What are PPF & SIP? Which will be a better option for investment at the age of 24?

What are PPF & SIP? Which will be a better option for investment at the age of 24?
by Nutan Gupta 05/04/2017

At the age of 24, an individual usually just starts earning. He does not have a lot of money at his disposal. This is also the best time to start long-term investments. Investing early gives you the benefit of rupee cost averaging, thereby giving you compounded returns in the long-term. Though both PPF and SIP qualify for a tax deduction of up to Rs. 1.5 lakh under section 80C of the Income Tax Act, there are some differences between the two instruments.

  Public Provident Fund Systematic Investment Plan
Investment PPF is a government backed long term small saving scheme. SIP is a planned approach towards investments. Investments through SIP are usually made on a monthly basis.
Where it invests Forms a part of Govt borrowings and deployed as per Govt. requirements. Invests in specific mutual funds scheme.
Lock-in Period 15 years If invested in ELSS scheme, the lock-in period is 3 years.
Returns 7.9% Based on equity market returns; usually between 15-18%.
Risk factor As it is backed by the government, it does not involve any risk. As the returns depend on market performance, there is some risk involved.
Liquidity Pre-mature withdrawals can be made from the start of 7th financial year. SIP provides easy liquidity. The money can be withdrawn anytime without paying any penalty.

Conclusion:

An individual can choose to invest in any of the two investments or even both - as per his financial dependence and risk appetite. Since he is 24 years old, he can take more risk and invest in SIPs. Individuals who are nearing the age of retirement can choose to invest in low-risk instruments like PPF.

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How to start with investing in the stock market

How to start with investing in the stock market
by Priyanka Sharma 05/04/2017
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Investing in the stock market is a very crucial financial decision. By doing so, you will be joining a very small group of investors as according to one estimate, less than 2% of the Indian population invests in equity. At the same time, investing in markets can be a tricky business and it can take years of reading and studying companies and companies’ stocks to reach a position where you can start making profits. And so, starting it on the right note is an important step. Here are a few aspects you should know when you begin your journey of investing in the stock market.

Open a stock broker account

Once you decide to foray into the stock market, you will be required to sign an agreement with a broker or a sub-broker to execute trades on your behalf. To place an order you can either go to the broker’s office or place it over the phone or online or as defined in the Model Agreement. The exchanges assign a Unique Order Code Number to each transaction, and once an order is executed, an order code printed on the contract note, which will be conveyed to the client by the broker.

Have a sound financial plan

Equities can turn risky and your investment should depend entirely on how much risk you are willing to take. Review your overall finances and allocate a separate fund for this investment after you have set aside money for emergencies and other important requirements. Funds for maintaining your family’s lifestyle, your medical expenses, life, car and other important assets should not intermingle with this investment. In brief, investing in stocks should ideally come from your surplus funds.

Avoid the herd mentality

Typically, a buyer’s decision tends to get influenced by those around him, whether these are plain acquaintances, neighbours or relatives. If an investor sees someone investing in a particular stock, he too is tempted to follow his footsteps. However, this is exactly what a smart investor should avoid doing. Your decisions on what and where to invest should be guided by your own detailed study and analysis. Ideally, you should devote some time each day to develop faculties so that you can take informed decisions. You should read books and articles regularly, get insights into market behavior by studying the greats of the field. Read and follow the market daily to build an understanding over a period of time.

Invest in a business you understand

It is generally advisable to invest in a business you understand instead of investing in a stock. This understanding will help you in gauging the movement of the underlying assets. Hence, before your start investing in a company, you should also understand the business the company conducts.

Follow a disciplined investment approach

It is normal to get anxious when the market soars. Great bull moments have often led to panic among the investor community. The volatility witnessed in the markets has inevitably made investors lose money despite the great bull runs. However, you need to be systematic in your investment approach and should be able to stand your ground in trying moments. Hence, it is prudent to have patience and follow a disciplined investment approach besides keeping a long-term broad picture in mind.

Create a diversified portfolio

Do not put all the eggs in the same basket. Explore the various financial instruments available to you and factor them to earn optimum returns on investments with minimum risk. However, keep in mind that the diversification also depends on the risk appetite of an investor.

Do not let emotions govern your decision

Many investors lose money in the stock market as result of knee-jerk reactions arising out of giving in to their emotions. In a bull market, the lure of quick wealth is difficult to resist and investors tend to buy readily. Similarly, in a bear market, investors panic and sell their shares at rock-bottom prices. Avoid both the scenarios. Fear and greed are the worst emotions to feel when investing, and it is better not to be guided by them.

