors can invest in Gold ETFs from any location in India. Moreover, the difference in price (due to GST) will not be applicable.3. Cost efficiencies: Unlike many investment avenues, there are no entry or exit loads with Gold ETFs. The only cost involved would be the brokerage fees. 4. Risk: Unlike physical gold, there are no storage hassles or theft fears with Gold ETFs. Additionally, gold prices are not prone to frequent fluctuations. This makes Gold ETFs a relatively safer choice. 5. Tax efficiencies: Gold ETFs do not attract any wealth tax or securities exchange tax. Also, if they are held for a period of more than one year, the gains are treated as long-term capital gains. For anyone interested in holding gold, these ETFs provide a tax-efficient alternative. 6. Diversification: Gold ETF investments can help to bring diversity in the investment portfolio. During volatile market conditions, they can help to stabilise or improve the overall returns for you.7. Collateral: Gold ETFs are accepted as security collaterals for loans or capital borrowings by many financial institutions. Why is investing in Gold ETFs better than traditional forms of gold? You do not need to worry about impurities or adulteration in the metal As ETFs are held in electronic form, there are no storage related issues or costs Easy trading on the stock exchanges and hence high liquidity Real-time tracking of investments No mark-ups costs such as making charges, wear and tear involved The price of Gold ETFs remains the same throughout the country. However, the gold prices can vary from one location to another.  How does Gold Exchange Traded Fund work? The investment is converted into unit of gold basis the cost applicable at the allotment time. For instance, the cost of gold (per gram) on a particular day is Rs. 3000. Ms. X wants to invest Rs. 60,000 in Gold ETFs. Her investment amount will get translated into 20 gold units. At the back-end, physical gold acts as security for these ETFs. For example, if you invest in Gold ETFs, the entity at the back-end purchases gold. They act as the custodian for the investment and also guarantee for the purity of the metal. The stock exchanges assign the responsibility of buying and selling gold to authorised members or participants which in turn can be used to issue ETFs. These are usually large companies. As a result, these authorised members ensure that there is parity between the gold cost and ETFs. How to invest in Gold ETFs? Gold ETF investments are a simple affair.1. Choose a broker or fund manager: Many financial institutions (including banks) offer Gold ETF products. Similar to the online share trading, you would need to reach out to a fund manager or a firm which will trade on behalf of you.2. Demat and Trading Account: In order to invest in Gold ETFs, you need to have a demat account and an online trading. You can apply for these accounts online with the broker or such service provider by providing details like PAN, Identity Proof, residential proof, photograph and a cancelled cheque (for bank account linkage).3. Online Order: Once the accounts are in place, you can select the desired Gold ETF and place the order through the broker’s online portal. You can also opt for Mutual Funds which have an underlying Gold ETF.4. Confirmation: The placed orders are then routed to the stock exchange. The purchase orders are matched with the corresponding sell orders and accordingly executed. A confirmation email or message is sent to you. Who all should invest in Gold ETFs? Gold is a relatively safe and stable investment. Its prices do not fluctuate as much as equities. Hence, Gold ETFs can be a good choice for you, if you do not want to take too much risk. Additionally, since these ETFs are tradeable easily on the stock exchange, they are useful if you are looking for an investment opportunity with high liquidity. Hence, it is a good option for you to diversify your portfolio. So, if you meet the requisite objective of investment, Gold ETF is a good option for you as well. Things to keep in mind while investing in Gold Exchange Traded Funds Here are some tips that you could use while investing in Gold ETFs Gold is generally considered as a stable asset. However, you should not forget that the Net Asset Value (NAV) of Gold ETFs can also fluctuate basis market volatility As an investor, you need to bear brokerage fees or commission charges for Gold Exchange Traded Funds. Hence, you should check these costs while deciding on the broker or fund manager However, you should not make the decision on the basis of price alone. Consider the broker/ fund house’s past track record, services provided, type of clients handled etc. before choosing the service provider Do not over-invest in Gold ETFs. It is usually suggested to restrict investment in these ETFs to 10% of the entire portfolio. Final Words A smart investor knows that all that glitters is not gold. A good fund manager or firm helps choose the best Gold ETF products in India. IndiaNivesh, a well-known financial services company can help in this regard. With their rich experience in the Indian market and in-depth understanding of the financial ecosystem, they have helped numerous customers to grow their wealth and fulfill their financial goals.Disclaimer: Investment in securities market / Mutual Funds are subject to market risks, read all the related documents carefully before investing.

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