Investing It!

Multi Commodity Exchange of India Ltd – IPO Note

2012-02-20T15:59:13Z

Company Background

Incorporated in the year 2003, Multi Commodity Exchange of India Ltd (MCX) is electronic commodity futures exchange, which provides online trading facility along with clearing and settlement operations for commodity futures across India. MCX has emerged as the market leader in India’s commodities future industry with around 88% market share as on 30^thSeptember, 2011. As on 31^st December 2011, it had 2,153 registered members nationwide with more than 296,000 terminals across India and has emerged as the 5^th largest commodity futures exchange in the world as per Futures Industry Association (FIA) survey.

Peers

In domestic market are National Commodity and Derivative Exchanges Ltd (NCDEX), National Multi Commodity Exchange of India Ltd (NMCE), Indian Commodity Exchange Ltd (ICEX) and ACE Derivatives and Commodity Exchange Ltd (ACE). In international market, the peers are Shanghai Futures Exchange, CME Group (includes CBOT and NYMEX), Zhengzhou Commodity Exchange, etc.

MCX market share against its peers (percentage) in domestic market

Source: RHP, MCX

MCX allows trading in more than 50 commodities across sectors like bullion, metals, energy and agricultural products. In the world, MCX is the largest silver exchange, the second largest in gold, copper and natural gas and third largest in crude oil futures based on the number of futures contracts traded as on 30^th June 2011.

Share in revenue of major commodities as on FY11

Source: RHP, MCX

IPO details

MCX is offering 6.4 million equity shares at a price band of Rs 860 to Rs 1,032 through an offer for sale. The key shareholders who are reducing their stakes are Financial Technologies (India) Ltd (FTIL), State Bank of India (SBI), GLG Financials Fund (GLG), Alexandra Mauritius Ltd (AML), Corporation Bank, ICICI Lombard General Insurance Company and Bank of Baroda. Through this IPO, 2.6 mn shares are offered by FTIL, 2.1 mn shares are offered by SBI, 0.78 mn by GLG, 0.39 mn by AML, 0.24 mn by Corporation Bank, 0.14 mn by ICICI Lombard and 0.1 mn Bank of Baroda. Subsequent to IPO, FTIL’s stake in MCX will reduce to 26% from around 44% they owned earlier. The issue is worth Rs 552 – Rs 663 crore. However, the company will not receive any proceeds from this offer.

IPO Grading

Credit rating agency, CRISIL has assigned 5/5 grade to the IPO of MCX which indicates strong fundamentals. However, this grade is not an opinion on whether the issue price is appropriate to the issue fundamentals. Also, it’s not a recommendation to buy, sell or hold this graded instrument.

Revenue Mix

The company originates its income from transaction fees with respect to the trades executed on their exchange, annual subscription fees, membership admission fees, terminal charges, proceeds of sale and dividend / interest income from investments.

Break-up of revenue mix

Strengths

§ Leadership position in the commodity futures industry.

§ To launch new products at regular intervals, retain existing investors and attract new investors for trading in futures market.

§ Technology infrastructure is a key factor of growth for this company and highly scalable business model.

§ Experienced Management team / board of directors to cruise the business, by adapting to newer changes in the regulatory environment and bring innovations to exchange.

Business strategy to grow in future

§ Intends to grow its market presence in new regions across India and to increase number of its participants.

§ Enhance marketing, educational and promote awareness of trading in futures industry among participants in related industries.

§ Continue to pursue strategic initiatives to open up new revenue streams. The company is looking for opportunities to invest in companies or assets in related industries, primarily in India and the pan-Asian region, which would enhance its growth, operations and profitability.

Risk factors

§ Unable to grow the turnover of commodity futures traded on exchange could affect the business.

§ Growing competition from existing players and new entrants in the industry.

§ Maximum income is derived from futures trading of some commodities on exchange. So, decline in trading volume of these commodities could affect the flow of income.

§ Failure to amend Forward Contracts Regulation Act, 1952 (FCRA) in timely manner. If this measures are not brought into force in a timely manner, and its inability to introduce new products on the exchange could have adverse affect on its operation.

§ Imposing Commodities Transaction Tax (CTT) by government could decline volumes of future trading on exchange.

