10 trading secrets every investor should know
Rahul began trading in the stock market at the age of 16 after he learned about his father earning a huge profit in one of his investments. He had a personal savings of Rs.10,000 and invested it in an IPO with his father through his demat account. The 10,000 he invested became Rs.20,000 in just six months, and he opened his own demat account at the age of 18 after he had accumulated Rs.40,000 worth of savings to invest.
Without having a good knowledge about the market and no real experience, he incurred huge losses and eventually lost a major part of his 40,000 capital. When he took a step back to analyze what went wrong, he came up with ten trading secrets which helped him invest in the right places and eventually increased the value of his portfolio from almost zero to a whopping 65 lakhs.
Passive indexing is the way to go
Most beginner investors are of the view that they have to make a quick and huge profit through the money invested as soon as possible. So did I when I first started investing. But the best way you can build wealth is through periodically investing your money in an index fund. An aggressive approach towards investing will always lead to a loss. As the great Warren Buffet said, ‘It is not necessary to do extraordinary things to get extraordinary results. By periodically investing in an index fund, the know-nothing investor can outperform most investment professionals.’
Your emotions are your worst enemy
There are actual books written just to make you understand that your sentiments can prove to be your worst enemy during the investment process. People tend to attach themselves with stocks that were given to them by their relatives or if they are of personal significance to a person. What Rahul did wrong was that he purchased the stocks of the same company in which his father invested just because of his emotions, and thus incurred a huge loss as a result. Always go with the actual analysis of the investment and keep your emotions far away from your investments.
You need a stockbroker
“I know everything about the stock market; I don’t need a stockbroker” Is one of the main reasons for a beginner investor to incur massive losses. You have to understand that the market is not as easy as you think and requires a basic understanding of the different factors that influence the price of the shares. You will need a stockbroker to guide you through the investment process and help you understand the basics of the market; then only you can earn profits on your investments.
Taxes and trading costs can eat into your profits
Even if you manage to make a profit on your investment, you will be shocked to see the reduction in this amount due to taxes and the commission of your stockbroker. These costs of investment must be primarily considered by an investor before he/she starts trading and reasonable efforts should be made to lower these costs. One of the best things you can do is to hire a broker who charges a flat brokerage fee rather than a commission. You can always consult your broker for other taxes lowering methods to increase your profits in the share market.
All it takes is just one bad decision
It doesn’t matter how experienced you are or how many good decisions you have taken in your investment career. All it will take to destroy your whole portfolio is one wrong decision regarding an investment. You must always thoroughly check the investment and the background of the company. Analyze its balance sheet, income statement, cash flow statement, etc. to get an idea about the company. If you think the company is profitable enough, then only you should decide to invest.
Taking advice from people is not a good idea
At times, it can be tough to pass on an investment after hearing numerous praises from someone about the investment being the “best.” Advertisements on social media or in magazines about an investment that can earn you interest over 11% are nothing but fake. If they know about investments providing returns of 11%, why aren't they billionaires themselves? You must yourself figure out what is right for you and should distance yourself from people providing you with unnecessary advice.
Don’t underestimate the power of compounding
Let's assume that you invested Rs.10,00,000 in the stocks of a company for ten years with the interest rate being 10%. You will get a return of Rs.25,93,742 after ten years, and if you retain the stocks for 20 years, this amount will become Rs.67,27,500. This is the power of compounding. The longer you invest, the more money you get in the end. Compounding makes a big difference when you think long term as you can build your wealth over time by doing nothing.
Always put a stop loss
When you put a stop loss at a certain price level of your investment, your broker automatically sells the investment when the price falls below the stop loss level. Every investor must put a stop loss on every investment to avoid losses which the investor cant afford. A stop loss will allow you to cut your losses by a specific amount and you will not lose all of your money in the market.
Never try to play the market
The market is so volatile that it can prove the predictions of even the professional investors wrong. When you think that the market is down and it has not risen from months, maybe you should consider selling your investments even if it means you have to incur a loss. The motive behind this is to cut your losses further if the market goes down even more. You should never try to play the market as it is a fair possibility that it can prove your predictions wrong.
The lifestyle of a ‘pro’ trader is nothing but a lie
A pro trader advertising himself on yachts or by claiming to buy a sports car worth crores is nothing but false advertising. They claim to provide crash courses about the share market that will help you to become a millionaire in months. There is nothing like a crash course in the share market. If you want to be successful in investing, read investment books or financial articles regularly and avoid these type of fraud advertisements.
