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why do stock market exists cover

Why do Stock Markets Exist? And Why is it So Important?

A stock market is a public market where people can buy and sell shares on the stock exchange. The stocks, also known as equities, represent ownership in the company.

Stock markets have existed for centuries. The oldest stock exchange was started in Belgium back in 1531. The brokers and moneylenders used to meet there to deal with the businesses. However, they never used actual stocks but traded in promissory notes and bonds. Later, the Amsterdam Stock Exchange was established in 1602 by the Dutch East India Company and regarded as the first real stock exchange.

Since its inception, stock markets have served many purposes, the most important being to provide companies with a source to raise capital for investment and expansion.

Why do stock markets exist?

Stock markets exist to serve the wider economy. It helps individuals earn a profit on their income when they invest in the stock market and allows firms to spread their risks and receive large rewards. It also enables the government to increase spending through the tax revenue they earn from corporations that trade on the stock exchange. The government uses the revenue to increase re-investment and employment capacity.

The stock market plays an important role in the economy of a country in terms of spending and investment. Without stock markets, many countries would not be as developed as they are. Alongside, it has helped individuals become wealthy and increases the overall standard of living in many economies.

Following are some of the most important functions of a stock market in the economy:

It helps companies raise capital

If stock markets did not exist, companies would have to resort to borrowing from the bank to raise money for expansion. This would be a burden on the company as they would have to repay the loans with interest.

Fortunately, with stock markets, businesses have the ability to create an initial public offering and raise large amounts of cash without having to worry about repayment. Moreover, publicly traded companies have no obligation to pay dividends when they incur losses.

Capital raised this way can help companies expand operations and create jobs in the economy. From a greater economic perspective, consumer spending increases,  governments can benefit from tax revenues and there will be lower levels of unemployment.

It helps create personal wealth

One of the most important benefits of the stock market is its ability to help generate personal wealth in the economy.

For the individual investor, the stock market provides a way to invest your income to earn a share of the companies’ profits. The revenue they earn can increase spending in the economy that can have a multiplier effect. The increased spending by individuals leads to increased investment and employment.

It helps increase investment in the economy

One of the key drivers of Gross Domestic Product is the level of investment in the economy. Governments often create fiscal and monetary policies in the economy to promote greater investment. The stock market is considered to be one of the most prominent sources for people to invest money in.

Furthermore, investors are always looking to invest in companies with high growth potential. If the stock market is performing well, this not only increases investment from local investors but also attracts foreign direct investment as people abroad invest in the local stock exchange. For example, people in India can invest in the NYSE which helps increase GDP of the US economy or vice-versa.

It serves as an indicator of the state of the economy

sensex last 30 years

(Sensex last +30 years graph)

The performance of the stock market is a rough indicator of how well the economy is performing. This often depends on speculators and perceptions of investors in the market. A rise or fall in the price of shares represents what cycle the economy is in such as recession or a boom.

There is a symbiotic relationship between the state of the economy and the performance of the stock market. Economists use this as a way to analyze past performance of investment and spending which helps them in the creation of new economic policies. The stock market serves as a barometer for the economy.

Also read:

It also affects non-investors in the economy

All members of society are affected by the stock market performance regardless of whether or not they invest in stocks.

People with pension funds and retirement accounts are impacted by low stock prices as the value of their accounts is tied to the stock market. Companies can also reduce employee benefits (pensions) as they can no longer afford to spend money on this which can delay the retirement age. Furthermore, when a company’s share price goes down, it affects job security as firms cut back on spending and many people could end up losing their jobs.

The stock market also impacts the rate of taxes and interest rates set by the government. During the Great Depression, the US government lowered taxes to induce borrowing but once the economy was out of depression, the government increased interest rates to encourage investment. Interest rates can affect a non-investor because a person renting out a home does not have to pay interest on a home loan directly but the landlord is likely to increase the rent to cover the high-interest expense.

Closing Thoughts:

Stock market gives opportunities to the businesses and public to transfer capital and ownership in a controlled, secure and managed environment. In addition to providing a convenient way for companies to raise capital and for individuals to increase wealth, the stock market helps keep a check on corporate regulation and increases the economic growth and prosperity of the nation.

rule of 15*15*15 sip calculator cover

Why You Need to Know The Rule of 15*15*15?

When the newbies enter the world of investing, one of the biggest questions that they may face is ‘how much’ and ‘how long’ should they invest? Enter the rule of 15*15*15.

In this post, we are going to discuss what is the rule of 15*15*15 (and the rule of 15*15*30) and how it can help you to make your investment decisions.

The rule of 15*15*15

The rule of 15*15*15 says that if you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 15 years, you will build a final corpus of Rs 1,00,00,000 (One crore).

Here,

SIP Amount = Rs 15k per month
CAGR =15%
Time horizon =15 Yrs
Final corpus = Rs 1 Cr

rule of 15*15*15 sip calculator

(Source: SIP Calculator)

Interestingly, your total invested amount is equal to just Rs 27 lakhs. However, over the time period of 15 years, you will build a total wealth of Rs 1 Crore.

Rule of 15*15*30

The rule of 15*15*15 gets even better when we double the ‘time horizon’ keeping all the other factors the same.

Here, you invest Rs 15,000 per month in an investment option which gives a return of 15% (CAGR), for a consistent period of 30 years.

Can you guess the final corpus build in this case?

The final corpus built after 30 years will be Rs 10,00,00,000 (Rs 10 Crores). And yes, that’s right — not a typo error…

Here,

SIP Amount = Rs 15k per month
CAGR = 15%
Time horizon = 30 years
Final Corpus = Rs 10 Crores

the rule of 15*15*30 sip calculator

(Source: SIP Calculator)

Here your total invested amount is just Rs 54 lakhs. However, as the power of compounding is working in your favor, you will accumulate a final corpus of Rs 10 crores. Only by doubling the time horizon, you can get ten times the amount compared to the rule of 15*15*15.

And that’s why the power of compounding is considered the most substantial factor for wealth creation. Here’s a quote regarding the same by one of the greatest scientist of all time, Albert Einstein:

Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.” -Albert Einstein

Quick Note: In the scenarios discussed above, 15% is considered as the average compounded annual growth rate (CAGR) over the years. However, you must understand that it is just an average as no market can give consistent 15% returns. In the bull market, the returns can be as high as 30–40%. On the other hand, in the bear market, the performance can be as low as -10% to 5%. Here, the 15% is taken as the average of the returns over the 15 or 30 years.

Warren Buffett Wealth Creation

The name ‘Warren Buffett’ needs no introduction, especially for the people involved in the world of investing. His wealth creation story is an interesting topic to discuss in this post.

Fascinatingly, unlike the young tech billionaires of this century like Mark Zuckerberg, Evan Spiegel, Bobby Murphy, John Collison, etc. Warren Buffett did not build his wealth by creating a super-tech company like FB, Snapchat, Google, etc.

Warren Buffett built most of his wealth over time through their investments (and acquisitions) by his company Berkshire Hathaway. You may get surprised to know the fact that the World’s third richest person become a billionaire only in his 50’s.

warren buffett net worth growth over time

The biggest factor why Warren Buffett was able to build such a huge wealth was his amazing returns for a consistently longer period. His company, Berkshire Hathaway, give an average yield of around 21.7% per year for over five decades. This return for such an extended time period is way-way better than what we discussed above. The power of compounding played an important role in Warren Buffett’s wealth creation story.

Resources:

Closing Thoughts

The time period is a significant factor when you are investing.

In this post, you can notice how by doubling the time horizon from 15 to 30 years; you can get ten times bigger final corpus. And that’s why it is recommended to start investing as soon as possible.

To end this post, here’s an amazing quote by Mr. Buffett:

“Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffett

7 Powerful New Year Resolutions For Equity Investors!

A new year always excites everyone. It’s a time for the people to make different personal and professional resolutions like to learn how to swim, join the gym, travel abroad, learn martial arts, create a new blog/youtube channel, learn a new language, maintain a journal etc.

Personally, I’ve always loved new years and enjoyed making plans for the next year. This time also I’ve made a few resolutions. On the top of the list is to travel all the 29 states and 7 union territories in India by the end of 2019 (Spoiler alert: I’ve already been to +20 entities).

Anyways, stock investors are ordinary people and hence, they also like to make resolutions for their new investing journey. However, if you an equity investor but do not have made resolutions for the new year yet, then we’ve got you covered.

In this post, we are going to discuss seven powerful new year resolutions for equity investors. All these resolutions are designed to make you a better investor by the end of the calendar year.

7 Powerful New Year Resolutions For Equity Investors

Here are the seven best new year resolutions for the Indian equity investors. I would recommend you to challenge yourself and accept as many as resolutions (out of seven) as possible.

