BASICS OF INVESTING

Basics of Investing
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A quick guide to the fundamentals

HDFC securities

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2014-15

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BASICS OF INVESTING

Basics of Investing
What goes around comes around

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Introduction
Welcome to the world of investing. Investing is no rocket science. It is as simple
as identifying your future goals and purchasing assets, which will generate
income to fulfil your goals. However, jargons such as P/E ratio, time value for
money, compounding, capital gains tax etc. can sound complicated! We uncomplicate it for you right here.

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Investing
Making Money Work for You

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It is easy to confuse saving and investing. These terms are used as synonyms,
which can prove to be a costly error. Learn the difference between saving and
investment to brace your future goals with the right bank balance.

Anand Ghosh is a 32-year-old man and a father of a 3-year-old daughter. He

bought a house 3 years ago, partly funded by a housing loan. Almost 40% of his
salary goes towards the EMIs. His wife, Sujata runs the house with her income
and the couple saves a sizeable sum every month in bank deposits and
insurance.

Anand feels that their home, contributions to provident fund, fixed deposits and
insurance plans are enough to secure his family's future. Are the Ghoshs missing
out on anything? Are these savings enough to fund his daughters higher studies,
foreign holidays and a comfortable retirement?

The answer is no. They are making a mistake by not distinguishing between
saving and investment.

The money they are saving is easily accessible and has zero risk. However,
holding money in this manner is suitable only for their immediate or unexpected
needs. Moreover, they are blind to the bigger risk factor, which is their savings
may fall short of their future requirements. Depositing their entire money in
these avenues is a costly error because the trade-off for safety and liquidity is
lower returns.

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SAVING IS NOT INVESTING
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Do you want to repeat the mistakes that Ghoshs did?
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After paying off all the expenses and EMIs at the end of the month, it is time to
decide what you want to do with the left over money. You have two options.

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Keeping it idle in your savings account or make your hard earned money work
harder by investing it.

We assume there is no difference between the concepts of saving and

investment. They are both aimed at growing your wealth.

However, there are major differences between the two. Let us understand them.

Saving money means keeping aside a part of your income in your bank account
to meet your immediate regular or unexpected expenses. Investment means
putting your saved money in various financial products such as stocks, mutual
funds, fixed deposits, gold to earn returns and grow your wealth.

Savings are usually used to meet your short-term needs. They come in handy to
meet unexpected expenses during a contingency. Investment, however, generally
entails a longer horizon of one year or more. It is designed to provide returns
and grow your money over a period of time to meet your future goals such as
buying of a house, car, holidays, childs education or your retirement.

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RISK AND REWARD EQUATION
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Another difference between savings and investment is the risk they bear and
returns they offer. Savings stored in a safety vault or kept in savings bank
account are very safe but they will not generate any meaningful returns over the
years.

On the other hand, money invested in various products such as real estate,
stocks, mutual funds, gold, etc. is subject to more risks. At the same time, it has
the potential to grow over time.

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If invested wisely, your money can grow manifold over years.
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GETTING THE BIG PICTURE RIGHT
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For your long-term goals, you should invest in avenues such as stocks, equity
oriented mutual funds, gold, real estate etc, which offer better returns and are
less riskier over long-term.

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Investing is not a one-time affair. You must also periodically review and modify
your investment choices and stay in tune with future goals and preferences.

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Asset allocation
Different slices of your Financial Pie

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It's not always about how much you invest. Your portfolio's asset mix determines
its profitability. Get the fine act of balancing right when it comes to Money
Matters.

What do we do to stay fit? Have a healthy diet, which includes a mix of proteins,
fibre, carbohydrates etc. The idea is to have right mix of nutrients for a healthier
lifestyle.

The same logic holds for your financial life. You need a right balance of
investments to be financially fit to meet the demanding needs and expectations
of future. You can allocate your money into different asset classes such as equity
(stocks, mutual funds, derivatives), fixed income (bonds, FDs etc), real estate,
gold etc.

In financial parlance, this is called the Asset Allocation. It is an investment

strategy that aims to balance risk and reward by apportioning a portfolio's assets
according to an individual's goals, risk tolerance and investment horizon.

There are three main asset classes - equities, fixed-income, and cash and
equivalents. Each of these asset classes has different levels of return and risk, so
each will behave differently over time.

If the value of one asset appreciates at a point of time, the value of another
asset may be depreciating at the same time. The impact of these asset-related
fluctuations can be mitigated if you include more assets in your financial
portfolio.

There is no simple formula that can find the right asset allocation for every
individual. The percentage allocation of funds to various assets varies from
individual to individual based on their age, goals and risk appetite.

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However, asset allocation is a pre-requisite to build a robust financial portfolio.