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What are your top 5 Investment Lessons in 2017?
In 2016, the total wealth in India stood at $5.2 trillion. According to market research group New World Wealth, this means we are the 7th richest country in the world!
People are often under the impression that they have to be an economist or have a strong understanding of investments to know how money works. But that’s not true. All we have to do is look at everything that happens around us; the constructions of residences and malls, people vacationing, jobs created by new companies, money earned and spent, etc.
Some look at investing as a science, some look it as an art, and others look at it as a craft. But we can improve our understanding of investments and other related decisions only with practice. There is much to learn from the perceptive insights and thinking. Here are just a few things that we learnt this year.
It’s essential to invest in the stock market for a long-term. The right time to invest in stocks is when they are available cheap, i.e. the bear phase. Purchasing opportunities in the downturn can help your stocks multiply and become wealthy, over a period of time. One should wait till their stock appreciates a good percentage.
Before buying a stock, it’s important to study closely all aspects of the company. Value oriented companies tend to offer higher value for the long term. If there are two products similar nature, go for the one that is less expensive.
For instance, direct plans of mutual funds are priced lower than regular plans. A lower expense ratio directly translates into higher returns for the investor.
Consistent investment in the stock market will reap a lot of benefits. If done right, the stock market will always deliver, though the quantum or strategy of investments can differ.
For instance, the banking and financial sector was benefitted with people forced to deposit cash into their bank accounts during demonetization. Any investor who could have thought about this strategically would have made a windfall from his investments by now.
You can’t make wealth the same way someone else did. You need to do your own research before making any investment. You can take advice and help from someone but it’s important to make your own decisions as per your requirements. One should invest only in businesses that they understand.
Tangible and intangible assets are also considered while valuing a company. Investors must be wary of the intangible assets, i.e. goodwill, involved. Sometimes due to goodwill, companies with good brands usually trade at higher multiples. Paying too much, even for a great branded company, might not be a good investment then.
To sum it up
Here is a quick recap of the important investment lessons:
Time: Buy when stocks are cheap, sell when they are high.
Value: Value-oriented companies offer higher stock value for a longer term
Stability: Consistent, and not sporadic, investment for greater benefits.
Inspection: Advice from experts is necessary as scenario changes for every person.
Evaluation: Tangible and intangible assets (such as goodwill) to be assessed while evaluating company’s stocks.
The coming year could play a crucial role in achieving India’s long-term potential of sustainable economic growth. Investors such as us can participate in this growth story through the equity route.
When should you invest in Fixed Maturity Plans?
Fixed Maturity Plans (FMPs) continue to garner a lot of attention among investors in the past few years due to ease of investing, tax benefits and good returns.
Fixed Maturity Plans are close ended debt schemes with a fixed maturity horizon, meaning they are open for investments for a few days and closed until maturity. This time range could be as short as 1 month to as long as 5 years. FMPs are often compared to Fixed Deposits (FDs) due to the tenure. They often invest in money market instruments, bonds, governmental securities, etc.
Low-risk opportunities such as FMPs are a good option for investors who are spooked by the market. It’s always viable to invest in FMPs if you are looking for predictable and better returns. One thing to note is that they don’t get affected by the change in the market’s interest rate. When debt funds benefit from the fall in interest rate, the FMPs won’t join.
Why should you invest in FMPs?
Due to their investment in debt and money market instruments, they provide less risk of capital loss as compared to equity funds
Low Exposure to Interest Rate Risk
They are not affected by interest rate volatility as they are held till maturity.
Tax effectiveness and indexation benefits are seen both in the short-term as well as long-term as they offer better returns as compared to FDs.
Indexation lowers the capital gain, thus lowering the tax.
This allows an investor to take advantage of indexing his investment to inflation for four years while remaining invested for a period of slightly more than three years.
Lower Expense Ratio
There is a cost saving with respect to buying and selling of instruments since these instruments are held till maturity.
They provide less risk of capital loss as compared to equity funds due to their investment in debt and money market instruments.
Who should invest in FMPs?
Investors with low-risk tolerance, looking at stable returns over the medium-term
Investors who are not pleased with returns from traditional fixed income avenues like Bank Deposits, Bonds etc.
Investors who want to invest money for a fixed tenure to meet certain financial goals in the future
Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income.
