7 Tips for Investing in Stocks (I)

Investment experts always advise investors to stay away from 'junk' stocks. Warren Buffet once famously said “The only time to buy these (junk stocks) is on a day with no ‘Y’ in it.”

Stocks can be as tricky a business for novice investors as they are for seasoned players. However, as Warren Buffet has always propagated, 'Right stocks at the right price' is the way to laugh your way to the bank. This means, avoiding all those ‘junk’ stocks and setting your sights only on the 'right ones'.

So how do we really separate the wheat from the chaff? In an age where Satyam and Infosys both ruled the roost at one point of time, how do we know which ones are the black sheep and which ones are not?

In this issue of women's weekly, we bring to you the fundamentals of choosing a stock from a long-term perspective: 

10. Aggressive cash management

It is important to understand what percentage of the assets a fund holds in cash and what its cash management strategy is, as well as what the historical cash holdings are.

Funds that move into cash aggressively may be able to protect you in crash. However, keep in mind, as the market rallies, they will lag the market as they move back from cash to equities. On the other hand, funds that are always fully invested will do well in a rally, but give you severely negative returns in a crash.

Selecting a mutual fund is both art and science and should be done very thoughtfully. Study the fund house carefully or work with a qualified investment advisor who understands mutual fund selection. More than 40 fund houses and thousands of funds make us spoilt for choice. So, choose wisely.

9. Investment objective

Ask your mutual fund agent to tell you the investment objective of the fund: What is the fund trying to provide to you?

Long-term capital appreciation is not an investment objective -- every fund tries to provide that and every investor wants that. Examples of investment objectives are tracking the Nifty, providing roughly 5 per cent over the Nifty, or providing 10 per cent a year in all market environments (bull or bear).

An investment objective should be concrete and realistic -- 50 per cent returns every year is not realistic.

Once you know the fund's objective you can correctly evaluate its performance -- a fund whose goal is to track the benchmark cannot be criticised for not outperforming it.

8. Fund house approach

The fund house's approach of managing their portfolio of funds says a lot about their commitment to providing clients good investment returns.

Fund houses that are focused on managing a few funds well are better than fund houses that launch one fund after another, just because there is a new flavour of the season. Fund houses that have the courage to launch innovative products and concepts are also better than those creating me-too products.

Also beware of fund houses that launch and shut down the same concept again and again -- just for the benefit of getting a fresh track record.

7. Cost of funds

Mutual fund investment costs are not insignificant and are often deceptive. Funds will often show only entry and exit loads, leaving out the expense ratio, which is a very significant cost. In addition, the entry load is now a moot point since SEBI has regulated that entry loads are out -- a fund is not doing you a favour with zero entry-load.

Exit loads, which are perceived negatively, are not always bad -- they prevent you from recklessly moving from one fund to another, and keep your focus on the long term. It is just important to make sure the exit load is in line with your investment horizon.

6. Fund size

Fund houses and mutual fund agents often pitch larger funds as better, because raising more assets is a sign of fund performance and investor confidence.

This is only partly true. While a fund should have some size, larger funds are not nimble and their trading activity can move the markets. If a large institutional investor redeems his units from the fund, the fund will have to sell its holdings to meet the redemption request. The sell orders of the fund are likely to move prices and the brunt of this is borne by smaller retail investors.

In addition larger funds struggle with liquidity -- it is hard to exit out of holdings in a cost-efficient and timely way because the trade size is so large.

Also, larger funds are likely to skip smaller potential multi-bagger investments because at the starting point, the investments are too small to make a meaningful difference to the corpus.

5. Portfolio turnover

Portfolio turnover is a measure of the amount of trading the fund is doing and a measure of how aggressively the portfolio is churning the portfolio. Higher amounts of turnover means the fund is holding their investments for a much shorter period, which may be undesirable if you think of your equity investments as a long term investment.

In addition, higher amounts of turnover lead to higher expenses whether it is brokerage, custody, statutory taxes or other expenses. This is a hidden yet important cost because it directly reduces your returns.