Financial Analysis and Valuation

MCX has reported robust growth over past 3 years. Operating income has growth at a CAGR of 32%, EBITDA at ~31% and adjusted PAT at ~30% between FY09-11. In medium term, the company’s strong market position and continuous focus on product innovation would act as growth drivers. In long term, introduction of new instruments such as options trading on exchange and active participation by institutional players, after necessary regulatory reforms take place, are likely to drive growth in income.

Financial Summary

As on December 2012, the company registered total income of ~Rs 474 crore and net profit of ~Rs 220 crore. Since, the company has the price band of the IPO at Rs 860 – Rs 1032 it pegs the valuation of the bourse at Rs 5263 crore (around $1 billion) at the upper end of the price band. On basis of earnings multiple, the upper end of the price band puts MCX slightly on the expensive side i.e. 30 times its earnings of FY11, while it would be 25 times on the lower end of the price band. However, IPO of MCX is first of its kind stock in the market with no close peer for valuation to compare and riding on India’s potential for rapid growth in commodity trading.

Conclusion

The pricing of this IPO is attractive based on valuation and growth prospects. It’s recommended to “Subscribe” for this issue considering MCX’s leadership position in commodity exchange markets, operating profits around 60% from last two financial years and debt free balance sheet.

Author

Hiral Thanawala

HDFC Fixed Maturity Plans- New Fund Offer

2012-01-13T04:49:00Z

HDFC Mutual Fund is offering two New Fund Offer (NFO) in the month of Jan 2012, under its Fixed Maturity Plans- Series XIX closed-ended income scheme.

The two funds under offer are:

HDFC FMP 92D January 2012 (2), open from Jan 12 to Jan 18, with a duration of 92 days.
HDFC FMP 370D January 2012 (3), open from Jan 12 to Jan 17, with a duration of 370 days.

Brief on Fixed Maturity Plans

Fixed Maturity Plans (or FMP) are funds with a fixed maturity date and with investments in debt instruments such as Certificate of Deposits (CDs), Commercial Papers (CPs), money market instruments and corporate bonds. FMPs are closed ended schemes and fund houses generally provide an indicative rate of return on the basis of where the investments are going to be done.

Scheme Information

Both the schemes offer similar features for investors. The duration of the schemes however vary. The primary aim of the schemes is to generate regular returns by investing in debt instruments, money market and Government securities, which would be maturing on or before the maturity date of the respective plans.

Ø Options available under the scheme:

The scheme offers investors a growth as well as a dividend option. The dividend option offers a choice of dividend payouts quarterly or a normal dividend option with payout facility only.

Ø Load:

There would be no entry and exit load applicable on the scheme.

Ø Minimum application:

The minimum application amount is Rs.5, 000 and in multiples of Rs 10 thereafter.

Ø Portfolio composition:

The scheme would invest 60% to 100% in debt and money market instruments of low to medium risk and the balance in government securities on low risk.

Ø Liquidity:

There is no lock in period applicable on the scheme. Investors can further purchase or redeem units from the National Stock Exchange where they would be listed. Units however cannot be directly redeemed from the fund, until the maturity date of the plan. On maturity, units will be paid out on the basis of the applicable NAV on the date of redemption.

Ø Credit rating of the scheme:

The scheme will be benchmarked against CRISIL Short Term Bond Fund Index.

Ø Dematerialization of units:

Investors have the option to hold the units in demat form.

For Whom is the Scheme Suitable?

Fixed Maturity Plan is a low risk investment option. The dividend received from a FMP is tax free in the hands of the investor, and they offer better post tax returns in comparison to fixed deposits. They also provide indexation benefits for investors.

FMPs however do not guarantee capital protection and the returns shown by the fund house are only indicative. Thus such schemes are ideally suitable for those investors who have the capacity to take a little bit of risk for tax efficient returns.

HDFC Mutual Fund house already has more than 20 such FMP schemes of different durations. Given their past track record and reputation to consistently perform, investors could definitely be optimistic of some decent returns from the scheme.