Your selection of individual securities is secondary to the way you allocate your
investment in stocks, bonds, and cash and equivalents, which will be the
principal determinants of your investment results.

ALLOCATION STRATEGIES

There are several types of asset allocation strategies based on investment goals,
risk tolerance, time frames and diversification: strategic and tactical

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STRATEGIC ASSET ALLOCATION
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This portfolio strategy aims at providing optimal balance between expected risk
and return by periodical rebalancing of the portfolio to meet your long-term
needs. It broadly follows the buy and hold strategy than an active trading
approach.

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TACTICAL ASSET ALLOCATION
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This is a method in which an investor takes a more active approach to earmark

funds into those assets, sectors, or individual stocks based, which shows highest
potential for gains at that point of time.

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Compounding Effect
The wonder of multiplying

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Compounding is all about putting time to work on your savings. If you start
saving early, compounding can have a startling effect on your hard earned
money!

You dont get a six-pack body in a weeks time. You have to follow a daily regime
of the right workout and smaller portions of healthier meals. You have to
dutifully follow this regime for a longer period of time to reach your goal.

The same concept works for growing your wealth as well. The earlier you start
investing and longer you invest, the asset has a potential to generate a higher
return on the investment amount. In financial parlance, this is called the
compounding effect.

See the example below to understand this concept.

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Structure of Stock markets

The wonder of multiplying

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Stock market brings buyers and sellers together. The shares are bought and sold
through a daily trading mechanism. Here we give a low down on the structure
of stock markets in India.

Globally there are two types of stock markets the Primary Market and the
Secondary Market. This holds true for the Indian stock markets as well.

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PRIMARY MARKET
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Shares are issued for the first time in primary market. When a company gets
listed for the first time by issuing shares at the stock exchange, it takes place at
the primary market. In financial parlance, it is called the Initial Public Offering
(IPO). Thus IPOs and debentures are controlled at the primary stock market.

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SECONDARY MARKET
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The existing stocks are brought and sold or traded by the retail investors
through brokers in the secondary market. The daily markets, trading on the
exchanges, stock prices etc, which we generally refer or read about is the
secondary market. For instance, if you buy HDFC Bank shares at a good price
or sell Infosys shares today to book profits, it happens in the secondary market.

It can be said that it is the secondary market, which controls the stock prices on
a daily basis.

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THE INDIAN STOCK MARKET
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There are a number of stock exchanges in India. However, the two largest stock
exchanges are the Bombay Stock Exchange (BSE) and National Stock Exchange
(NSE).

WHAT IS BSE?
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It is the oldest stock exchange in Asia and the third largest in terms of number
of stock listings. The popular trading index of BSE is called the Sensex.

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The indices of BSE include
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- BSE Sensex/BSE 30

- BSE 100

- BSE 200

- BSE Small Cap

- BSE Mid Cap

WHAT IS NSE?

It is the largest stock exchange in India in terms of daily turnover, number of

trades and the market capitalisation. CNX Nifty is the popular index of the
NSE. NSE has the following segments

- Capital Market: It includes Equity, mutual funds, ETFs, IPOs etc

- Derivatives : Equity, Currency & Interest rate derivatives

- Debt Market: Wholesale, Retail and Corporate bonds

- Bank Nifty

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Understanding Sensex and Nifty

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The highs and lows of Sensex and Nifty can be unnerving for investors. But
what defines these indices? How are they computed? We explain right here.

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SENSEX

Sensex is an indicator of the movement of 30 major stocks listed on the BSE.

For instance, if the Sensex moves up, it implies all major stock prices on the BSE
are up. Similarly, a fall in Sensex corroborates a fall in stock prices.

This Index comprises stocks of 30 major companies, which are large, actively
traded and representative of various industrial sectors. The BSE constantly
revises the composition of stocks in the Sensex to ensure it broadly reflects the
market conditions,

How is Sensex calculated?

Just like the major stock indices of the world such as S&P 500 or Dow, even
Sensex is calculated using a Free Float Market Capitalization. This ensures
the index, at any point of time, reflects the Free Float market value of these 30
stocks compared to a base period. Free float market value refers to those shares
which are available for trading in the market. It excludes shares held by the
government, promoters, management and locked in shares of other investors.

The base period for Sensex is 1978-79 and the base value is 100.

Nifty

It is the benchmark index of the National Stock Exchange (NSE). Nifty

represents a basket of 50 company stocks of various sectors, which are actively
traded.

How is Nifty Calculated?

The methodology of calculating Nifty is similar to Sensex. However, there are 3

key differences.

1) The base year is taken as 1995

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2) The base value is 1000

3) Nifty is calculated on 50 actively traded stocks

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What is Dematerialisation of Shares?

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The 3Ds of the Stock Market- Demat, Depository and Depository Participant
have a key role to play in share trading. What's in these for you?