4. Risk

Returns are important, but risk is just as important, if not more.

Risk can be quantified in various ways from as simple as standard deviation and beta to more complicated risk models. What is important to check is a fund doesn't just show good returns, but good risk adjusted returns. Sharpe or information ratio is a good measure of risk-adjusted returns.

In addition to total returns, the risk a fund takes relative to its benchmark should be studied. If you are looking for equity returns similar to the benchmark and a fund is taking a lot of risk to the benchmark, you may not be paying for what you want.

Also, good funds should have an independent risk management team that oversees the portfolio manager and keeps the risk the manager takes in check.

3. Investment style and process

A good fund manager will have a distinct investment style, whether it is fundamental, quantitative or macroeconomic. No one style is better than the other; the important thing is whether the manager sticks to her/his investment style and if this style is reflected in the portfolio holdings. A small-cap fund manager should not start doing arbitrage strategies just because they get good returns.

A fundamental manager who focuses on the deep understanding of companies and sectors should not manage an IT fund, a pharma fund, and an infra fund. A fund manager's style should not be determined by what is selling in the market.

2. Fund manager profile

The fund manager (not the fund) is often ignored in the mutual fund decision-making process, and is more directly related to how your money is managed than the fund house. In reality, the fund manager is the one making the actual investment decisions and driving the trades.

A strong fund manager will have a professional qualification in finance and many years of experience in investment management, where investment management is specifically the management of funds, and not investment banking, chartered accountancy, and brokerage.

Understand what funds the manager has worked at in the past and what her/his own investment track record is. It's also important to look at the management of the firm and their involvement in the fund: Who makes the final decision, the fund manager or the fund house management?

10 ways to evaluate a mutual fund (1)

Every mutual fund agent and financial Web site has different theories on how to evaluate mutual funds. Many of these theories focus on simply analyzing the fund's recent performance and the reputation of the fund house, which is rarely enough to differentiate a good investment from a bad one.

In reality, mutual fund analysis is a sophisticated problem studied by global investment professionals, and while no list can do complete justice to the problem, there are ten nuanced factors that professionals look at:

1. Performance track record

Everyone scrutinizes returns but the key word is track record or the complete history of returns. Funds in India often sell on recent track record (a week, month, or year), which says little about the fund's long-term performance. Fund houses will also cherry pick the period of returns they show to make the fund house look good.

Since inception performance or performance over the fund's life is a critical factor, equally critical is what the starting point for the fund was. An equity fund that started in October 2008, a market low, will have great since-inception performance today, because it happened to catch a big bull market.

Everyone can succeed in a bull market; analyses how funds have performed in a bear market. Be sure to use a correct benchmark when analyzing a fund's relative performance. A small-cap fund should be benchmarked to an index like the BSE 200 or BSE 500, while a large cap fund to the Nifty or Sensex.

Fund houses will commonly show small-cap funds in comparison to the Sensex, which is an unfair benchmark because there is a premium on small-cap stocks as they always do better in a broad based bull rally.

SaneBull Live Portfolio

stock market info

It's a New Year

It's a New Year

It's a new year
Let's give a cheer
Pour us some wine
And maybe some beer

Get all your friends                              
Party till the day ends
Then the ball will drop
And the balloons will pop

It will be 2009
Give me a high five
Another year passes
Through life's glasses
Happy New Year 

SIP (Systematic Investment Plan)

Very often we find ourselves as saying – "I don’t have time to invest," or "I can't afford to put away a lot at this point." These are all excuses! We bring to you the concept of SIP – that is a Systematic Investment Plan – which allows you to periodically invest small fixed amounts, which grow at a compounded rate into a substantial amount at the end of your long term plan. An SIP is a service offered by mutual funds and provides you, the investor, with an option of committing a small quantity of money regularly towards investing as opposed to a lump sum investment. Simple? Well, we're just getting started!

Why SIP is good

Now that we are about to lay the foundation for regular investing through the means of SIPs, let’s review why this is a good option to start with.