Have realistic expectations

Understandably, you invested in the stock market to create wealth, but you should not expect too much too soon. Successful investors have often spoken how they labored patiently for years before they created wealth. Therefore, chart a realistic and achievable plan when it comes to investing in the stock market.

Monitor rigorously

We live in world today where events in any part of the world have global ramifications. Any important event happening in any part of the world has an impact on our financial markets. Hence, you should keep a constant watch on the global affairs. You need to regularly monitor your portfolio and keep affecting the desired changes in it.

Invest in Mutual Funds

Investing in equity requires discipline. You also need to allocate some time for it on a regular basis. If it is not possible for to set aside time daily or weekly, you could explore the option of investing in Mutual Funds.

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How to Read the Mutual Fund Offer Documents?

How to Read the Mutual Fund Offer Documents?
by Nutan Gupta 13/04/2017

It is very difficult to not notice the words of caution after every mutual fund commercial - “Mutual Fund investments are subject to market risks. Please read the offer documents carefully before investing.” How many of us actually read the offer documents? 5 investors in every 100 investors might be going through the documents. Rest 95 either do not know how to read the offer documents or do not consider it important enough to go through the documents.

Here are some important aspects you should consider while reading offer documents:

Investment Objective

This is one of the most important things to look at in an offer document. It gives a fair idea about the thought process of the fund manager and the strategies that he will use in order to achieve the fund’s objectives. An individual can compare these objectives with his own expectations as per his risk appetite.

Past Performance

The past performance of the fund can be looked at to know if the fund has given consistent returns or not. Investors can also look at the launch date if the fund, its total assets under management and compare it with other funds in the similar space. However, this cannot be used to predict future returns, as one cannot determine future returns on the basis of past performance.

Fund Managers

Fund manager is an experienced professional who has an expertise is managing funds. The offer document clearly states who the fund manager to a particular fund is. This gives the investor an insight about the investment style of the fund manager.

Loads and Taxes

The offer document also states all the charges applicable like the entry and exit load, transaction charges and other charges applicable for managing a fund. All mutual funds do not have same charges as the charges vary according to the type of mutual fund.

Expense Ratio

Expense ratio is the ratio which is charged by AMCs to manage an investors’ money. It is charged in percentage terms. Different funds have different expense ratios. However, SEBI has restricted the limit for expense ratios that a fund can charge. Equity funds can charge a maximum of 2.5% and debt funds can charge a maximum of 2.25%.

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Long Iron Butterfly Options Strategy

Long Iron Butterfly Options Strategy
by Nilesh Jain 17/04/2017

A Long Iron Butterfly is implemented when an investor is expecting volatility in the underlying assets. This strategy is initiated to capture the movement outside the wings of options at expiration. It is a limited risk and a limited reward strategy. A Long Iron Butterfly could also be considered as a combination of bull call spread and bear put spread.

When to initiate a Long Iron Butterfly

A Long Iron Butterfly spread is best to use when you expect the underlying assets to move sharply higher or lower but you are uncertain about direction. Also, when the implied volatility of the underlying assets falls unexpectedly and you expect volatility to shoot up, then you can apply Long Iron Butterfly strategy.

How to construct a Long Iron Butterfly?

A Long Iron Butterfly can be created by buying 1 ATM call, Selling 1 OTM call, buying 1 ATM put and selling 1 OTM put of the same underlying security with the same expiry. Strike price can be customized as per the convenience of the trader; however, the upper and lower strike must be equidistant from the middle strike.

Strategy

Buy 1 ATM Call, Sell 1 OTM Call, Buy 1 ATM Put and Sell 1 OTM Put

Market Outlook

Movement above the highest or lowest strike

Motive

Profit from movement in either direction

Upper Breakeven

Long Option (Middle) Strike price + Net Premium Paid

Lower Breakeven

Long Option (Middle) Strike price - Net Premium Paid

Risk

Limited to Net Premium Paid

Reward

Higher strike-middle strike-net premium paid

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price (Rs)

9200

Buy 1 ATM call of strike price (Rs)

9200

Premium paid (Rs)

70

Sell 1 OTM call of strike price (Rs)

9300

Premium received (Rs)

30

Buy 1 ATM put of strike price (Rs)

9200

Premium paid (Rs)

105

Sell 1 OTM put of strike price (Rs)

9100

Premium received (Rs)

65

Upper breakeven

9280

Lower breakeven

9120

Lot Size

75

Net Premium Paid (Rs)

80

Suppose Nifty is trading at 9200. An investor Mr A thinks that Nifty will move drastically in either direction, below lower strike or above higher strike by expiration. So he enters a Long Iron Butterfly by buying a 9200 call strike price at Rs 70, selling 9300 call for Rs 30 and simultaneously buying 9200 put for Rs 105, selling 9100 put for Rs 65. The net premium paid to initiate this trade is Rs 80, which is also the maximum possible loss.