Demat, which is the short form of dematerialisation, is almost synonymous of

share trading. The process through which an investors physical certificate is
converted into electronic format is called dematerialisation of shares. This
electronic form of shares, which is referred to as demat shares are maintained in
an account with Depository Participant (DP).

The rationale behind the introduction of demat was to mitigate the risks
associated with share trading in paper format. In fact now, dematerialisation has
slowly made inroads into other investment avenues such as Exchange Traded
Funds (ETFs), Mutual Funds, Non-convertible debentures (NCDs), Bonds etc.

WHO IS A DEPOSITORY PARTICIPANT?

There are two depositories in India - National Securities Depository Limited

(NSDL) and Central Depository Service (India) Limited (CDSL). As mentioned
above, your demat shares are maintained with a DP.

DPs are intermediaries, which facilitate investors to perform various actions on

their investments with the depository.

DPs includes organisations such as banks, brokers, custodians and financial

institutions, which provide financial services to investors.

PROCESS OF DEMAT CONVERSION

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As per the current stipulations, you cannot trade in paper shares now. So you
need to convert the paper shares into demat form if you want to sell or trade in
those stocks.

For conversion, you have to open a demat account with a DP. It involves a two
step process.

1. You have to submit the physical certificates for dematerialisation to the DP

along with Demat Request Form (DRF)

2. The DP updates your account and allots the demat form of shares in your
account.

BENEFITS OF DEMAT

1) Buying and selling of shares take place in real time since the process is
automated.

2) Shares become highly liquid. You can place a buy or sell order in stocks and
get the funds/stocks in two working days from the transaction date (T+2) days.

3) All the extra shares from corporate action such as bonus, stock split, rights etc
directly get credited into your demat account. This eliminates the scope of any
transit losses.

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Stock Picking Strategies Simplified

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Fundamental Analysis & Technical Analysis are two sides of a coin. They both
aim at identifying star stocks for your kitty. But there is a world of difference
between the two. What should be your PICK?

Investing virtually does not exist without experiencing the thrills of a roller
coaster ride in the stock markets. But the investor psyche is to enjoys the ups in
stocks without the downs. Thats not possible as no stock is immune to falling
prices. However, you can pick stocks, which have the potential to deliver higher
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returns than the overall performance of the markets. Here is where stock
picking methodologies come into play.

Fundamental Analysis & Technical Analysis are the most common strategies
used for picking stocks. Both the methodologies aim at identifying front running
stocks which have the ability to beat the index. However, having said that there
are some key differences between the two. Here are some of them

BASIC CONCEPT

Fundamental analysis is a method of evaluating a companys stock based on its

intrinsic value and analyse the factors that might affect the stock price in future.

Technical analysis, on the other hand, only looks at the price of the stock. It is a
statistical method, which finds patterns and predicts future movements based on
past market data.

METHODOLOGY

Fundamental analysis is done mainly by examining the companys earning,

industry trends, competitors' performance, country's economic outlook, etc. In
the market parlance, these are called as fundamentals of a stock.

Technical analysis, on the other hand assumes that these factors are already
factored in the price of the stock. Hence it focuses only on only past price
movements and market behaviour to come to a conclusion.

TIME HORIZON

Fundamental stock views are long term in nature. It analyses various factors,
which will impact the stock price for a longer duration of time, which could run
into few years.

Technical Analysis are short term in nature. They predict stock price
movements for the next few weeks or days.

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END USERS

Investors should ideally look at fundamental analysis of the stocks if they intend
to stay invested in a stock for several years. Traders, who look at booking short
term profits or intra day gains, typically follow the technical analysis of a stock.

So, if you are investing in stocks for meting your long term gains, fundamental
analysis should be your pick!

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How to choose Right Stocks?

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There is no standard formula for succeeding in the stock market. But identifying
a good stock is a must to create long-term wealth. Here are some factors that
can help you pick the RIGHT STOCK.

How does a roller coaster ride feel? It is a treat for all thrill seeking individuals.
But the same roller coaster ride in stock markets can be unnerving for investors.
Be it a first time investor in stocks or even a seasoned investor, volatile stocks
have the ability to pass on jitters to most of us.

But thats the price we pay for investing in an asset class, which has delivered
higher returns and has beaten inflation over a longer period of time. Picking the
right stocks for investing can be a tricky affair. More than 5000 companies are
listed on the Bombay Stock Exchange (BSE) alone. These companies are of
different sizes, businesses and sectors, which make comparisons very difficult.
How should you decode this stock-picking maze?

KNOW THE BUSINESS

Warren Buffet, the legendary investor, had a very simple logic. He only invested
in those stocks, whose businesses he understood.