A systematic investment option such as the SIP enables you to build wealth over a long term horizon. Generally, investors look to time the market. This practice is futile and more often than not, investors buy when prices are rising and sell when the prices are depressed. This is in stark contrast to the sound principle of equity investing – Buy when the price is low, sell when it is high. So how does SIP help in this regard? Since the amount invested each month is fixed, what changes is the net asset value (NAV). So, when the prices are down, the NAV dips which means that you get allotted more units of the fund. Similarly, when prices rise, you get allotted more units, plus the returns on your earlier units, acquired at lost cost¸ rise. This does away with the risky business of timing the markets and ensures that you are investing in a disciplined manner.

So you save and invest in an SIP, but do you know why and how an SIP is good for you, especially as a woman investor? First let’s tell you why an SIP works in your favour. Most women save and spend in equal amounts (at least we hope they do!), though there are times when you find your hand reaching more towards your savings pocket to compensate for the shortfall in the spending account. A sure shot way to ensure the funds stay separate is to keep them in two different accounts. And then introduce the concept of SIP to your savings account! A systematic investment plan will enable you to maintain your savings in a disciplined manner and will also help you make money over the long term.

How SIP works

A systematic investment plan is not much different than the savings option of a recurring deposit account with a post office or a bank, except that these small monthly amounts are invested into a mutual fund. The SIP option is available with all types of funds like equity, income or gilt and works in your favour as the NAV (Net Asset Value) is averaged out as opposed to a one time buy. As you will be investing at regular intervals, the NAV may be higher or lower depending on market fluctuations.

	Person A			Person B
Month	NAV*	Amount	Units	Amount	Units
Jan-09	8.512	1,000	117.4812	12,000	1,409.774
Feb-09	9.591	1,000	104.2644
Mar-09	8.451	1,000	118.3292
Apr-09	8.321	1,000	120.1779
May-09	8.269	1,000	120.9336
Jun-09	9.421	1,000	106.1458
Jul-09	9.478	1,000	105.5075
Aug-09	7.598	1,000	131.6136
Sep-09	8.471	1,000	118.0498
Oct-09	7.987	1,000	125.2035
Nov-09	6.958	1,000	143.7195
Dec-09	7.524	1,000	132.908
Total			1,444.334		1,409.774

* These NAVs are assumed

The table above clearly shows how your cost of purchasing the units of any fund comes down and how a sense of discipline is instilled while investing even when there are swings in the NAV due to volatility in the market.

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Mutual Funds

What are Mutual Funds
A mutual fund is a common pool of money into which investors with common investment objectives place their contributions that are to be invested, in accordance with the stated objective of the scheme. The investment manager invests the money collected into assets that are defined by the stated objective of the scheme. For example, an Equity fund would invest in Equity and Equity related instruments and a Debt fund would invest in Bonds, Debentures, Gilts etc.
Mutual Funds in India-Growing from very Modest Beginnings
The Indian Mutual fund industry has started opening up many exciting investment opportunities for Indian investors. We have started witnessing the phenomenon of savings now being entrusted to the funds rather than in banks alone.
Mutual Funds now represent perhaps one of the most appropriate investment opportunities for most investors. As financial markets become more sophisticated and complex, investors need a financial intermediary who can provide the required knowledge and professional expertise on taking informed decisions.
The Indian Mutual fund industry has passed through three phases:
The first phase was between 1964 and 1987 when Unit Trust of India was the only player. By the end of 1988, UTI had total assets worth Rs.6,700 crores.
The second phase was between 1987 and 1993, during which period, 8 funds were established (6 by banks and one each by LIC and GIC). The total number of schemes went up to 167 and Assets Under Management saw the figures improving to over 61,000 crores.
The third phase was marked by the entry of private and foreign sectors in the Mutual fund industry in 1993. The first entrant was Kothari Pioneer Mutual fund, launched in association with a foreign fund. The Securities and Exchange Board of India (SEBI) formulated the Mutual Fund Regulation in 1996, which for the first time established a comprehensive regulatory framework for the mutual fund industry. Since then several mutual funds have been set up by the private and joint sectors. Currently there are 34 Mutual Fund organizations in India.
Today the AUM of the Mutual Fund Industry stands at over Rs.2 lakh crores, a growth of over 1 lakh crores since the last 5 years. Also the percentage of Equity assets in the overall AUM has increased from a shade under 5% to over 30% in the same period.