Author

Ramya Ramachandran

NHAI Tax Free Bond

2012-01-10T04:01:40Z

Issue Opens 28 Dec 2011; Issue Closes on 11 Jan 2012

Another two months of 2012 is going to be very hectic for investors as its time to file tax returns. Everybody is juggling with ideas to save tax. Various companies are also coming out with different tax saving products (infrastructure bonds, tax saving bonds). Issues of IDFC and L&T infrastructure bonds just closed and if you have missed investing in them for tax saving purpose, here is another opportunity being presented to you in the form of NHAI (National Highway Authority of India) tax free bonds. Infrastructure bonds have a limit of tax exemption as interest income after initial investment of 20000 is taxable. NHAI Bond issue comes to the rescue as the income by way of interest on these bonds will be fully exempt from Income Tax having tax benefits u/s 10 (15) (iv) (h) of IT Act, 1961 and hence would not form a part of taxable income. It’s a great opportunity for risk averse investors and they should consider investing in this option. Let’s analyze all the important features of the issue.

What are Bonds?

A bond is a security offered by the government, an agency or a corporation wherein issuer essentially takes out a loan from bond buyers for a fixed period. Like all loans, the bond has a particular interest or coupon rate set and over the period of the bond's existence the interest is paid to the bond holder and at the end of bond period the issuer must pay back the principal.

Key Features of the NHAI Tax Free Bond

NHAI Tax Free Bond	Features
Issue Dates	Open 28 Dec 2011, Close 11 Jan 2012
Application Form	Available in Dmat and Paper format
Credit Rating	CRISIL ,CARE and Fitch - (AAA/stable)
Interest on Application Money if no allotment	4%
Bondholder Claim	Superior to any unsecured creditor
Face Value (1 Bond)	Rs 1000
Minimum Investment	50 Bonds (Rs 50000)
Listing On Stock Exchange	BSE
Trading	Dmat format only
Coupon/Interest Rate (per annum) and Tenure	8.2% (10 years), 8.3% (15 Years)
Interest Payment	Annually
Who can Apply	Almost everybody (individuals, companies, corporate, cooperatives, mutual fund hoses, insurance companies etc.)
Allotment Procedure	First come First serve basis

Why should you invest in NHAI Tax Free Bond?

There are five features related to security and returns which makes this issue attractive –

This issue is placed by NHAI an Autonomous authority of the Government of India under the Ministry of Road Transport and Highways whose financial performance is good and has the backing of Government of India making this pretty safe investment.
The rating which this issue has received from rating agencies certifies that NHAI is pretty secure in terms of servicing its debt obligations.
Tax benefit which is associated with this issue makes it very attractive. The whole of the interest income is tax exempt and there is no cap on it like infrastructure bonds. So, we believe that's a very attractive option. Mind it – Only interest income is tax exempt and you will have to pay full tax on the principle you invest in the issue.
The coupon rate of 8.2% is quite competitive once you take tax benefits into consideration. If you compare the interest rate with taxable bond, for a person who is in 30% marginal tax bracket, 8.2% would be equivalent to more than 11.7%.
As the issue will be traded on BSE it will be highly liquid and when somebody wants to get out prematurely he can liquidate his position easily.

How appropriate this investment option is?

As the interest income of NHAI bonds is tax exempt the effective return on this investment will be same as the coupon rate being offered on them (8.2% or 8.3%). Taking tax factor into consideration it will be on the higher side as compared to safer investment options like PPF, NSC, Fixed deposit etc. Another area where this offer clearly beats the above options is the Liquidity factor. As it will be traded in secondary market (BSE) it will be highly liquid as compared to above options.

Author

Bimlesh Singh

Sovereign Rating - How ratings are assigned to National Government

2011-12-28T18:43:00Z

Few months back, S&P downgraded US rating creating havoc in financial markets. Financial market tanked in the range of 10% throughout the world. Not much time has passed since the market digested that unprecedented downgrade and we are standing on the verge of another collapse. This time, S&P is ready with news which can have even bigger implication on the health of financial markets. It’s threatening to downgrade the whole Euro zone, if there are only words and no actions from the European leaders towards solving the debt crisis. How exactly S&P or any other rating agency decides the sovereign rating? Is it such an easy task or a lot of pain involved in this revelation? Let’s try to find out the answer.

What is this Sovereign Rating?

A sovereign credit rating is the credit rating of a country or a national government. It’s basically evaluation of the capacity of a national government to pay its debt obligations. It also indicates the level of risk an investor is exposed to, while investing in that particular country.