1. Save enough, Invest more

This is something which most youngsters struggle with. Although the older generation is doing much better in the art of saving, however, when it comes to intelligent investing — they too are not much mature.

If you are struggling with savings, plan to optimize your expenses this year. Track your spendings and perfect them wherever possible in order to increase your savings. However, do not just stop there. Invest those savings in different investment options based on your needs and risk tolerance. For beginners, investing in blue-chip stocks are a good option to get started.

2. Start goal-based investing

investment goal

Goal-based investing is a new way of wealth management where the individuals focus on attaining specific objectives or life-goals through their investments. Here, before starting to invest, the individual tries to answer the question- “What exactly are you investing for?”. The best part about the goal-based investing is that here the investors do not focus on getting the highest possible returns. But the aim of this investment is to reach the desired returns that meet their goals.

This year, switch from the traditional investing to goal-based investing. Set a specific goal and start investing to achieve it. This goal can be owning your new house, funding your business venture, corpus for your kid’s education/marriage, retirement, travel fund etc.

3. Increase your circle of competence

circle of competence

Because of different background, qualification, or experience, everyone has built up a greater knowledge in a specific area. In this certain field, these people have the expertise and hence, have a significant advantage. This is called the circle of competence.

The circle of competence might vary from people to people depending on the criteria mentioned above. For example, a doctor might have an expertise in medicines, healthcare or pharmaceutical and he can consider this area as his circle of competence (COC).

This year, make a resolution to increase your circle of competence.

For example, let’s say you might have been ignoring tax saving mutual funds or ELSS or any other investment option just because you were not competent earlier. But this year, spend some time and efforts to get comfortable in those investments.

Even for stock investors, there might be different industries or sectors that you may be ignoring. This can be because you do not have good knowledge of that industry and hence not inside your circle of competence. This year, learn those new industries and expand your circle of competence.

4. Be consistent

Consistency is the key to build long-term wealth. If you invest in equities just in a bull market and shy off during the bear market, it’s definitely not a good strategy. Bulls and bears are the part of market and stocks are characterized to go up and down.

This year, make a resolution to become consistent in your investments.

If you have got a monthly SIP, then consistently keep investing in that plan. If you are a direct stock investor, then fix an allocation of money that you’ll invest in the market throughout the year, whenever you find the best opportunities. Overall, to win the game, you need to stay in the game. And that’s why you need to be consistent in your investment plans.

5. Become more Socially Responsible Investor

Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good. For example- investing in companies promoting health, cleaner energy, healthy foods etc. The companies are evaluated based on the ESG index: environment, social justice, and corporate governance.

Being an investor gives you a lot of power in the financial world. This year, make a resolution to realize the power and influence you have as share investors to make a positive impact on society.

solar panel cells

6. Continue your education:

The stock market is very dynamic and things keep on changing very fast here. New technology, a new sector, new research tool etc. And that’s why the biggest resolution that you need to make this year is to continue your education.

This doesn’t mean to go and enroll in a university. You simply have to keep learning more. Whether it’s through courses, seminars, workshops, books or youtube videos, it’s up to you. But make sure that you keep on learning. One best way to continue your education is by taking a resolution to read at least one investing book each month. This is not a tough resolution and easily achievable. If you are not sure which books to read, here is a list of ten must-read books for stock market investors.

7. Diversify

This is the last resolutions to make this year. No matter how good you are in equities, do not invest all your money in the market. Stock market investments are subjected to market risk. And if you’ve allocated all your money in the market and it doesn’t perform well (because of whatever reason)– you are doomed.

This year, make a resolution to expand your investment options and look into alternative investment options. Maybe investing in real estate or diving into startups as Angel investor. Diversify your investments and reduce the potential risks.

Closing Thoughts

The new year is the best times to ‘make the change’ or ‘be the change’. Whether you want to meet your needs/goals or become a better investor, this is a great time to start working on it. Through the new year resolutions, take your investing to the next level this year.

Wish you all the best!

what is equity funds

What is an Equity Fund? Basics, Performance, Taxation & More!

“Mutual funds were created to make investing easy, so consumers wouldn’t have to be burdened with picking individual stocks.” – Scott Cook

An equity mutual fund is a variety of mutual fund where the portfolio management invests the cash collected from the investors in equities of listed companies. The portfolio of an equity oriented mutual fund consists of at least 65% investment in equities or equity related instruments.

(Quick note: An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains.)

Equity funds can be either the traditional mutual fund variety or it can come in the form of ETF (Exchange Traded Funds).

The ETF trades in the stock exchange like an equity share, throughout the day. A traditional equity mutual fund, on the other hand, settles once in a day, where the buy and sell orders are netted after market hours for the computation of the Net Asset Value or NAV.

Different varieties of Equity Funds

Equity Funds can be classified into the following categories which are consisted of several sub-categories as follows:-

Based on market capitalization:

  • Large Cap Equity Funds: invest in companies having large market capitalization.
  • Mid Cap Equity Funds: invest in companies having medium market capitalization.
  • Small Cap Equity Funds: invest in companies having small market capitalization.
  • Micro Cap Equity Funds: invest companies having market capitalization less than that of companies with small market capitalization.

(Also read: Basics of Market Capitalization in Indian Stock Market.)

Based on the style of investment:-

  • Private Equity Funds: invest in companies that are not listed in any stock market.
  • Equity Income Funds: invest in equities of companies which pay a significant dividend.
  • Dividend Growth Funds: invest in equities of companies having a record of increasing dividends per share (DPS) at a rate much faster than the entire stock market.
  • Index Equity Funds: mimic an index like Nifty. (Also read: The Essential Guide to Index Fund Investing in India.)
  • Sector or Industry Specific Equity Funds: track specific areas of the economy of India like any industry or sector.

types of equity funds

Image source: sipfund.com

Equity Mutual Fund: How does it work?

how mutual funds work

Image source: Corporatefinanceinstitute.com

Mutual funds issue units to its investors according to the amount of money received from the latter by the former.

The assets of the mutual fund are known as a portfolio which is managed by the Asset Management Company or AMC through the qualified fund managers. The value of each unit of a mutual fund is called the Net Assets Value (NAV) of the mutual fund. As the stock prices keep continuously changes, the fluctuations in the value of the portfolio results in the fluctuation of the value of the units.

The AMC offers diverse products of mutual funds called schemes, structured in a way to suit the requirements of the unitholders. A portfolio statement, revenue account, and balance sheet are available for every scheme. (Also read: 23 Must-Know Mutual fund Terms for Investors.)

Calculation of NAV of Equity Mutual Funds

NAV of a fund is used as a parameter to judge the performance of the same. It is referred to the market value of the investments held by the scheme deducting liabilities and dividing the result by the number of units issued under the scheme.

Suppose, the market value of all investments held with respect to a mutual fund scheme is Rs. 100 lakh and 10 lakh units have been issued to the unitholders. In this case, the NAV per unit comes to Rs. 10.

NAV Mutual funds

Source: Moneycontrol

Which is the best way of investing in Equity Funds?

best ways to invest

Source: Clearfunds.com

The most effective way of investing in an Equity Mutual Fund scheme is through SIP or Systematic Investment Plan.

An investor usually invests monthly in a SIP. SIPs give the benefit of rupee-cost averaging. So when the markets go up, an investor ends up getting fewer units.

Again, when the markets are bullish, an investor is rewarded with more units in the same amount. Investing through SIP makes investing a regular habit for investors.

How to analyze the performance of an equity mutual fund?

  • Having a look at the cost of investment as reflected by the expense ratio and exit load.
  • Checking whether the turnover ratio of the underlying portfolio is not too high.
  • It is to be checked whether the investor’s investing strategy or philosophy matches with that of the fund manager.
  • The underlying portfolio should be broadly diversified so to gain the benefit of risk reduction.
  • Comparing the last few years’ returns of the fund under evaluation with that of its peers. Risk-adjusted returns should be the ideal basis for comparison.
  • Alpha and Beta of an equity fund should be given emphasis. Alpha measures the extra percentage of returns generated by the equity fund as compared with the benchmark returns. Beta gives the magnitude of risk of a fund i.e. the variability of returns of the fund about its expected return.
  • An equity fund managed by several fund managers for a long duration is preferred less as compared to one which is managed by the same person for the same period.
  • A prospective investor is required to check the quality of stocks in the portfolio as the latter drives the return of the fund in the future.

Note: New to investing and want to learn how to invest in mutual funds from scratch? Check out this amazing online course: Investing in Mutual Funds- A Beginner’s course. Enroll in the course now to start your journey in the requisite world of investing today.

How to determine the taxation of equity funds in India?