This approach is noteworthy as you can be more aware of the risks and the
opportunities that could have an impact on a company's performance. Similarly,

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if a broker or an analyst gives an insight on this stock or sector, you will be able
to reach an informed and independent stock investing decision.

MARKETCAP

Some quantifiable measures also pay a key role in selecting the right stock and
one of them is Market cap. Market cap is an acronym for market capitalisation,
which is an estimation of the value of a business. This number is calculated by
multiplying the number of outstanding shares by the current price of the share.
Thus, a company with 10 lakh outstanding shares selling at Rs 100 per share
would have a market cap of Rs 10 crore.

There is no standardized definition for a small cap, mid cap and large cap
company. They vary from analyst to analyst. Broadly analysts categorise
companies with a net worth of over Rs 10,000 crore as a large cap company.
Companies with a net worth of Rs 2000 crore to Rs 10,000 crore are mid-cap
companies and the companies with a net worth of up to Rs 2,000 crore is
considered a small cap company. Large cap stocks are less riskier and less
volatile as compared to mid cap and small cap stocks. First time investors should
ideally buy large cap stocks when they enter the stock market.

VALUE

Value stocks are those, which are priced lower than the actual value of the
company and its assets. This implies that the stock has the ability to perform
better in future and it could be a good value for money. P/E ratio is a good
indicator of value stocks. It is the ratio of a company's current share price
compared to its per-share earnings. In simple words, a high P/E ratio means,
investors are anticipating higher earnings growth in future as compared to
companies with lower P/E ratio.

FUNDAMENTALS

This refers to the financial health of a company. Analysts take a look at Balance
sheet, cashflow, income statement, quarterly earnings report to analyse a stock.
In the market parlance, this way of analyzing a company is called fundamental
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analysis. Consistent earnings and low debt are strong indicators of financially
sound companies.

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Impact of Corporate Action

on Shareholders
Stock splits, Dividends, Bonus Issue, Rights Issue... What do
these measures hold for you? Read on..

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Know your Rights as a Shareholder

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Buying a stock makes you a part owner of the company. However, your right as
a shareholder hinges on what kind of shares you hold.

Whenever a company requires money, it can issue shares and borrow money
from investors. However, not all shareholders enjoy the same priveleges. It
primarily depends upon the kind of shares you own.

EQUITY SHARES

These shares are commonly known as ordinary shares. As the name suggests,
these shares do not enjoy any preference be it for dividend payouts or
repayment of capital. Dividends on these shares hinge on the profits made by
the company. Higher the profits, higher the dividends, lower the profits lower
are the dividends. Thus dividend pay outs fluctuate based on the company
earnings in case of ordinary shares.

PREFERENCE SHARES

These shareholders are given preference when it comes to dividend payments

and repayment of capital. In an event of a company shutdown, the preference
shareholders get their capital first. Secondly these shareholders get dividends at
a fixed rate, which makes it somewhat like a fixed income security. Hence
preference shares are a best bet for investors who expect the security of fixed
rate of dividends. However, they do not enjoy voting rights like common
shareholders.

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DEFERRED SHARES

These shares are held by the founders of the company, commonly known as
Founder shares or Management shares. The right to share profits of the
company is postponed till the other shareholders receive their normal dividends.
Hence these deferred payouts are knows as deferred shares. The voting rights of
these shareholders are proportionate to their shareholding in the company. If
the company goes into liquidation, these shareholders have the last claim on the
capital, which makes it highly risk prone.

STOCK SPLIT

As the name suggests, stock split refers to division of existing outstanding shares
into multiple shares. The rationale behind a stock split is to increase the liquidity
of shares. Often if a share price is very high or low, it may become illiquid in
nature. At such times, a company resorts to stock split to spur the tradability of
the share. Thus the number of shares increases even as the market capitalisation
of the company stays intact. For example, if the stock split is announced in the
ratio of 2:1, you would receive one additional share for every one share you
own. Thus the number of shares you own would double. The value of per share
however falls in the same proportion

INVESTOR IMPACT

1) The shares becomes liquid

2) There is no loss in value since the number of shares is higher

RIGHTS ISSUE

Through rights issue, a company offers additional shares to existing shareholders

before going to the open market. Any company which is in need of capital offers
rights issue.

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INVESTOR IMPACT

1) You can invest if the end use of its funds is likely to generate profits for
company in future

2) The price of rights issue should be considerably lower than the current
market price of the stock.

BONUS ISSUE

The basic exercise of issuing additional shares is similar to that of Rights Issue.
However, there are few key differences between the two issues

1) The extra shares are allotted to existing shareholders based on the number of
shares owned. For example, if the bonus issue is in the ratio of 1:2, it implies
you would get one additional share for every two shares owned by you.

2) These shares are given to existing shareholders at no extra cost. You dont
have to apply for these shares.