OPTIONS in DERIVATIVES MARKET

What are options?
Before you begin options trading it is critical to have a clear idea of what you hope to accomplish. Only then will you be able to narrow down on an options trading strategy. Let us first understand the concept of options.
An option is part of a class of securities called derivatives.
The concept of options can be explained with this example. For instance, when you are planning to buy some property you might have placed a nonrefundable deposit to hold it for a short time while you evaluate other options. That is an example of a type of option.
Similarly, you have probably heard about Bollywood buying an option on a novel. In 'optioning the novel,' the director has bought the right to make the novel into a movie before a specified date. In both cases, with the house and the script, somebody put down some money for the right to buy a product at a specific price before a specific date.
Buying a stock option is quite similar. Options are contracts that give the holder the right to buy or sell a fixed amount of a certain stock at a specified price within a specified time. A put option gives the holder the right to sell the security, a call option gives the right to buy the security. However, this type of contract gives the holder the right, but not the obligation to trade stock at a specific price before a specific date. Several individual investors find options useful tools because they can be used either as:
A) A type of leverage or
B) A type of insurance.
Trading in options lets you benefit from a change in the price of the share without having to pay the full price of the share. They provide you with limited control over the shares of a stock with substantially less capital than would be required to buy the shares outright.
When used as insurance, options can partially protect you from the specific security's price fluctuations by granting you the right to buy or sell shares at a fixed price for a limited amount of time.
Options are inherently risky investment vehicles and are suitable only for experienced and knowledgeable investors who are prepared to closely monitor market conditions and are financially prepared to assume potentially substantial losses.
What are the different types of Options? How can Options be used as a strategic measure to make profits/reduce losses?
Options may be classified into the following types:
a) Call Option
b) Put Option
As mentioned before, there are two types of options, calls and puts. A call option gives the holder the right to buy the underlying stock at the strike price anytime before the expiration date. Generally Call options increase in value as the value of the underlying instrument increases.
By contrast, the put option gives the holder the right to sell shares of the underlying stock at the strike price on or before the expiry date. The put option gains in value as the value of the underlying instrument decreases. A put option is one where one can insure a stock against subsequent price fall. If the value of your stocks goes down, you can exercise your put option and sell it at the price level decided upon earlier. If in case the stock price moves higher, all you lose is just the premium amount that was paid.
Note that in newspaper and online quotes you will see calls abbreviated as C and puts abbreviated as P.
The examples stated below will explain the use of Put options clearly:
Case 1:
Mukesh purchases 1 lot of Infosys Technologies MAY 3000 Put and pays a premium of 250 This contract allows Mukesh to sell 100 shares of Infosys at Rs 3000 per share at any time between the current date and the end of May.Inorder to avail this privilege, all Mukesh has to do is pay a premium of Rs 25,000 (Rs 250 a share for 100 shares).
The buyer of a put has purchased a right to sell. The owner of a put option has the right to sell.
Case 2:
If you are of the opinion that a particular stock say "Ray Technologies" is currently overpriced in the month of February and hence expect that there will be price corrections in the future. However you don't want to take a chance , just in case the prices rise. So here your best option would be to take a Put option on the stock.
Lets assume the quotes for the stock are as under:
Spot Rs 1040
May Put at 1050 Rs 10
May Put at 1070 Rs 30
So you purchase 1000 "Ray Technologies" Put at strike price 1070 and Put price of Rs 30/-. You pay Rs 30,000/- as Put premium.
Your position in two different scenarios have been discussed below:
1. May Spot price of Ray Technologies = 1020
2. May Spot price of Ray Technologies = 1080
In the first situation you have the right to sell 1000 "Ray Technologies" shares at Rs 1,070/- the price of which is Rs 1020/-. By exercising the option you earn Rs (1070-1020) = Rs 50 per Put, which amounts to Rs 50,000/-. Your net income in this case is Rs (50000-30000) = Rs 20,000.
In the second price situation, the price is more in the spot market, so you will not sell at a lower price by exercising the Put. You will have to allow the Put option to expire unexercised. In the process you only lose the premium paid which is Rs 30,000.
What is open interest?
The total number of option contracts and/or futures contracts that are not closed or delivered on a particular day and hence remain to be exercised, expired or fulfilled through delivery is called open interest.
What are Index Futures?
As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock Index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
What is meant by the terms Option Premium, strike price and spot price?