For the financial year 2017-18, no long-term capital gain (for units held for 1 year or more) is charged for both Resident Indians and NRIs.

On the other hand, short-term capital gain (for units held less than 1 year) is charged @ 15%. The TDS rate applicable to the NRIs for the redemption of equity oriented funds is 15% and the same is applicable only for short-term capital gain.

The dividend received by an investor for an equity fund is completely tax-free in the hands of the former. As per the Finance Act 2018, the long-term capital gain of over Rs 1 lakh will attract tax @ 10% and no indexation benefit will be allowed. (Also read: Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?)

Should one invest in Equity Mutual Funds?

mutual funds growth

Source: Amfiindia.com

If an investor wants to invest in equity funds, then he/she should decide on the basis of his/her risk appetite and horizon of investment. Investing in equity funds is meant for someone willing to invest for five years or more. These don’t suit someone willing to make money in the short term.

For an individual and HUF, ELSS sounds a great option for tax saving u/s 80C of the Income Tax Act, 1961. ELSS has a lock-in period of 3 years which relatively lower than other tax saving options like NSC, PPF, and ULIP. Having said this, ELSS also yields higher return as compared to any other investment eligible under the said section.

For a new investor willing to take exposure in the stock market, then large cap funds are highly recommended. Large-cap equity funds invest in the well-established corporate organizations giving stable long-term returns. Small-cap funds are suitable for young investors who are hungry for higher returns and are high-risk takers. Balanced funds represent one-third of debt instruments and the rest equity and are meant for those who are highly risk-averse.

For an investor who is willing to take calculated investment risks, the investment recommendation would be mid-cap equity funds. These funds invest in the shares of companies having diverse market capitalizations.

Also read:

indian stock market holidays 2019

Indian Stock Market Holidays 2019

The Indian stock market holidays 2019 has been announced by the stock exchanges. There’s going to be 15 holidays throughout the year (apart from regular holidays on Saturdays and Sundays).

Here are the trading holidays for Equity Segment, Equity Derivative Segment, and SLB Segment:

Indian Stock Market Holidays 2019

S. No Holidays Date Day
1 Mahashivratri March 04,2019 Monday
2 Holi March 21,2019 Thursday
3 Mahavir Jayanti April 17,2019 Wednesday
4 Good Friday April 19,2019 Friday
5 Maharashtra Day May 01,2019 Wednesday
6 Id-Ul-Fitr (Ramzan Id) June 05,2019 Wednesday
7 Bakri Id August 12,2019 Monday
8 Independence Day August 15,2019 Thursday
9 Ganesh Chaturthi September 02,2019 Monday
10 Muharram September 10,2019 Tuesday
11 Mahatma Gandhi Jayanti October 02,2019 Wednesday
12 Dussehra October 08,2019 Tuesday
13 Diwali Balipratipada October 28,2019 Monday
14 Gurunanak Jayanti November 12,2019 Tuesday
15 Christmas December 25,2019 Wednesday

(Source: BSE India)

Quick Note:

  1. Muhurat trading, the traditional trading on the day of Diwali, will be held on Sunday, October 27, 2019 (Diwali – Laxmi Pujan). The timings will be announced subsequently in the month of Diwali.
  2. The holidays falling on Saturday/Sunday are not listed above.
  3. The Exchange may alter/change any of the above holidays, for which a separate circular shall be issued in advance.

Also read: Stock Market Timings in India.

solar panel cells

Socially Responsible Investing: Why it matters?

Deciding how you want to invest your money is often hard. You need to take many factors into consideration such as risk, returns, taxes, and inflation. It takes a lot of forethought and groundwork to figure out a way to get the best return on your investments.

Yet, there are some investors who choose to invest in companies that are not only financially stable but also make a positive impact on the environment.  Socially Responsible Investing or SRI is choosing to invest in stocks that provide a financial gain as well as do social good.

The companies are evaluated based on the ESG index: environment, social justice, and corporate governance.

Although socially-responsible investing is still up and coming in India, it is expected to gain greater momentum in the next few years. Companies have become more aware of the ESG factors and are looking to incorporate more of it into their business practices.

Socially Responsible Investing History

Socially responsible investing began in the early 1700s when the Quakers refused to participate in the slave trade in the U.S. Pastor John Wesley, the leader of the Methodist church claimed it was a sin to make a profit at the cost of your neighbor’s well-being. He stated that it was unethical to gamble and invest in industries that used toxic chemicals.

For many decades after John Wesley’s speech, investors avoided industries such as tobacco and liquor referring to them as ‘sin industries’. This evolved in the 1960s when investors decided to invest their money in companies that promoted social causes such as women’s rights and civil liberty.

Socially responsible investing played a huge role in South Africa during the 1980s when investors began pulling out their money due to the apartheid or the segregation of races. SRI had a prominent role in helping bring an end to the apartheid in 1994.

Sustainability Indexes

If you look into the American and European nations, they already a family of indices evaluating the sustainability performance of thousands of companies trading publicly. The Dow Jones Sustainability Indices (DJSI) launched in 1999, are the longest-running global sustainability benchmarks worldwide. To be incorporated in the DJSI, companies are assessed and selected based on their long-term economic, social and environmental asset management plans.

For India, S&P BSE has three main indices that measure corporate sustainability: S&P BSE 100 ESG INDEX, S&P BSE GREENEX, and S&P BSE CARBONEX.

How to be a Socially Responsible Investor?

Here are a few points that can help you become a socially responsible investor:

–        Know the difference: The first and foremost important step to become a socially responsible investor is to know the difference between traditional and responsible investing. The difference might be in returns that you get from your investments. The returns from socially responsible investing may differ a little from the traditional one as you might be leaving behind a lot of high return investment options. However, always remember the reason why you have opted for this way of investing.

–        Do your research: This is where investors use negative and positive screening to shortlist investment options. In the negative screening, they avoid investing in companies that don’t relate to their social values. Many mutual funds that are socially responsible screen out tobacco and liquor companies. One type of negative screening is divestment, this is where investors take their money out of certain companies because they do not like their business practices or social values.

Along with screening out negative companies, it is also important for investors to choose companies that align with their values. These are companies that strive to bring change to a social aspect that the investor finds important along with their socially responsible business practices. This is also known as impact investing or incorporation of ESG.

–        Use your influence as a shareholder: Shareholders not only invest in companies that align with their values but they also use their position to influence the actions of the company in which they own stock. Investors do this by filing a shareholder resolution. This is a document outlining the shareholder’s suggestions for management on how to run the company in a more socially responsible way.

–        Invest in the community: This is where an investor invests in companies that have a positive impact on the community. This is usually done in low-income areas where the investment is used to provide loans to people and small-business owners who would otherwise have trouble getting approved for a loan. Community investments also support ‘green companies’ that have a large carbon footprint on the environment.

–        Lead by examples: Socially responsible investing is still in the early adoption phase. By making the right investment choices, you can make a real positive impact on the community- along with building wealth. Moreover, sooner or later, social conscious will become the selling point for global companies. And you, being a part of it, can lead the movement.

Socially responsible investing: Promoting health

Socially responsible investing: Cleaner Environment

How to get started with Socially Responsible Investing?

1. Decide what your social principles are-

Before you choose your stocks you need to decide what social goals you want to promote. You should focus on your values and what you want to achieve through your investments.

2. Decide what your financial goals are-

The next step is to decide what financial goals you want to achieve through your investment just as you would with any other investment. You need to decide how much return you need to meet your goals as well as how much risk you are willing to handle. SRI has been shown to provide comparable returns as a traditional stock would.

3. Choose the fund that meets your needs and goals-

Once you have decided what your social and financial goals are, the next step is to find the investment that’s right for you. The most common ESG funds in India include Tata Ethical Fund, Taurus Ethical Fund, and Reliance ETF Shariah BeES.

Social investing has also resulted in the success of micro-finance. This was created by social investors to create an impact on small businesses and has now become an industry worth over $8bn and is now a mainstream financial service.

Socially Responsible Investing cover

Also read:

Conclusion

Socially Responsible investing is becoming increasingly popular in India and there has been a visible shift in the market strategy adopted by many participants as they incorporate social, economic and governance (ESG) factors into their investment process. Stakeholders realize the importance of their role in financial markets to influence sustainable growth.

According to the Indian Impact Investors council ‘more than 30 impact funds have invested in social enterprises in India’. There has been $2billion investment in over 300 companies in India.

While socially responsible investing is still not as big as traditional investing in India, it is still a rapidly growing market. Social investing in India has helped provide basic needs such as housing and education to the poor. Many investors have now realized the power and influence they have to make a positive impact on society.

biggest mistake stock market

The Biggest Investing Mistake that 90% Beginners Make!

