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Finance & Stock Groups Forum Index » Mutual Funds » Investor Education
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| subbu |
 Posted: Thu Oct 02, 2008 2:51 am |
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Importance of Stop Loss
Sensex at 18 months low and global markets feeling the heat of us
economic failure, and most of us have accumulated loss in our
portfolio.We need to sit and analyse if we can digest the current loss
and if we can digest more loss or should i cut back loss and move to
fixed return investments.
This is required because each one of us have a certain level of risk
appetite and we should ensure that our investments are bearing a risk
which is affordable by us. All of us invest our hard earned income and
hence we should have a comfort level with your investments.
Any investment made should have the following attributes associated
with it.
1. Time period of investment.
2. Stop Loss.
3. Target Amount.
Lets take a usecase and analyse it. Ram makes an investment of 2 lacs
in sensex(sensex taken for easy reference) on Oct 1st 2007.
Time period of investment = 3 years
Stop Loss = 10%
Target Amount = 3 lacs
Current Value of investment = 1.5 lacs
What is stop loss?
Stop loss is usually expressed as a %age of total investment. In this
case it is 15%. So when your market value of investment reaches
90%(100-10) of your initial investment, you should book your losses
and exit from that investment.In this example, Ram should have booked
loss when it was 1.8 lacs (10% 2 lacs = 20,000) and exited his
investment.
However he continues to hold his investment and his loss has increased
from 20,000 to 50,000 now. There are so many Rams out there in the
market who does not have a well defined stop loss planned for their
investment and hence accumulate their losses.
How stop loss is useful?
Emotions should never play a part in one's investments. When you
invest a certain amount and have your target set, you should exit when
your target is achieved. In the same case, you should exit when your
stop loss condition is also met.
Stock market is all about emotions but an intelligent investor should
never get into that trap.
What is the common mistake committed?
Most of the investors, when experience a loss in their portfolio and
if that loss is more than a specified stop loss, expect the market to
recover and expect their investments to come back to profit at some
point of time. But they never know "when will their investments be
back in profit again". They live on hope of recovery.
Instead of living on hope of recovery, an investor should cut his
losses and analyse the investment he had made and what are the areas
that he can improve upon so that his upcoming investments are made
properly.
Capital Protection Vs Hope of Profit
When an investor is in loss, he is expecting the market to recover and
go back to highs but at the same time he has already lost his capital
and he is bearing the risk of losing more of his capital. Capital
protection should be given highest priority over expectation of
recovery when an investor is experiencing a loss.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Fri Oct 03, 2008 3:35 am |
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Guest
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What is Arbitrage Fund?
Arbitrage Funds are referred as equity-and-derivative funds. The
objective of an arbitrage fund is to capitalise on a stock's price
difference between the spot market (cash segment) and the derivatives
market (futures & options segment). These funds basically generate
income by taking advantage of the arbitrage opportunities arising out
of the mis-pricing between the two markets (spot and derivative).
If a stock A has a spot price of 100 and future price of 110, then an
arbitrage fund manager sells the stock futures at 110 and buys the
stock in spot market for Rs 100 and earns Rs 10 for the stock.
Furthermore, on the settlement day of the derivatives segment, the
stock prices in both the markets tend to coincide. So, the fund
manager will reverse his transaction - buy a contract in the futures
market and sell off his equity holdings in the spot markets - and earn
more profits.
Arbitrage funds offer better returns than debt or income funds and
their earnings become tax-free after a year. However the concern is if
the size of the fund is very large, most of the money would be parked
in money market instruments.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Sat Oct 04, 2008 4:21 am |
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Guest
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What is Capital Gains Tax?
Tax is one area where most of us have always loads n loads of
questions. One major tax that is associated with any individual who
owns an asset is Capital gains tax.
What is Capital Gains?
When a person sells an asset and makes profit out of it, the profit is
called Capital Gains. The tax paid on profit of these asset sale is
Capital Gains Tax. The asset may include mutual funds, stocks, house,
land,gold and few other. When a person makes a loss out of his asset
sale, it is called Capital Loss.
What are 2 types of Capital Gains?
Depending on how long you hold on to your asset before selling, there
are two types of capital gains.
Short Term Capital Gains
If a person sells an asset before 3 years from its purchase and if he
makes a profit , it is called short term capital gains tax. For mutual
funds and equities, it is 1 year.
Long Term Capital Gains
If a person sells an asset after 3 years from its purchase and makes a
profit, it is called as a long term capital gains tax. For mutual
funds and shares, it is 1 year.
Short Term Capital Gains Tax:
The short term capital gains is added to your taxable income for the
financial year and taxed at your income tax slab rate.
Long Term Capital Gains Tax:
There are two ways for taxing long term gains.
1. 10% of your gains without indexation.
2. 20% of your gains with indexation.