Investors who have a three-year investment horizon and do not need liquidity during the tenure of the investment
Investors in the higher tax brackets, who lose a significant portion of their FD interest to taxes.
When you understand the risk-return characteristics of FMPs, you will realise that FMPs can give better risk-adjusted returns than FDs, even after factoring in the risk-free nature of FDs.
While FDs give us assured returns, FMPs give us an expected range of returns, when we go through the scheme information document and calculate carefully.
In a nutshell
Fixed Maturity Plans:
They are basically the FDs of mutual funds. Close ended debt scheme with fixed maturity.
Low risk, tax benefits, ease of investing, good expected returns.
The more you know about FMPs, the more you realise that they are still excellent alternatives to FDs!
What is stock market? What should I know about investing in stock market?
Stock market and the rules for investing in stock market
Have you ever been in need of cash and reached out to your relatives or friends for help? After the situation is under your control and when you have enough cash, you return your relatives or friends’ money. However, since they are your friends and family, they do not expect any returns. That said, if you were to return the money after a substantial duration, you would also consider the inflation and other interest charges when returning the money to your relative. Now, imagine that instead of a personal situation, you need money for business opportunity. Then, your friends and family who lend you would also expect returns. This is the underlying principal of stock market.
Let’s glance through the rules of investing in stock market:
Do your research well: As a kid, you used to achieve success in exams by regularly doing your homework. This works even in case of stock market. Success is just a hands distance away if you invest appropriate time in research.
Don’t be a sheep: Following in someone great’s footstep is good. However, this is not true in case of stock market. It is advisable to avoid the herd mentality. Don’t be influenced by the actions your acquaintances, neighbors or relatives.
Invest in only what you understand: If you appear for an exam, you can answer the questions only that you’ve already prepared. You could prepare for questions only that you understood. This is true even for investments. You can be successful only if you invest in what you understand.
Be target-based instead of time-based: Even Warren Buffet doesn’t like to time the markets. Thus, instead of investing for specific time, invest with a specific target in mind.
Be disciplined: Discipline is the most essential ingredient for success. Without discipline, you tend to divert from your goals or miss the timelines and be relaxed about it. Discipline ensures that your investments help you reach your financial goals.
Be more practical, less emotional: Attachment issues are realistic and we all tend to face them at some point in our lives. However, it is best avoidable in case of stock market. It is advisable that you not get attached to a particular company or a sector. You need to see the trends and invest according to your research. Be practical and choose your stocks; don’t let your emotions chose your stocks.
Don’t put all your eggs in one basket: Change is the spice of life. Diversification is the spice of investments. To maximize your gains and insure your investment against market volatility and inflation, it is recommended that you diversify your investments and not put all your eggs in one basket.
Be optimistic but be realistic: Optimism is a great asset. It can take you places in life. However, when it comes to stock market, you need to have a perfect balance between being optimistic and realistic. You need to set realistic targets and not presume your stocks to be made of superman DNA.
Try and invest only the bonus: Occasionally, market volatility effects the stock market as a whole. Thus, you are bound to get your gains, albeit after longer time period. If you invested all your earnings into stock market without diversification, you could be in for a surprise. Hence, it is advisable that you only invest the extra amount that you have.
Scrutinize strictly: Investments are like babies. You need to constantly monitor their progress. If you allow them to grow unmonitored, you stand a chance to be in for a surprise. Thus, monitor your plans and be a proud investor.
To sum it up
Your investments in stock market have the potential to earn huge. However, it demands time and efforts. If you are ready to make some intelligent investments, you can rest assured that you will get guaranteed returns.
Are Gilt funds Safe? Should you invest in gilt funds? - A complete guide
Of the several mutual fund's product categories available in the market, gilt funds are probably the least understood product category. Many retail investors stay away from gilt funds and many others have wrong strategies when investing in gilt mutual funds. Gilt funds invest in Government securities or bonds with varying maturities.
Misconceptions about Gilt Funds:
Gilt Funds are Risk-free investments: While the Government securities themselves are risk-free with respect to interest and principal payments, the price of the securities fluctuates with changes in the yields or interest rates.
Gilt Funds are as risky as equity funds: Gilt Funds are more volatile than other debt fund categories because if interest rates go up, the NAVs of gilt funds will decline and it is even possible to get negative returns in the short term. However, unlike Equity funds, Gilt funds will secure the principal amount at least.
Now that you are aware of the concept of Gilt Funds let’s take a look at their feasibility as investments.