Suppose you bought two stocks- Stock A and Stock B. The buying price of both these stocks is the same, i.e. Rs 100.

After two years, you checked the returns from both these stocks and found that the current price of stock A has moved to Rs 180. On the other hand, the market price of company B has fallen to Rs 60. What would you do next?

Would you sell stock A and book a profit of 80%? Or Would you sell stock B to get rid of your losing stock?

scenario stocks

I will give the answer to this question in a few minutes. But first, let’s discuss another scenario in a similar context.

Let’s say, you have a garden where you’ve planted three vegetables- Ladyfinger, tomatoes, and Cabbage.

garden-min

Out of the three, Ladyfinger and tomatoes are doing exceptionally well. They are growing big and healthy. And that’s why you are able to make huge profits by selling them.

Anyhow, the third vegetable i.e. cabbage is just not doing well. It is not growing enough, no matter how much time, money and efforts you spend on planting those vegetables. It simply dies out without producing anything worthwhile to sell.

What’s the logical step here for you as the gardener?

Shouldn’t you get rid of the Cabbage which is not growing no matter how much efforts you put and focus more on growing the other two vegetables which are giving you awesome returns? After all, those two vegetables are the ones who are making you profits.

A similar concept should be applied in the stock market world.

Out of the two stocks- Stock A (which went up by 80%) and stock B (which fell down by 40%), it’s logical to hold the winning stock and get rid of the losing one.

Why do you want to sell Stock A to book a profit of just 80%, when it can get returns of 100%, 200%, 500% or even 1,000% in the future? If the company is fundamentally strong, selling its stocks just to book short-term profits doesn’t make much sense.

On the other hand, keeping the losing stock just to break even is also not a wise strategy. If you get rid of that stock and invest the same money in stronger companies, it can give you better returns. Holding the losers just to break even may lead you to loss of both time and money.

Here, the biggest lesson that every beginner should know is- “Hold your winners and cut your losers!!”.

But sadly, most people follow the totally opposite approach while investing. Even if the stock moves up by 30%, most beginners are eager to sell that stock, book profit and boast among their friends. 

The majority of the investing population would prefer to sell their winning stocks just for instant gratification of short-term profits. However, booking short-term profits should not be the goal of the investors if they want to build long-term wealth. After all, the consistent returns should always be preferred over a one-time profit.

The only reasons when you should sell your winning stocks is A) when the company’s fundamental changes and the stock is not as strong as when you originally invested, B) When you find a better stock to invest with bigger opportunity and C) when really need the money. For all the rest cases, you should stick with the stock.

Also read:

Besides, one more thing that most beginners ignore while booking short-term profits is taxes. When you sell your winning stock in short-term for booking profits, you are obliged to pay short-term capital gain (STCG) taxes of 15% on your profits.  Therefore, this portion of the profit is already gone to the government.

Nonetheless, you can easily avoid/delay this STCG gain tax by NOT selling your winning stocks and keeping it for the long term. After all, you only have to pay taxes when you book profits. Moreover, Long-term capital gain taxes are comparatively smaller (i.e. 10% of your gains). Therefore, by investing for long-term, you can save a few additional bucks.

Overall, whether you are investing in stocks, mutual funds or any other investment option, the first and biggest lesson is the same- “Cut your losers and hold your winners!”.

That’s all for this post. Happy Investing!!

A Complete Guide to Tax Saving Mutual Funds - ELSS

An Essential Guide to Tax Saving Mutual Funds – ELSS

Whenever you research how to save taxes in India, you can easily find the experts mentioning to invest in tax saving mutual funds or ELSS. However, for the beginners, getting started with ELSS investment might be a little confusing.

In this post, we are going to cover everything regarding tax saving mutual funds. By the end of this post, you’ll be able to clearly understand why exactly is an ELSS and how it works. Here are the topics that we’ll discuss today:

  1. What is Equity linked saving scheme (ELSS)?
  2. Types of ELSS
  3. What are the features of Tax-saving mutual funds?
  4. How is ELSS fund taxed?
  5. How to choose the right ELSS?
  6. Closing Thoughts

So, if you are a newbie and find it challenging to get started with tax saving mutual funds in India, then please read this article till the very end. It will definitely help you to demystify majority of the questions that you might have regarding ELSS. Let’s get started.

1. What is Equity linked saving schemes (ELSS)?

An ELSS (Equity Linked Savings Scheme) Mutual Fund is a variety of Equity Mutual Fund which allows individuals and HUFs to avail Income Tax deduction from their Total Income for an Assessment Year subject to a maximum limit of Rs.1.5 lakhs u/s 80C of the Income Tax Act, 1961.

ELSS mutual fund is an Equity oriented fund which is having a lock-in period of 3 years. The said duration is counted from the respective allotment date of the unit(s).

Like any other type of Equity Mutual Fund, ELSS comes with both growth and dividend options as well.

Investment in an ELSS scheme can either be made in a lump-sum or through a Systematic Investment Plan (SIP). Investments made in a Financial Year (Previous Year) up to ₹1.5 lakhs can be claimed for tax deduction under the said Act.

Till the Financial Year 2017-18, no tax on income from Long-term capital has been charged from an Assessee on redemption of the unit(s) of an ELSS. As per the Budget (Finance Act) 2018, Long-term capital gain over ₹1 lakh is to be taxed @ 10% by the Government of India.

2. Types of ELSS

ELSS comes in two varieties. The first category is the dividend scheme and the second type is the growth scheme.

In the case of former, when the mutual fund announces a dividend, the unitholders earn income in the form of a dividend on the units held by them. Such dividends can either be withdrawn or reinvested by the unitholders.

Another part of ELSS with dividend feature is that the dividend earned is eligible for tax benefits. Moreover, the dividend earned by the unitholder is not subjected to any lock-in period, i.e. it can be withdrawn any time.

A similar provision is not applicable to the growth schemes.

3. What are the features of Tax Saving Mutual Funds?

Gaurav Munjal

Image source: Richvikwealth.in

–        In order avail the benefit of the tax deduction, an Assessee can make an investment in an ELSS Mutual Fund for as low as Rs. 500. There is no upper limit of investing in ELSS, unlike PPF and NSC, but as said earlier one would only get tax deduction u/s 80C to the maximum of Rs. 1.5 lakh.

–        Investment in an ELSS scheme is, of course, meant for a long duration as it comes with a lock-in-period of 3 years.

–        Irrespective of the short lock-in period of ELSS funds, the later have time and again yielded substantially higher returns in comparison to NSC, PPF, ULIP, etc.

–        ELSS is an equity oriented mutual fund wherein the underlying portfolio majorly consists of equity investments in publically listed companies having strong business models. Being equity oriented mutual fund, it is subjected to market risks.

–        Tax saving mutual funds or ELSS are mostly open-ended.

–        Like any other mutual fund, an investor of ELSS can also make another person as his/her nominee.

–        Like most of the equity funds, many ELSS funds also come with entry and exit loads.

–        Many investors prefer investing in ELSS funds through SIP route. It ensures rupee cost averaging that significantly cuts volatility in the stock market.

4. What are the benefits of investing in an ELSS?

ELSS locking period

Image source: Cleartax.in

Here are a few of the distinguishing benefits of investing in ELSS:

–        As discussed earlier, a taxpayer can enjoy the benefit of deduction from his/her taxable income (for a maximum of Rs.1.5 lakh).

–        We all know that Mutual Fund investments are subject to market risks i.e. systematic risks. Market risks can’t be eliminated but the fund manager invests the funds of investors in diversified equities which eliminate the unsystematic risks.

–        An investor may opt for not withdrawing the investment at all after the end of the 3 years lock-in-period. Holding on the units will result in the growth of the investment and will subsequently yield handsome inflation risk-adjusted return for the investor.

–        As said earlier, the investor can withdraw any dividend earned as no restriction is there on its withdrawal during the lock-in-period. The restriction of withdrawal is there only in respect of the investment.

–        ELSS, being an open-ended mutual fund, allows anyone to invest in the same at any time during the year.

–        One can find popular tax saving avenues like ULIP, NPS, and PPF which offer lock-in period ranging from 6 to 15 years. But, investing in ELSS will reduce the lock-in-period significantly to 3 years only.

–        In case an investor of ELSS is not having knowledge of the market, he/she can be rest assured that his/her funds will be managed by a qualified fund manager.

–        It is not necessary that one has to invest in ELSS for only availing tax benefits. ELSS can also be considered as a long-term wealth generation tool. As the lock-in-period is 3 years, one can even think of investing in ELSS for meeting any future financial goal.

5. How is the Capital Gain from an ELSS Fund taxed?

If an investor sells his/her units of an equity mutual fund after a year, tax on long-term capital gains (LTCG) will be applicable.