Companies usually build reserves by retaining part of their profits that is not
paid as dividend. When free reserves increase, companies transfer a portion of it
into the capital account, which is then used to issue bonus shares.

The share price of the company gets adjusted according to the bonus ratio.

For instance, if the share price of the company is Rs 200 before the bonus and it
issues bonus shares in the 1:1 ratio, the post-bonus price would be Rs 100. The
total market value of the company would, however, remain the same.

Investor Impact

1) Shares become highly liquid

2) It arrests free fall in stock prices

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DIVIDEND

The company management distributes a part of its earnings to the shareholders

through dividends.

For instance, if the stock price is Rs 100 today and there is a dividend
declaration of Rs 2 per share, you will get Rs 2 per share. The assumption is you
hold the shares on or before ex-dividend date.

Investor Impact

1) Typically stock price rises post issue of dividends

2) You could invest in dividend declaring shares just before the dividend
declaration date and benefit from price appreciation and earn cashflow on the
same through dividends.

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Why do Stock Prices fluctuate?

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The highs and lows of stock prices resembles a roller coaster ride. We analyse
some factors which are the Movers and Shakers of the Stock Market.

Have you ever seen a ticker on a business news channel? It shows that stock
prices change by the second.

A price change is always determined by the forces of demand and supply. In

case of stocks, the stock price rises when there are more buyers than sellers for
that scrip. Similarly, price of a stock falls when there are more sellers than
buyers. Having said that, following are the factors, which makes a stock/s more
attractive than the rest of the pack.

1) COMPANY EARNINGS

The net profit of a company gives an indicator of the viability of its business
model and growth prospects of the company. Hence higher the earnings, better
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would be the performance of the stock. In India, the companies report their
earnings once in every quarter over and above the annual results every year.
These quarterly earnings are a good indicator of the likely performance of the
stocks. In fact every analyst gives a BUY, NEUTRAL or a SELL rating on the
stock based on the companys earnings.

2) CORPORATE GOVERNANCE

Poor corporate governance can change the tide of a well performing stock. Be it
Satyam, Kingfisher Airlines, Yes Bank or Financial Technologies, each of these
stocks eroded the hard earned savings of an investor as the stock prices
plummeted due to issues related to bad corporate governance. Poor corporate
governance questions the financial viability of a business and it can deplete the
earnings of the company as well. Hence you should verify the company
background, credentials of the management and the promoters before investing
in its stock.

3) SECTOR SPECIFIC DEVELOPMENTS

A stand alone stock may not be underperforming in isolation. Some times, it

could be merely representative of the entire sector, which could be battling its
own set of challenges. For instance whenever the Reserve Bank of India (RBI)
hikes interest rates, the banking stocks take a dip. The underlying assumption is
the RBI move would trigger the banks to hike rates, which in turn could lead to
slower credit growth for banks in future. Similarly, whenever the rupee falls, IT
stocks perform exceptionally well. The rationale is these export oriented
companies would clock in more business and the higher revenues would aid the
margins of these companies. Hence whenever a stock price falls, you should
compare the performance with its peers from the same sector. This will help you
narrow down if the negative trigger has stemmed from some sectoral
developments or within the company.

4) ECONOMY

Little can be said or done when the economy itself is weathering a storm in
form of a slowdown. This can cast a bearish outlook on the stock market as a
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whole. However, some sectors may be more vulnerable to price shocks than the
other. At such times, it is advisable to stay invested in stocks especially if they are
meant for long term goals such as childs education or your retirement.

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Treat Bear Markets like Discounts in a Shopping Mall

Discounts are not exclusive to shopping. Bear markets are like clearance sale
where you can buy stocks for a steal. A quality stock picked at low prices always
pay off.

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"Flat 50% off on Shoes Apparels and More"
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Such an email on your inbox, a hoarding on a crowded highway or a board

outside a store cant miss your eye! It brings a smile to your face and grief to
your wallet.

But the logic is simple! This price is a steal. You can buy more for half the price.
Then why should you let go of this opportunity!

The stock market offers a similar bonanza once in a while. This is called the
Bear markets! A bear market refers to a trend when stock prices are falling for a
prolonged period of time. This could be a function of an economic slowdown,
overvaluation of stocks, poor earnings by corporates or any other factor.

But shopaholics who are Gung Ho about raining discounts go on a reverse gear
when stocks are available at discounted prices. They fear the prices may fall even
lower after they purchase the stock. As a result investors keep away from any
investment in the bear markets, waiting for prices to correct further.

A bear market is bad news for investors who are looking to sell stocks. A buyer,
however, can build a quality portfolio only in a bear market.