The price that a person pays for a call option/Put Option is called the Option Premium. It secures the right to buy/sell that particular stock at a specified price called the strike price. In other words the strike price is the specified price at which the holder of a stock option may purchase the stock. If you decide not to use the option to buy the stock, and you are not obligated to, your only cost is the option premium. Premium of an option = Option's intrinsic value + Options time value The stated price per share for which underlying stock may be purchased (for a call) or sold (for a put) by the option holder upon exercise of the option contract is called the Strike price. Spot Price is the current price at which a particular commodity can be bought or sold at a specified time and place.
What is meant by settlement price?
The last price paid for a contract on any trading day. Settlement prices are used to determine open trade equity, margin calls and invoice prices for deliveries.
How does one determine the price of an option?
A variety of factors determine the price of an option.
The behavior of the underlying stock considerably affects the value of an option. Investors have different opinions about how a particular stock will behave in the future and hence may disagree about the value of any given option.
In addition, the value of an option decreases as its expiration date approaches. Thus, its value is also highly dependent on the amount of time left before the option expires.
Intrinsic & Time Value
An options price is composed of its intrinsic value and time value.
What a particular option contract is worth to a buyer or seller is measured by how likely it is to meet their expectations. In the language of options, that's determined by whether or not the option is, or is likely to be, in the money or out-of-the-money at expiration. Intrinsic value is how far an option is 'in-the-money.' Thus, the phrase is an adjective used to describe an option with an intrinsic value. A call option is in- the-money if the spot price is above the strike price. A put option is in the money if the spot price is below the strike price.
It is calculated by subtracting the options strike price from the spot price. An out-of-the-money option has an intrinsic value of zero.
For example if XYZ is trading at Rs 58 and the June 55 call is trading at Rs 4, to calculate the intrinsic value subtract Rs 55 from 58, leaving you with Rs 3 of intrinsic value. The remaining Rs 1 is known as extrinsic or time value.
Time value is the amount over intrinsic value that a buyer pays for the option. While buying time value, an options purchaser assumes that the option will increase in value before it expires. As the option nears expiration, its time value starts decreasing toward zero.
Theoretical Value
Theoretical value is the objective value of an option. It shows how much time-value is left in an option. The most commonly used formula to calculate the theoretical value of an option is known as the Black-Scholes model.
This model considers the price of the stock, the options strike price, the time remaining before expiration, the volatility of the underlying stock, the stock's dividends and the current interest rate while arriving at the theoretical value of the option.
Although an option may trade for more or less than its theoretical value, the market views the theoretical value as the objective standard of an option's value. This makes the price of all options tilt toward their theoretical value over time.
The Components of Theoretical Value
Volatility
The volatility of the underlying stock is one of the key factors in determining the value of an option. Often, the options price increases as the volatility of the stock increases. The difficulty in predicting the behavior of a volatile stock permits the option seller to command a higher price for the additional risk.
There are two types of volatility, historical and implied. As the term suggests, historical volatility is a measurement of the stocks movement based on its past behavior.
By contrast, implied volatility is calculated using option prices. It is a measurement of the stocks movement as implied by how the market is currently valuing options.
Dividends
As an owner of a call option you can always exercise your right to the stock and receive any dividend it might pay. Interest RateIf you buy an option rather than a stock, you invest less money upfront.
Days Until Expiration
An option, being a wasted asset; wastes a little as each day lapses. Thus its value is calculated in accordance to the amount of days left in its life.
What are swaptions?
A swaption is an option on an interest rate swap. Swaptions are options contracts, which give you the right to enter into a swap agreement at the option expiration, in return for a one-off premium payment.
What is meant by Covered Call, Covered Put, In the Money, Out Of the Money, At the Money?
Ø In-the-money
A call option is in the money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Ø Out of the money
A call option is out-of-the-money if the price of the underlying instrument is lower than the exercise/strike price. A put option is out-of-the-money if the price of the underlying instrument is above the exercise/strike price.
Ø At-the-money
At the money is a condition in which the strike price of an option is equal to (or nearly equal to) the market price of the underlying security.
Ø Covered Call
You can take a covered call if you take a long position in an asset combined with a short position in a call option on the same underlying asset.
Ø Covered Put
The selling of a put option while being short for an equivalent amount in the underlying security.