Up to 31st March 2018 tax charged on the long-term capital gain was nil. But, as per the Union Budget 2018, tax on LTCG of stocks and equity funds were re-introduced.

If the long-term capital gain exceeds Rs.1 lakh from the redemption of an equity fund, then tax @10% will be charged on such LTCG.

Again, in the said budget it said that if investors sell their equity mutual funds within a year, they will be required to pay short-term capital gains tax @15% on their returns. The provision regarding short-term capital gain (STCG) tax was there in the Finance Act 2017 as well.

ELSS funds as said earlier, are having a lock-in period for 3 years. So, the gain on an ELSS fund by default comes under the long-term capital gain tax.

taxes ELSS

Image source: Tflguide.com

Also read:

6. How to choose the right ELSS fund?

Following key points should be considered by someone who is looking to invest in an ELSS fund:

Looking into the past performance: Past performance does not guarantee future performance of a mutual fund scheme. Looking at historical returns is the initial step of evaluating a scheme. It helps in evaluating the performance of the fund managers over the years.

Age of an ELSS Fund: An ELSS Fund has been in the market for 5 years or more is generally considered ideal for new investors. This is because they generally represent reputed AMCs and have good track records.

Risk of ELSS: Different ELSS schemes come with different risks. An investor should select a specific ELSS Fund based on his/her risk appetite.

Looking at the Expense Ratio: The Expense Ratio refers to the percentage of the fund which an asset management company charges from the unitholders. This is the charge for meeting the cost of operations of the fund.

Assets Under Management (AUM): This is the amount of money which is being managed by a mutual fund scheme. Various types of ELSS Funds have different ideal sizes for AUM.

Checking the Rating of ELSS Fund: Ratings of the ELSS Funds published in a reputed online platform helps a prospective investor to know which fund is the best.

Gaurav Munjal

Source: Mymoneysage.in

Note: New to investing and want to learn how to invest in mutual funds from scratch? Check out this amazing online course: Investing in Mutual Funds- A Beginner’s course. Enroll in the course now to start your journey in the requisite world of investing today.

7. The last few words on ELSS Mutual Funds

With the rise in the equity market over the years, the investors have gained interest in ELSS mutual funds as an income tax saving instrument. ELSS is a category of equity mutual fund that is created by the government to encourage people at large to participate in the equity market of India.

As ELSS funds come with the benefit of the tax deduction, middle-aged people feel interested to invest the major part of their savings in the Indian equity market.

There is no doubt in saying that investing in an ELSS scheme is certainly not risk-free. Even though the NAV graph of an ELSS scheme is not free from frequent ups and downs, the growth of the fund never falls below other tax saving alternatives like PPF and ULIP.

But, owing to a fact of scope for higher returns at a minimum lock-in period, Equity Linked Saving Schemes have emerged as the most demanding tax saving option today.

wealth creators 2018 cover

Top 20 Wealth Creator (& Destroyer) Stocks of 2018

The calendar year 2018 was full of ups and downs for the Indian stock market investors. While Sensex made its all-time high in August 2018, the net return in this year is still just 4.90% (YTD). Sensex started with 33,812 points in January 2018 and as of December 2018, it is currently hovering around 35,470 points.

nifty 2018

On the other hand, if we look into the NSE benchmark index Nifty 50, it started at 10,435 points in January 2018 and currently trading at 10,663 points, with an overall return of merely 2.18% this year.

nifty 2018

If we compare the returns on Nifty in 2018 with that of last year (2017- when it gave a return of around 28.6%), we can easily notice that the index has comparatively underperformed in 2018. Nonetheless, ups and downs are the characteristics of the market and the stock market investors should be not be haunted by it.

As the year 2018 is fastly approaching to its end, we performed a short analysis to find the winning and losing stocks of 2018. Here is a list of 20 large cap companies in India with a market capitalization greater than Rs 100 Billion, which either grew over +30% or fell over -35% within the year 2018.

If you are interested in large-cap companies, this list might give you a rough idea of the stocks that you missed or can add in your watchlist for the upcoming year.

Top 20 Wealth CREATORS of 2018

S. No Name Symbol Industry Last Price Market Cap 1-Yr Chg (%)
1 HEG HEGL Electronic Instr. & Controls 3675.35 155.86B 83.82
2 L&T Technology Services LTEH Construction Services 1687.05 171.74B 71.22
3 Larsen & Toubro Infotech LRTI Software & Programming 1695 291.26B 57.67
4 Adani Enterprises ADEL Coal 158.55 175.67B 53.92
5 Bata India BATA Footwear 1109 144.13B 47.74
6 Tata Consultancy TCS Software & Programming 1918.5 7130.75B 44.97
7 Bajaj Finance BJFN Consumer Financial Services 2564.9 1497.28B 43.9
8 Tech Mahindra TEML Software & Programming 697.9 684.05B 41.43
9 Indiabulls Ventures INDB Investment Services 379.85 235.61B 41.22
10 MindTree MINT Computer Services 837.7 139.19B 39.69
11 Nestle India NEST Food Processing 10923.35 1064.11B 38.56
12 Mphasis MBFL Software & Programming 1018.15 187.77B 38.52
13 Jubilant Foodworks JUBI Restaurants 1218.95 173.76B 38.14
14 Abbott India ABOT Biotechnology & Drugs 7466.25 157.83B 34.82
15 Avenue Supermarts AVEU Retail (Grocery) 1545.75 1031.01B 34.28
16 Ipca Laboratories IPCA Biotechnology & Drugs 801.85 101.97B 33.6
17 Divi’s Labs DIVI Biotechnology & Drugs 1447.15 392.45B 32.77
18 Hindustan Unilever HLL Personal & Household Prods. 1784.65 4009.29B 31.56
19 Adani Power ADAN Electric Utilities 50.8 194.66B 31.27
20 Britannia Industries BRIT Food Processing 3100.55 751.53B 30.64

 

HEG was the biggest wealth creator in the large-cap segment this year. This stock gave a return of over 83% in 2018. Currently, HEG is trading at a share price of Rs 3,675. Surprisingly, this stock was also one of the biggest winners in 2017. (Quick Note: The stock of HEG was hovering at just Rs 160 during the start of January 2017).

Next, L&T Technology services (+71%) and Infotech (+57%) –both have performed well followed by Adani Enterprises and Bata India. TCS has also given a return of over 44% this year.

A few other popular winners in this list are Bajaj Finance, Tech Mahindra, India bull ventures, MindTree, NESTLE and Avenue Supermart (DMart).

Top 20 Wealth Destroyers of 2018

S. No Name Symbol Industry Last Price Market Cap 1-Yr Chg (%)
1 Vodafone Idea VODA Communications Services 37.35 335.36B -62.89
2 Tata Motors DV Ltd TAMdv Auto & Truck Manufacturers 94.15 559.20B -60.83
3 Tata Motors TAMO Auto & Truck Manufacturers 172.5 559.20B -59.12
4 NBCC India NBCC Construction Services 54.15 100.86B -57.36
5 Motherson Sumi Systems MOSS Auto & Truck Parts 161.55 534.49B -57.13
6 Punjab National Bank PNBK Regional Banks 76.7 284.07B -56.41
7 CBI CBI Regional Banks 35.15 106.22B -53.54
8 Bharat Electronics BAJE Aerospace & Defense 87.95 215.91B -53.34
9 Aditya Birla Capital ADTB Consumer Financial Services 97.05 216.36B -48.12
10 Mangalore MRPL Oil & Gas Operations 72.8 131.23B -43.24
11 Hindustan Petroleum HPCL Oil & Gas Operations 246.3 381.94B -42.63
12 Sun TV Network Ltd SUTV Broadcasting & Cable TV 576.95 233.42B -42.28
13 Bharti Airtel BRTI Communications Services 309.1 1233.18B -41.52
14 Yes Bank YESB Regional Banks 182.3 424.05B -41.22
15 Bank of India BOI Regional Banks 100.9 171.04B -41.05
16 New India Assurance THEE Insurance (Miscellaneous) 183.9 306.93B -40.15
17 Steel Authority SAIL Iron & Steel 51.95 218.50B -39.2
18 Indian Bank INBA Regional Banks 238.4 115.26B -39.15
19 Emami EMAM Personal & Household Prods. 401.85 187.63B -38.67
20 Vedanta VDAN Metal Mining 196.4 745.40B -37.96

 

Interestingly, Vodafone Idea is the biggest loser in this list and has lost a market price of over 62% in this year. The stock was trading at a market price of Rs 104.60 at the start of the year, and currently, its share price is fluctuating at Rs 37.35.