If you are looking for a long-term investment, 5 years or more, falling stock
prices and depressed markets is a great opportunity to buy.
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History has shown that the stock market has bounced back from the all time
lows to all time highs over the long term.

The Sensex plunged to 8160.40 level when Satyam Scam jitters hit the Indian
corporate and the financial system in March 2009. Then the Sensex recovered
and hit an all time high of 21,000 in November 2010. If an investor would have
perceived the 8000 level as a BUY opportunity, the bulls would have added
value to the portfolio with the Sensex hovering at 20,000 levels even today.

The bottomline is any long term investment can offer good returns if it is built
in a bear cycle. However, if you want to use the bear market to your advantage,
you should be extremely careful in selecting the right stocks.

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SIP Your Way to Wealth

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You dont have to start WEALTHY to become WEALTHY. Small and Steady
steps count BIG in Wealth Creation.

The mutual fund industry has done a yeoman service to the investing fraternity
by educating the investors the benefits of Systematic Investment Planning,
commonly called SIP.

However, the concept of SIP is not restricted to mutual funds alone. This can be
perfectly applied to buying your favourite stocks or Exchange Traded Funds
(ETFs) as well. In a stock SIP, you will invest a fixed amount every month in
your chosen stock or stocks and reap the same benefits.

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WHAT ARE THE BENEFITS OF SIP?

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Disciplined Approach
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It imbibes discipline in your investments. On a given date of every month the

pre-fixed amount is debited from your trading and it is invested in the chosen
stocks.

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Dont worry about the timing
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When you fundamentally like a stock, you should pick the stock when the price
falls, other things being same. But if you follow the herd menality, you will get
jitters and sit on the fence when the price falls. You will keep waiting for the
prices to fall further and buy the stock at the right price and the right time.
But a SIP will ensure that your fear does not come in the way of your
investment and you go ahead and actually invest on the designated date.

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Forced Savings and planning
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When you decide to invest through a monthly SIP, you commit yourself for
future savings. You think of a goal such as childs education, a bigger house or a
car. This gives you a ballpark figure and you align your SIP amount that. Since
you start investing the surplus cash, you start trimming unnecessary expenses.
Thus your entire financial health starts improving and streamlined.

Invest as you earn SIP allows you to match your investment outflows with your
income stream. If you dont have a ready cash mound to invest, you can easily
plan and save every month and invest from your salary.

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No amount is small
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Today is the age of living on loans and earning for EMI pay outs. The house we
live in, the car we drive has all been financed by some or the other bank.
However, when it comes to investments we dont have to start rich to become
rich. You can begin investing with as low an amount as Rs 500 per month. The
idea is to deploy the savings in the equity markets as early as possible so that the
compounding effect can work harder on growing your wealth.
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Lets look at the power of compounding effect. A hundred Rupees invested in
1978-79 in the Sensex would have grown to Rs 19000. That is a CAGR of
17%.

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Staggered buying averages the price

Instead of buying in one go, the buying that you do through the SIP route
averages out your purchase price.

Let us assume you had invested a lumpsum amount of Rs 3 lakhs in Hindalco in

the month of January in 2008. The stock was quoting around Rs 133 at that
point of time. Your decision would have gone wrong as the buying price was retested after long period of 29 months. At the end of 30 months your return on
investment would have been zero.

But, If you had opted the SIP approach and invested Rs.10,000 every month in
Hindalco for the same period of 30 months you would have accumulated a
corpus of Rs 3 lakh. At the same time, your average purchase price would have
come down to Rs 86, which is much lower than the prevailing price. This way,
you would have made a return of 55% at the end of 30 month period.

It is not necessary that gains from the SIP mode of investment will always be
more than lump sum buying. It all depends upon how the stock behaves. If the
stock price runs up after the first month, the next month you will have to buy the
stock at a higher price and as a result the amount you have set aside will buy
lesser number of shares. SIP works better in a volatile market for absolute
returns.

But the bigger benefit is, it sets a discipline in your investment. It gives you the
flexibility to buy stocks in smaller installments that suits your cash flow. Lastly, it
guards you against volatility by buying more number of shares at lower levels.

So take the SIP route to investments and build wealth in the longer term.

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ETF is the Way to Go

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ETFs offer the flexibility of a stock and protection of a fund. They are
diversified, tax efficient and lighter on investor's pockets. Are they worth your
buck?

When an Asset Management Company, an Insurance Company or a Broker is

trying to sell you equity, the first argument he makes is that Equity investments
have given you the highest returns on investments amongst all asset classes. You
would have heard them throwing various numbers at you. Where does this data
come from?

It comes from the returns the Sensex or the Nifty have given over the period of
time. So when you buy an ETF that tracks these benchmarks, you are sure to get
market returns.