This strategy is initiated with a view of movement in the underlying security outside the wings of higher and lower strike price in Nifty. Maximum profit from the above example would be Rs 1500 (20*75). Maximum loss will also be limited up to Rs 6000 (80*75).

For the ease of understanding of the payoff, we did not take in to account commission charges. Following is the payoff chart and payoff schedule assuming different scenarios of expiry.

The Payoff chart:

The Payoff Schedule:

 

On Expiry NIFTY closes at

Net Payoff from 1 ITM Call Bought (Rs) 9200

Net Payoff from 1 OTM Call Sold (Rs) 9300

Net Payoff from 1 ATM Put bought (Rs) 9200

Net Payoff from 1 OTM Put sold (Rs.) 9100

Net Payoff (Rs)

8800

-70

30

295

-235

20

8900

-70

30

195

-135

20

9000

-70

30

95

-35

20

9100

-70

30

-5

65

20

9120

-70

30

-25

65

0

9200

-70

30

-105

65

-80

9280

10

30

-105

65

0

9300

30

30

-105

65

20

9400

130

-70

-105

65

20

9500

230

-170

-105

65

20

9600

330

-270

-105

65

20

 

Impact of Options Greeks before expiry:

Delta: The net Delta of a Long Iron Butterfly spread remains close to zero if underlying assets remain at middle strike. Delta will move towards 1 if underlying expires above higher strike price and Delta will move towards -1 if underlying expires below the lower strike price.

Vega: Long Iron Butterfly has a positive Vega. Therefore, one should buy Long Iron Butterfly spread when the volatility is low and expect to rise.

Theta: With the passage of time, if other factors remain same, Theta will have a negative impact on the strategy.

Gamma: This strategy will have a long Gamma position, so the change in underline assets will have a positive impact on the strategy.

How to manage Risk?

A Long Iron Butterfly is exposed to limited risk but risk involved is higher than the net reward from the strategy, one can keep stop loss to further limit the losses.

Analysis of Long Iron Butterfly strategy:

A Long Iron Butterfly spread is best to use when you are confident that an underlying security will move significantly. Another way by which this strategy can give profit is when there is an increase in implied volatility. However, this strategy should be used by advanced traders as the risk to reward ratio is high.

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5 Things to Know About Asset Allocation in Mutual Funds

5 Things to Know About Asset Allocation in Mutual Funds
by Nutan Gupta 17/04/2017
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Asset allocation is putting your money across different asset classes - stocks, bonds, real estate, cash and commodities. Asset allocation ensures that you get the best returns out of your savings. Here are five things that an individual must know about asset allocation.

Asset allocation is not diversification

A lot of times people use the words asset allocation and diversification interchangeably. However, one needs to understand that these are two different terms. Asset allocation is the process of deciding the amount of exposure one needs to have in different asset classes. On the other hand, diversification is what you invest within these asset classes.

Asset allocation could be tactical

An investment strategy is planned to achieve long-term goals. A mutual fund invests in stocks which the fund manager believes will give higher returns in the future. Sometimes, a fund manager thinks that a particular fund will give good returns in the short-term but also has the potential to give superior returns in the long-term. Investment moves are based on what the fund manager thinks and this is known as tactical approach.

Asset allocation is not standard

Asset allocation differs based on the age and risk appetite of an investor. An individual who plans to retire next year will have a different asset allocation than a person who is a young entrepreneur. Asset allocation also differs depending upon the income stream of an individual. An individual with a fixed and regular income stream can have a more aggressive asset allocation than a person whose income is not regular.

Asset allocation could be dynamic

A dynamic asset allocation model is the one when a fund manager makes changes in the portfolio which reflects the most recent changes. These changes should be made keeping the long-term performance of the asset in mind. The riskiness of assets change with time.