Tata Motors is yet another beaten company on the street. Both fully paid ordinary shares and DVR are down by around 60% in this year. This stock is continuously declining for around two years, since it made its high of Rs 578.70 in September 2016. Currently, Tata motors ordinary shares are trading at a price of Rs 172.5.

A few of the other popular losing stocks in this list are NBCC, Motherson Sumi Systems, PNB, CBI, Bharat Electronics, Aditya Birla Capital, Mangalore Petronet, HPCL, Bharti Airtel and YES BANK.

Also read:

Closing Thoughts

Although it’s good to monitor the yearly returns of the companies, however, looking at the performance of stocks just for a year is not enough. It is the long-term returns of the stocks that matter the most for the wealth creation of shareholders.

Besides, a lot many big companies on the list are trading at a decent discount currently. Whether the losing companies mentioned above will continue to decline further or bounce back will depend on their future performances.

The share investors should consider these as opportunities to invest in amazing businesses at a fair value. Happy Investing.

Disclaimer: The stocks listed in this post should not be considered as recommendations. Please study the companies carefully or take the help of a financial advisor before investing.

goal based investing cover

The Real Truth About Goal-Based Investing!

Goal-based investing, also known as Target based investing or Goal-driven investing has been into a lot of buzzes lately. The name itself defines this investing strategy.

However, still many investors do not know what exactly is a goal-based investment and how to pursue it. In this post, I’ll try to answer the most frequently asked questions regarding goal-based investing. Here are the topics that we’ll discuss today:

  1. What is a goal-based investing?
  2. How is goal-based investing different from traditional investing?
  3. Why goal based investing is the key to long-term success?
  4. How to get started with goal-based investing?

This post may change the way you look towards investing. Therefore, make sure that you read this article till the end. Let’s get started.

1. What is a goal-based investing?

Although goal-based investing is not a new concept and many financial experts have been following this strategy over a long period, however, it started getting fame recently.

Goal-based investing is a new way of wealth management where the individuals focus on attaining specific objectives or life-goals through their investments. Here, before starting to invest, the individual tries to answer the question- “What exactly are you investing for?”.

The best part about the goal-based investing is that here the investors do not focus on getting the highest possible returns. But the aim of this investment is to reach the desired returns that meet their goals.

In a goal-based investment, the individuals periodically measure the progress on their returns against the specific goals. Instead of trying to outperform the market, they try to attain their goals within the desired time horizon.

Moreover, the goal can be person specific like planning for children education, retirement fund, buying a new house or even financial independence. A few factors included while planning goal-based investments are the aim of the person per age, risk tolerance, financial situation, and investment horizon.

2. How is goal-based investing different from traditional investing?

The main motive of traditional investing is to get higher returns and generally to beat the market.

Here, the individuals compare their returns with the index such as Sensex or nifty in order to find whether their personal investments are over or underperforming.

On the other hand, goal-based investing redefines the success based on the individual’s goals and needs, rather than whether they beat the market or not. This strategy tries to shift traditional investing to a personal financial goal approach and helps to invest based on needs and risk tolerance.

The problem with traditional investing is that they do not focus on the individual’s needs. In such a scenario, no matter, how good are the returns, if the individuals are not reaching your final goal, then the returns might not be good enough for the individuals. After all, investing is a long-term activity and NOT a phenomenon of beating the market for a year or two.

Goal-based investment allocates the funds depending on the individuals’ situation and aims. For example- if your goal is retirement, then you might choose a conservative strategy with a majority of investments in debt funds. On the other hand, if your goal is to build a corpus for your children’s marriage, you might choose an aggressive strategy with 50% investment is equity and rest 50% in debt.

goal based investing trade brains

3. Why goal based investing is the key to long-term success?

The biggest advantage of goal-based investing is that it increases the individual’s commitment to invest consistently in order to reach their life goals. Unlike traditional investing, here the individuals participate actively and observe the progress towards their goals.

Moreover, having a long-term strategy helps the individuals to avoid making impulsive decisions based on market fluctuations. As the individuals are more focused to achieve their goals, they are less inclined to make spontaneous decisions just with an expectation to get a little higher return. Goal-based investing prevents rash investment decisions by providing a clear process of identifying goals and choosing strategies to achieve them.

Lastly, it also avoids the situation of under-saving (and under-investing). As goal-based investing continuously monitors the progress of individuals towards their goal, and hence they remain updated on how far they are from their goals. In a case where they are under-investing, they can re-improvise their strategy so that they can reach their goal in time.

Also read:

4. How to get started with goal-based investing?

Although planning a goal-based investing requires a detailed study of the individual’s goals, financial situation, time-horizon, and risk tolerance. However, here are a few simple steps that can give you a rough idea of how to get started.

The first step is to clearly define your goals and the time horizon to attain them. The goal can be building a corpus for buying a new house, savings for children education/marriage, retirement etc. You can even have multiple goals and differentiate them as short-term, mid-term and long-term.

The next strategy is defining your strategy of where you’ll invest and how. Depending on the risk-tolerance, required rate of return and time horizon, you can choose different funds like equity, debt or a combination of both. Further, you also need to decide your monthly, quarterly or yearly contribution to all these funds.

The next step is to be disciplined in following your strategy. To attain your goals, you need to make consistent investments.

Finally, periodically monitor and review your progress towards your goal. If your progress is not in line with your purposes, you might need to revise your strategy and re-allocate your funds so that you can reach your goal in time.

Closing Thoughts

Goal-based investing is a relatively new way to achieve personal needs by investing in a definite strategy. It’s a good alternative over traditional investing which does not focus on the individual’s goals and financial situation.

Most individuals start investing in the market without any goal. There are even a few who invest in the market just for fun and to make a few extra bucks alongside their primary income source.  And it’s perfectly okay to start like that. However, with time you need to eventually decide a goal for your investments. It will help you reach them in time and to avoid situations of taking unnecessary risks just in order to get some extra returns.

Besides, another benefit of goal-based investing is that it helps in ‘Guilt-free spending’. Here, as you already know that all your goals have been taken care of, you can spend the additional income on something that you love without any guilt.

Final thoughts, “Investing is good. But it is even better when attached to a goal.”

Financials Signals That A Company May Be Declining cover

3 Financial Signals That A Company May Be Declining.

Do you know that out of the 30 companies in the constituents of Sensex in 1992, only seven are still the part of it?

Yes, that’s true. The remaining companies couldn’t maintain their growth & value and hence were thrown out of the list of the biggest thirty companies in India with time. (Read more here: The Sensex story in the 25-year reform period —The Hindu Business Line) .

Although becoming a large-cap company is a dream of most of the businesses, however, after becoming a mature company, many companies find it a little challenging to maintain their growth.

Moreover, the problem arises when they are not able to sustain their profitability and starts declining. There are a number of examples of companies which were once a market leader, however, couldn’t keep a sustainable profit margin and later either shut down or went bankrupt. The most common example is Kingfisher. 

Declining companies do not have much growth potential left and even the returns (and value) of their existing assets keep on sinking.

Therefore, as investors, it’s really important for us to continuously monitor the growth of our invested company. And if we are able to find some signals that the company is declining, it might be the time for exit from them.

After all, no matter how much we love our invested company, the main goal of our investments is to make money and if the company is continuously declining, there’s no point remaining invested. It’s really difficult for the declining companies to reward their shareholders. Further, we as investors have thousands of other options available to invest in the market. Then, why to stick with the declining companies?

In this post, we are going to discuss three clear signals that you can study from the financial statements which show that a company may be declining.

Besides, these financial signals are very simple to identify (even for the beginners). Therefore, make sure that you read this post till the very end. Let’s get started.

3 Financial Signals that a company may be Declining.

Although evaluating the exact financial health of a company requires a serious study of the statements of profit & loss, balance sheet and cash flow statement of the company. However, there are a few financial tools which send an easy signal for the investors to identify the declining companies. If all these three financial signals are negative for a company, then the company might be in a little trouble.

Here are the three simple financial signals that you can study to evaluate if a company is declining:

1. Declining Revenue:

If a company’s revenue is continuously declining for the past multiple years, it may be a warning sign for the investors.

The revenue of a company is the TOP LINE of the income statement. And if the TOP LINE is declining, in general, all the lower levels will follow the same trend.

Even a stagnant (flat) revenue for a continued longer period of time is a sign of caution for the investor. After all, there’s a fixed extent up to which a company can control its expense. And if the company want to increase its profit, then it has to increase its revenue eventually.

A flat or declining revenues for past multiple years is an indicator of operating weakness. Moreover, if you can find that the revenue of the competitors (and the industry) is growing over the same perio, then it sends even a stronger signal of a weak management and poor health of the company.

For example- here is the income statement of Reliance communication for the last five years. Here, you can easily notice the declining net sales (and total revenue) for the past multiple years.