MARKET RETURNS

It is this ability of an ETF to give market returns that it is most sought after. If
you are in equities, but not in ETF the chances are that you could beat the index
or underperform or give the same returns as the Index.

Investors understand the risks and they know markets can be under water for
considerable period of time, but they are not going to tolerate under
performance. If the Index has gone up, why are my stocks down? Investment in
ETF ensures that you will get market returns.

MIRRORING THE INDEX

The Fund Manager of an ETF just mirrors the constituents of the Index in his
portfolio. If you have chosen a Nifty ETF , the Fund Manager would mirror not
only the constituents but also their weightage. If ITC has a weight of 9.8% and
Hindustan Unilever 2.4%, he has to maintain that. He cant buy more HUL and
less ITC.

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The fund manager of an ETF is like that blinkered horse that pulls tongas. It
just has to move ahead , neither look left nor right. There is virtually no chance
of a fund manager making you lose your short by virtue of bad stocks in the
portfolio. It is this compulsion of mirroring the index in toto gives it the ability
to give market returns and ensures that the ETF will not underperform the
index.

LOW COST STRUCTURE

Since the fund has to just mirror the indices, the fund manager literally twiddles
his thumbs. His needs to act only when the indices change their constituents.
This means the fund can afford to have lean team with no expenditure on
research. Such funds have a low expense ratio as compared to mutual funds.

PASSIVE ON THE SURFACE, ACTIVE UNDERNEATH

The Sensex, which was constituted in 1986 has 30 stocks and the Nifty, which
was envisaged in 1995, 50 stocks as its constituents. The Index management
committee would decide on what stock to include and what to exclude over the
period of time keeping the stock number at 30 and 50 respectively.

The Sensex has seen 53 changes since inception in its 30 stocks and the younger
Nifty 72 changes in its stable of 50 horses. If you have visited Kedarnath any
time you would have seen how the river is frozen on the surface but the water
gurgles underneath. An ETF is just like the river Ganga which keeps itself clean
as it moves down to the Bay of Bengal. The Indices keep on changing according
to the times.

Only 10 of the original 30 remain in the Sensex. The rest have all fallen by the
way side.

It is this ability of the indices to remain relevant at all times that it gives the ETF
that track them the power of invincibility. Automatic Diversification

Though you buy just a unit of the ETF, you are infact buying 50 stocks of the
Nifty or 30 stocks of the Sensex, depending upon, which index does the ETF
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track. This automatic diversification comes at low cost, which makes it a least
hasslefree for the investor.

USER FRIENDLY

An ETF is very user friendly. It can be bought at any time during the market
hours . Not all ETFs are liquid, so choose one that is liquid. If you are a long
term investor, it is for you. If you are a trader, you can trade in ETFs as well. If
you want to buy and forget, you can do it with an ETF but not with an
individual stock, because the stock will not let you sleep What to look for while
choosing an ETF

Before you choose the ETF, choose the Index you want to track. So if you want
to track the broad based Nifty dont by an ETF that tracks the Sensex.

Also ensure that the ETF you buy faithfully mirrors the Index you are looking to
track. Dont choose an ETF that allows its fund manager the power to pick and
choose stocks from the Index.

Your returns could be higher or lower than the Index. While the fund managers
job is to just mirror the Index, a fund manager can make heavy weather of it.
The tracking error can be costly. The various ETFs have 0.10 to 0.90 tracking
error.

The biggest attraction of an ETF is that the charges are less. Dont look at any
ETF that charges you more than 0.5%.

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SIPping the NIFTY BEES

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Making Money need not be complex. Some times it pays off to keep your
investments simple. A SIP in Nifty ETFs shows how simple and small
investments come a long way in creating long lasting wealth.

Setting up a SIP in Nifty Bees, an index ETF, combines the wisdom of index
investing and benefits of SIP. It is a sure and certain way to make money over
the longer term.

Investors often argue that buying an index ETF is a dumb way of making
money.

Looking at it from their perspective they are right. You dont have do any
fundamental research, burn any midnight oil or deploy an army of technical
and derivative analysts to tell you what to buy. Just go out and buy the Nifty Bees
at the end of the day.

Yes its so simple that it actually appears dumb. But it works.

All you have to do is set up a SIP in the Nifty Bees and execute it every month.

The following examples will bring out the efficacy of an Index ETF and the
second that makes you see the advantage of SIP. Confidence in the Index not in
the stock.

Let me take you back to the year 2000 when technology stocks were king and
were re-writing the rules of investment. At that point of time in the first quarter
of 2000 you invested in two stocks Infosys and Wipro.

Now these are stocks that have given one of the best returns to their initial share
holders and are rather well managed. After 13 years you find that Infosys has
given you a CAGR of just 5% in the form of capital appreciation. Wipro on the
other hand has reduced your capital by half.