Asset allocation needs periodic rebalancing

The asset allocations in our portfolio fluctuate every year depending on market fluctuations. Some assets may have performed extremely well in one year, while some may have underperformed in that period. Periodic rebalancing is required as it reduces volatility in the portfolio.

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Short Call Condor Options Trading Strategy

Short Call Condor Options Trading Strategy
by Nilesh Jain 17/04/2017

A Short Call Condor is similar to Short Butterfly strategy. The only exception is that the difference of two middle strikes bought has different strikes.

When to initiate a Short call condor?

A Short Call Condor is implemented when the investor is expecting movement outside the range of the highest and lowest strike price of the underlying assets. Advance traders can also implement this strategy when the implied volatility of the underlying assets is low and you expect volatility to go up.

How to construct a Short Call Condor?

A Short Call Condor can be created by selling 1 lower ITM call, buying 1 lower middle ITM call, buying 1 higher middle OTM call and selling 1 higher OTM calls of the same underlying security with the same expiry. The ITM and OTM call strikes should be equidistant.

Strategy

Sell 1 ITM Call, Buy 1 ITM Call, Buy 1 OTM Call and Sell 1 OTM Call

Market Outlook

Significant volatility above higher and lower strikes

Motive

Anticipating price movement in the underlying assets

Upper Breakeven

Highest strike price - Net credit

Lower Breakeven

Lowest strike price + Net credit

Risk

Limited (if expires above lower breakeven point and vice versa)

Reward

Limited to Net premium received

Margin required

Yes

Let’s try to understand with an example:

Nifty Current spot price

9100

Sell 1 ITM call of strike price (Rs)

8900

Premium received (Rs)

240

Buy 1 ITM call of strike price (Rs)

9000

Premium paid (Rs)

150

Buy 1 OTM call of strike price (Rs)

9200

Premium paid (Rs)

40

Sell 1 OTM call of strike price (Rs)

9300

Premium received (Rs)

10

Upper breakeven

9240

Lower breakeven

8960

Lot Size

75

Net premium received

60

Suppose Nifty is trading at 9100. An investor Mr. A estimates that Nifty will move significantly by expiration, so he enters a Short Call Condor and sells 8900 call strike price at Rs 240, buys 9000 strike price of Rs 150, buys 9200 strike price for Rs 40 and sells 9300 call for Rs 10. The net premium received to initiate this trade is Rs 60, which is also the maximum possible reward. This strategy is initiated with a view of significant volatility on Nifty hence it will give the maximum profit only when there is movement in the underlying security below 8900 or above 9200. Maximum profit from the above example would be Rs 4500 (60*75). The maximum profit would only occur when underlying assets expires outside the range of upper and lower breakevens. Maximum loss would also be limited to Rs 3000 (40*75), if it stays in the range of higher and lower breakeven.

For the ease of understanding of the payoff schedule, we did not take in to account commission charges. Following is the payoff schedule assuming different scenarios of expiry.

The Payoff Schedule:

On Expiry NIFTY closes at

Net Payoff from 1 Deep ITM Call Sold (Rs) 8900

Net Payoff from 1 ITM Calls Bought (Rs) 9000

Net Payoff from 1

OTM Call bought (Rs) 9200

Net Payoff from 1 deep OTM Call sold (Rs.) 9300

Net Payoff (Rs)

8600

240

-150

-40

10

60

8700

240

-150

-40

10

60

8800

240

-150

-40

10

60

8900

240

-150

-40

10

60

8960

180

-150

-40

10

0

9000

140

-150

-40

10

-40

9100

40

-50

-40

10

-40

9200

-60

-50

-40

10

-40

9240

-100

90

0

10

0

9300

-160

150

60

10

60

9400

-260

250

160

-90

60

9500

-360

350

260

-190

60

9600

-460

450

360

-290

60

The Payoff Graph:

Impact of Options Greeks before expiry:

Delta: If the underlying asset remains between the lowest and highest strike price the net Delta of a Short Call Condor spread remains close to zero.

Vega: Short Call Condor has a positive Vega. Therefore, one should buy Short Call Condor spread when the volatility is low and expect to rise.

Theta: Theta will have a negative impact on the strategy, because option premium will erode as the expiration dates draws nearer.

Gamma: The Gamma of a Short Call Condor strategy goes to lowest if it moves above the highest or below the lowest strike.

Analysis of Short Call Condor spread strategy

A Short Call Condor spread is best to use when you are confident that an underlying security will move outside the range of lowest and highest strikes. Unlike straddle and strangles strategies risk involved in short call condor is limited.