Reliance communication income statement
Source: Equity Master

And this decline is in line with the stock return of this company. In the last five years, Reliance communication’s share price has shrunk by over 88%.

2. Negative Profit margin:

Profit margin is calculated by dividing the net profits by net sales realized over a given time period. It represents how much percentage of sales has turned into profits. In other words, the percentage figure indicates how many cents of profit the business has generated for each rupee of sale.

If the profit margin of a company is negative, it shows that the company is not able to generate profit from its regular business. A negative or declining profit margin of the company for a continued longer period of time can be taken as a warning sign for the investors.

Declining companies generally lose their market share to their competitors. And in order to keep up their sales, they often have to either give bigger discounts or to cut their profits. Moreover, they also lose the pricing power which further leads to a fall in the margin.

While evaluating companies, you can look into the three levels of the profit margins- Gross profit margin (GPM), Operating profit margin (OPM) and Net profit margin (NPM), each being a more refined level of profitability. As a rule of thumb, avoid investing in companies with a negative profit margin.

Anyways, if you’ve already invested and now find that the profit margin of the company is continuously declining for the past multiple years, then it might be a signal that this company is declining.

3. Big dividend payouts:

Dividend payout is the ratio of the total amount of dividends paid out to shareholders relative to the net income of the company.

It can be calculated by dividing the dividend per share (DPS) by earnings per share (EPS) of a company in a year. For example, if the DPS of a company for the current year is Rs 2 and its EPS is Rs 10, then the payout ratio is equal to 2/10 i.e. 20%.

If a company gives a consistent dividend to its shareholder, it is a healthy sign.

However, the problem arises when the company starts paying a major portion of its net income as dividends. In such a scenario, the company is not retaining enough income for investment in its growth or future plans.

There should be a balance between rewarding shareholders and the retaining income for its own growth. After all, if the company is not investing enough in itself, it will eventually become difficult for them to increase (or to maintain) their profitability in the future.

Declining companies generally pay out large dividends to their shareholders as they have a very little need (or scope) of reinvestment. As a rule of thumb, payout ratio greater than 70% for a company can be a warning sign for the investors.

Other financial signals:

Another financial tool that can give you a better picture of the financial situation of a company along with the above three financial indicators is the company’s debt level.

If the debt level of a mature company is continuously increasing at a high pace, it is a sign that the company has been aggressively financing its growth with debt. You can use debt to equity ratio to evaluate the debt level of a company. A high debt to equity ratio (greater than one) can be considered a high risk for the company.

Apart, there are also a few handfuls of financial ratios like Return on assets (ROA), Return on equity (ROE), interest coverage ratio etc that you can also study to check if your company is declining. A continuously declining ROA, ROE and interest coverage ratio can be a warning sign.

Also read:

Closing thoughts:

Even big mature companies are capable of declining over time and losing their value. And that’s why it is important for the investors to continuously monitor the growth of their invested company.

In general, a flat or declining revenue, negative profit margin and huge dividend payout can be considered signs of a declining company.

Anyhow, if the company takes necessary steps, it may recover back on track or even become a turn-around. However, if the management doesn’t take the significant steps in time, the company may decline further destroying the shareholder’s investment. 

what are intangible assets

What You Need To Know About Intangible Assets!

Evaluating the intangible assets of a company is a crucial part of the fundamental analysis, especially in a generation with a lot of leading companies in the technology and service-based industries.

However, most investors ignore this part and focus more the physical assets like land, building, equipment etc. One of the major reasons why people skip the part of studying intangible assets is because these assets are a little difficult to evaluate. After all, how would you correctly measure the value of a brand or non-physical assets of a company?

In this post, I’ll try to demystify intangible assets in simple words so that you can understand what exactly are intangible assets, why are they valuable for a company and how can you evaluate the intangible assets of a company.

Overall, it’s going to be an exciting post. Therefore, please read it till the end because I’m sure it will be helpful to you in assessing companies better.

What are intangible assets?

Intangible assets are those assets that are not physical in nature, yet are valuable because they contribute to the potential revenue of the company.

A few of the common examples of intangible assets are brand recogintion, licenses, customer lists, and intellectual property, such as patents, franchises, trademarks, copyrights etc.

Quick Note: Contrary to these, TANGIBLE Assets are those assets that have a physical form. For example- land, buildings, machinery, equipment, inventory etc. Further, financial assets such as stocks, bonds etc. are also considered tangible assets.

Although intangible assets do not have an obvious physical value such as land or equipment, however, they can be equally valuable for a company for its long-term success or failure. 

For example, companies like Apple or Coca-Cola are highly successful because of the significant brand equity. Since it is not a physical asset and tricky to calculate the exact value, still brand equity is one of the primary reasons for the high sales of these companies. In India, companies like Hindustan Unilever, Colgate, Patanjali, etc also enjoy benefits of enormous brand value.

Further, a few more examples of intangible assets can be marketing-based (ex- Internet domain names, non-competition agreements etc), artistic-based (ex- literary works, musical works, pictures etc), Contract-based (ex- franchise agreements, broadcast rights, use rights etc) and technology-based (example- computer software, trade secrets like secret formulas and recipes etc). [Credits: Examples of intangile assets- Accounting tools]

what you need to know about intangible assets cover

Moreover, in a few industries, intangible assets are more valuable.

Unlike manufacturing companies where inventories and fixed assets contribute to the majority of their total assets, in a few industries the intangible assets are more valuable:

  • Consumer product companies depend on the brand name. For example- Hindustan Unilever, Godrej, Colgate, etc. The bigger the brand name, the easier are the sales. 
  • Technology companies get the most success by their technical know-how and skilled human resource. Ex- Infosys, TCS, etc.
  • Banking companies have their computer software license, stock exchange cards and electronic trading platform (websites). Ex- HDFC bank.
  • Telecom industries use their bandwidth licenses (including spectrum) to enjoy benefits. Example- Bharti Airtel
  • Drugs and pharmacy companies protect their sales through patents, which means that they can sell unlimited medicines of patented drug and their competitors can’t enter or replicate the same. Ex- Dr. Reddy’s Laboratory, Glenmark Pharma etc.

And that’s why, the leading companies in these industries spend a lot of money in building these intangible assets. 

For example, in the IT industry, training and recruiting are more prominent than investing in physical assets like buildings.

Similarly, the pharmaceutical companies spend a lot of capital in the Research and development (R&D) which may help them get a patent on a revolutionary drug. And that’s why, while evaluating companies in this industry, the capital expenditure of the different companies/competitors in their R&D work should be carefully evaluated. 

If you look into the consumer product companies, they spend a lot of money in advertisement just for brand awareness. Although, this may not lead to instant sales and may add overhead expenses, However, over the long term. branding help these companies to generate more profit. 

Valuing Intangible Assets:

Intangible assets of a company can be found on the asset side of the balance sheet of a company. For example- here is the intangible assets for Hindustan Unilever (HUL)

hul balance sheet

Source: Yahoo Finance

You can use the intangible to total asset ratio to evaluate the worth of intangible assets in a company. For example- in the case of Hindustan Unilever, its intangible assets make around 2.05% percent of its total asset.

However, valuing intangible assets are easier said than done. One of the biggest reasons equipment high sales of HUL in India is its prominent brand recognition. A few of the popular brands of HUL are Lux, Lifebuoy, Surf Excel, Rin, Wheel, Fair & Lovely, Pond’s, Vaseline, Lakmé, Dove, Clinic Plus, Sunsilk, Pepsodent, Closeup, Axe, Brooke Bond, Bru, Knorr, Kissan, Kwality the and Pureit

Here, do you really think that the brand value of HUL contributes only around 2% of its net assets? I don’t think so. It must be worth more. However, there’s no easy way to correctly evaluate the worth of the brand recognition and other non-physical assets. 

Quick fact: According to Forbes, COCA COLA’s brand value amounted to 57.3 billion U.S. dollars. It is the only company in the top seven list that sells carbonated sugar water beverages. Rest all are technology companies with Apple and Google as leaders. This is the power of branding. Read more here: The world’s most valuable brands. 

Also read:

Bottom Line:

Although intangible assets do not have a physical presence, they add a huge value to the company. There may be even cases where the intangible assets are of far greater value than the market value of the company’s tangible assets. 

However, while valuing such companies, you may have to put some efforts to study these assets as the accounting conventions do not always value the exact worth of a few intangible assets and they may be reported below their true value in the balance sheet.

Any how, look for the intangible assets that are definite (i.e. stays with the company for as long as it continues operations) and difficult to replicate.

top down and bottom up investing approaches

What is Top Down and Bottom Up approach in stock investing?

While performing the fundamental analysis of companies, two of the most common strategies to research stocks that are used by investors are top down and bottom up approach.