FUTURES in DERIVATIVES MARKET

What are Derivatives?
A derivative is a financial instrument whose value depends on the values of other underlying variables. As the name suggests it derives its value from an underlying asset. For Ex-a derivative, may be created for a share, or any material object. The most common underlying assets include stocks, bonds, commodities etc.
Let us try and understand a Derivatives contract with an example:
Suresh buys a futures contract in the scrip "Satyam Computers". He will make a profit of Rs.500 if the price of Satyam Computers rises by Rs 500. If the price remains unchanged Anil will receive nothing. If the stock price of Satyam Computers falls by Rs 800 he will lose Rs 800.
As we can see, the above contract depends upon the price of the Satyam Computers scrip, which is the underlying security. Similarly, futures trading can be done on the indices also. Nifty futures is a very commonly traded derivatives contract in the stock markets. The underlying security in the case of a Nifty Futures contract would be the Index-Nifty.
What are the different types of Derivatives?
Derivatives are basically classified into the following:
Futures /Forwards
Options
Swaps
What are Futures?
A futures contract is a type of derivative instrument, or financial contract where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price.
The example stated below will simplify the concept:
Case1:
Ravi wants to buy a Laptop, which costs Rs 50,000 but owing to cash shortage at the moment, he decides to buy it at a later period say 2 months from today.However,he feels that after 2 months the prices of Lap tops may increase due to increase in input/Manufacturing costs .To be on the safer side, Ravi enters into a contract with the Laptop Manufacturer stating that 2 months from now he will buy the Laptop for Rs 50,000. In other words he is being cautious and agrees to buy the Laptop at today's price 2 months from now.The forward contract thus entered into will be settled at maturity. The manufacturer will deliver the asset to Ravi at the end of two months and Ravi in turn will pay cash delivery.
Thus a forward contract is the simplest mode of a derivative transaction. It is an agreement to buy or sell a specific quantity of an asset at a certain future time for a specified price. No cash is exchanged when the contract is entered into.
What are Index Futures?
As Stated above, Futures are derivatives where two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. Index futures are futures contracts where the underlying is a stock index (Nifty or Sensex) and helps a trader to take a view on the market as a whole.
What is meant by Lot size?
Lot size refers to the quantity in which an investor in the markets can trade in a derivative of a particular scrip.For Ex-Nifty Futures have a lot size of 100 or multiples of 100.Hence if a person were to buy 1 lot of Nifty Futures , the value would be 100*Nifty Index Value at that point of time.
Similarly lots of other scrips such as Infosys, reliance etc can be bought and each may have a different lot size. NSE has fixed the minimum value as two lakhs for an Futures and Options contract. Lot sizes are fixed accordingly which will be the minimum shares on which a trader can hold positions.
What is meant by expiry period in Futures?
Each contract entered into has an expiry period. This refers to the period within which the futures contract must be fulfilled. Futures contracts may have durations of 1 month,2 months or at the most 3 months. Each contract expires on the last Thursday of the expiry month and simultaneously a new contract is introduced for trading after expiry of a contract.
What are the uses of Derivatives? What are the various derivative strategies that I can use?
Derivatives have a multitude of uses namely:
a) Hedging
b) Speculation &
c) Arbitrage