Lets take an example for case 2 (with indexation)
Let's say Mr Ram purchased a house of Rs 2,50,000 (Rs 250,000) on June
20, 1996. He sells it on January 20, 2005, for Rs 4,50,000 (Rs
450,000). Since the house was sold over 36 months after being bought,
the capital gain will be long term.
First, you calculate the Cost Inflation Index. These indices are fixed
and declared by the Central Government every year (see table below).
This is called indexation.
Cost inflation index:
Index of the year it was sold / index of the year it was bought
2004-05 index / 1996-97 index
480/305 = 1.57377
Indexed cost of acquisition
= Buying cost x CII
= 250000 x 1.57377
= 3,93,443
Long term capital gain
= Selling price – Indexed cost
= 4,50,000 – 3,93,443
= Rs 56,547
Tax payable will be 20% of Rs 56,547 ie Rs 11,310. (Plus surcharge of
10% if applicable)
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Mon Oct 06, 2008 3:42 am |
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Guest
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Importance Of Fixed Income
In the period of falling markets, many are now concerned about capital
protection and not about sky rocketing returns which was the story an
year back.
Fixed income investment instruments provide capital safety and also
assurance in returns unlike stock markets.
Scenarios when fixed income investment is needed
1. Need for constant monthly income which is the case for most senior
citizens. This can be achieved by post office senior citizen deposit
scheme.
2. To meet short to medium term goals(3-5 years). In order to meet a
financial commitment 3 years down the line,you need the capital to be
safe and also have an assured return over time.In this world of
volatile markets, equity investments should be chosen only for periods
greater than 5 years.
3.To Rebalance your portfolio. Based on financial needs and risk
tolerance, a good balance between equity and debt needs to be
maintained.
Thumb Rule : Debt %( One's age) : Equity % (100 - one's age)
Eg : for 25 years old , debt:equity ratio is 25:75
The portfolio rebalancing should be done in a regular basis to meet
your risk tolerance.
Fixed Income Instruments
1. Bank Fixed Deposits.
2. Post Office Deposits.
3. FMP mutual funds.
So start reviewing the fixed income component in your portfolio.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Tue Oct 07, 2008 3:48 am |
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Guest
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How to read a company's balance sheet?
As a continuation of Fundamental Analysis Series, let us learn about
balance sheets of a company and how to interpret it and how to utilize
a balance sheet of a company.
What is Balance Sheet?
Balance sheet of a company indicates how healthy is a company with
respect to financial factors. It lists the assets and liabilities of a
company and you should remember that assets and liabilities are not
same as revenue and earnings. Broadly balance sheet has the following
components
1. Assets
2. Liabilities
3. Equity
Asset:
There are two types of assets
Current Assets:
It includes assets that be converted into cash in a financial year.It
includes ready cash,inventories and receivables. A company with high
cash holding in its balance sheet is a good bet compared to a company
with debt or less cash. Inventories are nothing but goods which are
yet to be sold to consumers and receivables are bills which are
pending payment to the company.
Non Current Assets:
These are assets which are not very liquid and can not be converted to
cash quickly. These include Land,machinery etc.
Liabilities:
These are again classified into two types.
Current Liabilities:
These are debt which needs to be repaid within the current financial
year.
Non-current Liabilities:
These are long term debt in the form of bank debt or bonds borrowed.
Equity or Shareholder's equity:
Shareholder's equity is nothing but
Equity = Total Assets - Total Liabilities
Paid Capital:
Amount of money the company collected during its IPO(Initial Public
Offer).
Retained Earnings:
It is the amount of earnings that the company has reinvested in the
business rather than paying it back as dividend to the share holders.
So these are the important components of a balance sheet though there
may be few other. So as an investor one can derive very useful insight
about the company financial health from its balance sheet and make a
good decision on his investment.
Subbu
http://investorskool.blogspot.com/ |
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| subbu |
| Posted: Wed Oct 15, 2008 10:21 am |
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Guest
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Cash is King
When you take a look at the newspapers in the morning, you see more
news on "DECLINE" in almost all asset classes and if not declining ,
they are volatile otherwise. So where can we put your money (if at all
you are left with some money after being battered with losses in
markets)
In these troubled times, "Cash is King" the best way to survive this
downfall is just to keep accumulating your savings bank account with
loads and loads of cash as and when you get them.
Reasons for being in Cash
1. The first and foremost reason to be in cash is that you have
control over your money. In current scenario markets are driven by all
kinds of external dependencies and is more sensitive to global
economic condition.
2.Capital Protection is a must in these troubled times and one should
minimize the risk of losing his/her money.
Where to park my cash
1. The best and most safe instrument is fixed deposit. Most banks
offer 10+% interest on 1 year deposit. This is the safe heaven.
2.Investors with more risk appetite can go for liquid funds,FMP and
other short term debt mutual funds.
Reiterating once more, "Cash is King" is the film Name and You are the
real hero if you have cash right now.
Subbu
http://investorskool.blogspot.com/ |
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