Reasons to Invest in Gilt Funds
The 10-year Gilt yield has been on a decline from around 9% from 2014 onwards. There are several macro-economic reasons for the decline and there are enough reasons to believe that it will continue to decline further.
Lower Fiscal Deficit: As per the latest economic estimates, the Government is on track to meet its fiscal deficit target this financial year. Lower the fiscal deficit, lesser is the Government’s need to borrow money and hence, we can see lower yields and higher Gilt prices in the future.
Lower Inflation: Inflation has a direct impact on Gilt yields. Lower inflation will encourage the RBI to further reduce repo rates to stimulate demand in the economy. Falling crude prices have lowered Wholesale Price Inflation considerably this year. The long-term inflation target of 5% is also achievable, albeit there are certain risks of not meeting it.
Accommodative Monetary Policy Stance of RBI: The RBI is committed to reducing interest rates, to spur economic growth, provided inflation remains in check within the policy parameters. This augurs well for Gilt Fund investors in the long term, the short-term volatility not withstanding.
Indian economy is structurally strong: A number of global reports have suggested that the Indian economy is structurally strong, at a time when the global economy is going through a period of tumult. In fact, many reports from leading institutions have predicted that India will be a strong outperformer, in terms of GDP growth over the next few years. This will put lower pressure on fiscal deficit and consequently Gilt yields.
That the macros of the Indian economy are strengthening over the past few years is evidenced by the returns of Gilt Funds over the last 3 to 5 years. Top performing Gilt Funds have given excellent returns over the past three to five years.
In a nutshell
Given that there are widespread expectations for the interest rates to fall in the coming quarters, you could do well by investing in gilt funds.
But remember, you would need to move out before the rate reversal. If you are comfortable tracking and analysing the trajectory of interest rates, you can consider investing in gilt funds opportunistically. For most other retail investors who find it too difficult, other types of debt funds are a better option.
Is Dividends from Mutual Funds a Boon or Bane?
A mutual fund scheme can declare dividends only from the realised profits in its portfolio. Realised profits are the gains made by the fund manager from instruments by selling them and booking profits or when he receives dividend or interest (in the case of debt funds) from the instruments the scheme holds.
Dividend schemes can announce dividend daily, monthly, quarterly or annually as the case may be. For example, many hybrid funds or monthly income plans endeavour to give a monthly dividend to their unit holders.
For example, if you have invested in a fund at the NAV of Rs 15 and opted for dividend option. The scheme performs and after appreciation, the NAV reaches Rs 18. The fund house may decide to pay out Rs 3 as a dividend. So you receive Rs 3 and simultaneously the NAV will fall back to Rs 15. If you invest it back your NAV will go back to Rs 18.
What can you do With Dividends?
Unrealised profits or paper profit from the instruments held cannot be used to pay dividends. These profits are added to the NAV. Some part of this can be declared as dividend depending on the fund manager.
Alternatively, the fund manager could also deploy this money back in buying stocks or debt instruments in line with the scheme objectives.
When is Dividend a Boon?
Lower Risk: Financial planners recommend dividend option for conservative investors in equity for those who are risk averse and those who need some cash flows.
Regular Cash Inflow: Another case when it is useful to collect regular dividends is where you need income to meet your expenses and dividends can be a good way to achieve the same.
Tax Benefit: Dividends received from all mutual funds are tax-free in the hands of the investors. However, in the case of debt funds, the fund house pays a dividend distribution tax of 28.84% which includes surcharge and cess. In an equity mutual fund, there is no dividend distribution tax.
When is Dividend a Bane?
Reduces Investible Fund: Every time it pays out a dividend, the mutual fund reduces its own investible funds. Either it uses the cash available with it or it sells some of the investments to generate that cash and pay the dividend to you.
Eliminates Compounding Effect: As soon as the money arrives in the bank, it is out of work. It is highly possible that you will spend it. The same money, if it had stayed invested, could benefit from the power of compounding leading to a growth in the final investment corpus. As an investor, while you may feel you have gained (dividend), you are actually at the losing end.
To sum it up
Many investors opt for the dividend option in a mutual fund scheme, as it gives them intermittent cash flows, which comes handy in meeting their regular expenses.
However, when it is not required it is best to reinvest the dividend back into the fund. This is because the compounding benefit is lost when the dividend is paid unless the amount is invested immediately in a higher than equity yielding asset.