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You would argue that by taking an example that suits my argument I have
chosen the wrong time to invest as the markets had peaked in the Ketan Parekh
rally in February and Technology stocks in the month of March along with the
Nasdaq which called the shots in those days. Obviously when you buy stocks at
their tops you would end up in misery.

This is where Index investing steps in. Had you invested in the Nifty you would
have got a CAGR of 8%. And you still call it dumb. Remember when you buy a
stock you only have to decide when to sell it. In the case of an index fund, the
index committee would decide on the changes and the ETF fund manager will
carry out the changes with out your even having to bat an eyelid.

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CONFIDENCE IN THE EFFICACY OF A SIP

This second example would bring out the efficacy of the SIP.

Lets assume that heeding our advice on investing in the Index ETF you invested
in the Nifty Bees when the Nifty was at 6357 on January 8, 2008 its highest level
seen in history.

At the end of July 2013 you would notice that the Nifty still at 5742 even after
more than 5 years and you are down by 9.7% even after investing in the Index
ETF.

But if you had invested in the Nifty Bees your portfolio would still be higher by
18.9%. How is that possible when the Nifty has not touched 6357 again?

The magic lies in your ability to continue to buy blind folded month after the
month. Your sincerity and regularity of investing in the Nifty Bees even when
the Index was down has paid you dividends.

The bottomline is that you should never stop your Nifty Bees SIP as it is meant
for times like these.

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BOTTOMLINE

Even famed investor Warren Buffet has said that beating the Index is not easy.
In fact he has even wagered that he will give away US $ 1 million to any one
who will beat the S&P 500 ( the broad based US Index). The bet began in 2008
and guess what, Buffet is ahead half way through the race.

Those who have a crystalball or those who have enough intelligence, time and
inclination to research will always make more money. But for us the lesser
mortals, Sipping the Nifty Bees is the best, cheaper and a simpler way of making
money in the longer term.

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Better ways to invest in Gold

Smart ways of investing in Gold

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Gold is not just a glittering piece of jewellery. It has metamorphosed into a
valuable investment option. Even if you are a stickler for tradition, you can still
opt for smarter ways to invest in gold. We have identified some options for you.

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How to Invest in Gold?

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Gold has metamorphosed from a glittering piece of jewellery to a valuable
investment option. Are you investing the RIGHT way in gold?

A mother always takes pride in passing on her gold jewellery to her daughter.
The jewellery design may have gone out of style but this age-old practice hasnt.
This is because what matters more is the intrinsic value of gold!

In India, people buy gold on auspicious days such as Akshaya Tritiya or

Dhanteras as they associate the yellow metal with growing wealth and
prosperity. Today, despite its high price, the precious metal still remains a good
investment option for several reasons.

It is a good hedge against inflation. It has the ability to beat inflation just like
equity or real estate
It has been a safe haven even in uncertain times. Whenever an economy
encounters a big calamity, investors tend to rush towards gold as a stable
investment option.
Gone are the days when gold looked good as a glittering piece of jewellery in
your locker. It has metamorphosed into a valuable investment option over years.

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GOLD COINS/BARS

Banks or jewellers sell these coins and bars. However, investing in gold coins or
bars come with some disadvantages. Firstly, you have to incur an additional cost
on storage. You may consider keeping it in a bank locker. But, you will incur a
recurring expense to maintain that locker.

Purity of these coins may not be an issue as banks do sell 24-carat gold coins
with an assaying certificate, but the banks are not authorised to buy back those
coins.

So, you will still be at the jeweller's mercy to get the right value. So instead of
gold coins and bars, consider these options, which make more sense from an
investment perspective. Lastly there is a wealth tax payable on gold coins/bars
holdings.

GOLD ETF

Gold Exchange Traded Funds (ETFs) are the smartest way to invest in gold.
They are dematerialised form of gold and they directly invest in 99.5% purity
gold.

While Asset Management Companies (AMCs) do charge an annual fee, Gold

ETFs are more tax efficient than physical gold. They are listed on the stock
exchange hence easily tradable like any company scrip.

Gold ETFs are available in small denominations, and can be kept in the demat
account. Each unit of Gold ETF represents one gram of gold in case of most
ETFs.

You have to open a demat account and buy units of Gold ETF.

GOLD FUND OF FUNDS

Several asset management companies have launched gold mutual funds. These
gold funds are just like mutual funds and you don't need a demat account to
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invest in them. The investment amount can be as little as 5,000 and you will
have the flexibility of opting for an SIP (systematic investment plan) or STP
(systematic transfer plan), unlike in a gold ETF. These gold funds will be costlier
by at least 0.5% when compared with gold ETFs, because of the AMC set-up.
Hence, investors who have demat accounts should opt for gold ETFs.

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General Terms And Conditions

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