In this post, you’ll learn what exactly is top down and bottom up approach, how they work and which one may be more suitable to you.

Top down approach

Have you ever heard any investor/analyst saying something like- “The electric vehicle industry looks particularly promising now. The industry is growing at a fast pace and I should invest in this industry”.

Well, here the investor is following the top down approach to find stocks.

In the top down approach, the investors first look into the macro picture of the economy and later work down to research the individual stocks.

The overall steps involved in top down approach is to first look at the big picture of the world i.e. which economy is doing great, then look at the general market in that economy, next find the particular sector that may outperform and finally research the best stock opportunity to invest within that sector.

For example, let’s say you studied that the European economy is growing at a very fast rate. Next, when you looked further into the European market, you found that especially the biotechnology industry in outperforming. And finally, you researched some appealing stocks in that industry to invest. This is the top down approach for stock investing.

Here, you start with the big picture and ultimately move down to find the suitable investing opportunity. Top down approach looks at the performance of the economy & sector and believes that if the industry is doing good– the chances are that the stocks in that industry will perform too.

A few of the major areas where the top down analysts pay attention are economic growth, GDP, monetary policy, inflation, prices of commodities, bond yields etc before moving into the specific industry study.

top down approach investing

The biggest advantage of top down approach is that there’s no pre-conceived notion about what may work and the selection of economy, industry & stocks are based on the real-time studies. Further, as they focuses on the strong sectors, the chances of underlying companies performing well are favorable.

However, one of the major flaw of top down approach is that here you may miss out a few good bargain stocks in the eliminated industries.

Also read:

Bottom up approach

This approach is exact opposite of the top down approach. Here, you first start with company research and later move up to find the other details.

Bottom up approach tries to study the fundamental of the company regardless the market conditions, industry or the macroeconomic factors. While performing the bottom up approach, the investors studies how fundamentally strong the company is by focusing on its revenues, earnings, financial ratios, products/services, sales growth, management etc.

The key here is to find the potentially strong company which may outperform the industry and market in future. If the fundamental factors are good, then regardless of what the industry is doing, the bottom up investors will pick such companies to invest.

The biggest advantage of the bottom up approach is that the investors may find the best potentially strong company which can outperform even if the economy or industry as a whole declines. Bottom up approach helps in picking quality stocks.

On the other hand, one of the cons of bottom up approach is that the investor may have some pre-conceived notion of the company and in such condition, their investment decisions may be a little biased. Further, as these investors ignore the longer economic influence and market conditions, some investment returns may be adversely affected because of these factors.

Closing Thoughts

Top down and bottom up are entirely different approaches to analyze and invest in stocks. However, both have their own advantages and disadvantages.

The top down approach first looks at the broader economy and macroeconomic factors, and then move to the specific industry and the company within. On the other hand, bottom up approach starts at the company level and later moves up for the other important details.

In general, top down approach can be little easier for the less experienced investors as they do not have to perform the intense stock research and analysis. They can start studying the most appealing industry and find the companies within to invest.

Anyways, both approaches have their own effectiveness and hence, difficult to say which one is better. Moreover, it also depends on the knowledge and preference of the investor. My final advice would be to better try out both the approaches and find out which one suits you the best for your investment strategy.

swot analysis for stocks cover

SWOT Analysis for Stocks: A Simple Yet Effective Study Tool.

SWOT Analysis for stocks is one of the most widely used tools for performing the ‘qualitative’ study of the company. It helps to understand the company’s market position and competitive advantages.

In this post, we are going to discuss what is SWOT analysis and how to use this tool for qualitative analysis of a stock.

What is SWOT Analysis?

SWOT Analysis focuses on four important factor while evaluating the quality of a company. Here’s what SWOT Analysis for stocks looks at:

  • S—> Strength
  • W—> Weakness
  • O—> Opportunity
  • T—> Threat

swot analysis for stocks

Our of the four factors of SWOT analysis, ‘strength’ and ‘weakness’ are the internal factors of a company and hence are controllable.

On the other hand, ‘opportunities’ and ‘threats’ are external factors and it’s little difficult for a company to control these factors. However, using the SWOT analysis of stocks, the management can identify the threat and opportunities and hence can take proper actions within time.

For example, Bharat Stage (BS)- IV fuel was launched in India in April’2017. This means the ban on the sale of all the BS-III compliant vehicles across the country after the launch date.

Those automobile companies who have already realized this big opportunity might have started working on the BS-IV vehicles months before the expected launch date. On the other hand, companies who haven’t done the opportunity/threat analysis properly would have faced a lot of troubles. They cannot sale the old BS-III model vehicles. Hence, a big loss of the finished products and the inventories.

Also read: BS-III vehicles: Auto-industry to absorb losses over Rs 12,000 crore.

Why use SWOT Analysis for stocks?

Here are few reasons why SWOT analysis for stocks is beneficial:

  • SWOT analysis is one of the simplest yet effective approaches for the qualitative study of a stock.
  • It helps in identifying weak points of a company that may become an issue in future.
  • It helps in finding the durable competitive advantage i.e. moat that will help to protect your investment in future.

Quick Note: During swot analysis for stocks, only include valid/verifiable statements. Do not add rumor/misleading pieces of information in the study.

Components of SWOT Analysis for stocks:

1. Strength

The strength of a company varies industry-to-industry. For example, a low non-performing asset (NPA) can be the strength of a banking sector company. On the other hand, cheap supplier or cost advantages can a big strength for an automobile company.

Here are few other strengths of a company that you should take notice while performing SWOT analysis of stocks:

  • Strong financials
  • Efficient Management (People, employees etc)
  • Big Brand recognition
  • Skilled workforce
  • Repeat clients
  • Cost advantages
  • Scalable business model
  • Customer loyalty

Also read: Why You Need to Learn- Porter’s Five Forces of Competitive Analysis?

2. Weakness:

The ‘reverse’ of everything discussed in the ‘Strengths’ can be the weakness of a company. For example- Weak financials, in-efficient management, poor brand recognition, unskilled workforce, non-repetitive clients, un-scalable business and disloyal customers.

Besides, there are few other weaknesses that may affect the company:

  • Outdated technology.
  • Lack of capital
  • High Debt

For example- many companies in telecommunication industry ran out of business as they were using outdated 2G/3G technology. Similarly, in the energy sector, renewable power generation is the future technology and those companies who are ‘not’ working on the new technology might get outdated soon. In short, outdated technology adversely affects most of the industry.

3. Opportunity:

A company with a lot of opportunities has a lot of scopes to succeed and make profits in future. Here are few points that you need to consider while evaluating opportunities for a company:

  • Internal growth opportunity- (New product, new market etc)
  • External growth opportunity (Mergers & Acquisitions)
  • Expansion (Vertical or horizontal)
  • Relaxing government regulations
  • New technology (Research & Development)

4. Threats:

In order to survive (and moreover to remain profitable), it’s really important for a company to analyze its threats. Here are few of the biggest threats to a company:

  • Competition
  • Changing consumer preferences/ new trends
  • Unfavorable Government regulations

The changing consumer preferences are one of the repetitive threats that many industries face. Here, if no proper action is taken to retain the customer, then it might unfavorably affect the profitability of the company.

For example-  The new trend of ‘health awareness’ among the people may result in a decline in the sales of beverages/Soft drink companies. (These companies are fighting back this threat by introducing ‘DIET-COKE’).

Similarly, a preference towards ayurvedic products in India has already reduced the sales of non-ayurvedic FMCG companies (and a rise of PATANJALI).

Also read: How to Invest Your First Rs 1,000 in The Stock Market?

How to use SWOT ANALYSIS of stocks to study companies?

Swot analysis of stocks is quite useful while performing the comparative study of companies. Using these analyses, you can study the comparative strengths and weaknesses of different companies.

Let’s say there are two companies- Company A & Company B.

‘Strength’ of COMPANY A can be the ‘Weakness’ of COMPANY B. Similarly, ‘Opportunity’ for COMPANY A can be a ‘Threat’ to COMPANY ‘B’. For example-

  1. The loyal customers can be the ‘strength’ of company A. Whereas, disloyal customers can be a ‘weakness’ for company B.
  2. A new Merger & Acquisition (M&A) is an opportunity for company A. However, it is a threat to company B.

Also read: SWOT Analysis of FORD Motors.

CONCLUSION:

SWOT Analysis of stocks is a useful tool to analyze stocks based on their strengths, weakness, opportunities, and threats. If done properly before investment, SWOT Analysis can help an investor to understand the competitive advantages/disadvantages in order to make a reasoned decision.

New to stocks? Want to learn how to invest in Indian stock market from scratch? Then, here is an amazing online course: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your share market journey today.