Parameters used for Sovereign Rating

Rating agencies takes into account the economic risk and the political risk involved while assigning a sovereign rating. A careful analysis is done and based on the outcome a rating downgrade or upgrade is recommended.

The Economic Risk: This is risk which is the measure of a nation’s capacity to pay its debt obligations is short term and long term. While measuring the economic risk rating agencies take into account economic growth prospects, living standard, inflation rate, liquidity, income level, strength of currency and public debt burden (Pensions to be paid, Heath services cost). Together with these factors high weight age is given to the monetary and fiscal flexibility applied by the country.

The Political Risk: As economic risk measures ability and capacity to repay debt, political risk is the measure of government’s willingness to repay its debt obligation. This all depends on the stability of the government and acceptance of economic policy goals. This risk is quite evident on global trade platform and is indicated by the trust shown in national financial system. Unlikely events like War and crisis enhances this risk. The unavailability of any legal alternative in case of default by a nation makes it even more important to analyze the political risk.

Conclusion

It’s not an easy task to downgrade a nation’s credit rating as a lot is at stake for both the parties. If the rating agencies assessment is correct, the whole financial market tailspins and if the assessment is not so correct, the future of the rating agency gets darker. But in any case as a smart investor, we should raise the red flag once such news flows into the market. It’s time to be cash rich and keep away from risky investment instruments like stocks and commodities. Wait for the storm to subside and you will get a chance to purchase these assets at better prices.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass. He can be reached at bimlesh@verticalgrass.com.

Company Fixed Deposits - An alternative of Bank Fixed Deposits

2011-12-27T18:16:00Z

Investing in risky assets is not a wise proposition if you don’t have time and mental bent for research. Normally investors who invest in risky assets like stocks and derivatives have very high return expectations. In real sense sometimes these expectations are highly unrealistic which leads to the fall of a larger percentage of risk loving investors. If stock market has given a historical return of 15 to 20% expecting 40% return out of it on continuous basis should be categorized as highly unrealistic. So if you are risk averse and don’t have enough knowledge and time and you want return in the range of 8 to 15% (15% return is quite competitive with respect to stock market returns), what are the options available with you? If you are willing to roll your sleeves up and do a little bit of analysis, Company Fixed Deposits can prove good alternative for you.

What are Company Fixed Deposits?

Company fixed deposits are similar to the famous bank deposits, but in this case, deposits are managed by a corporate firm which is not a bank. It can be a NBFC, listed public limited company or private firm. The main difference between Bank’s Fixed Deposit and Company Fixed Deposit is the loan guarantee of up to Rs 1 lakh given by RBI against Bank Fixed Deposits. Company Fixed Deposits are not secured by RBI and hence they are risky as compared to Bank Deposits.

Pros and Cons of Company Fixed Deposits

The Good

The Bad

· Higher Interest rate (9% to 16%) as compared to Bank Deposits (9 to 10%)

· These are short term deposits (Ranging from 6 months to 1 year)

· Income tax is not deducted at source if the interest income is less than 5000

· Deposit can be spread in more than one company so as to keep the interest income lower than 5000 from each of them to avoid tax deduction at source

· Company Deposits are not Secured by RBI as done for Bank Deposits

· Procedure of foreclosure is complex and not smooth. Guidelines may vary from company to company

· Possibility of default of payment by company is high as compared to Bank Deposit

· Proper research needs to be done before choosing a company for investment

Risk Analysis

Company Fixed Deposits are exposed to default risk as, at maturity, the company might not be in a position to repay the accrued amount. There might be various reasons like bankruptcy, fraud, cash crunch due to loss etc. These loans are not secured by RBI as done for Bank Deposits so investors do not have insurance of even Rs 1 Lakh.

Who Should Invest

As there is a default risk involved and these deposits sound risky, before you plan to invest you need to take out some time for research. It’s not that you reject this option as a whole but do some analysis to find out the good option as the effort is worth it (you will get superior returns 11 to 14%). Please find below some of the checks which you should apply before choosing a company fixed deposit:

Company deposit rating by rating agency like ICRA, CRISIL and such.
Financial health of the company – Profit, Debt, EPS and such parameters should be in good shape.
Dividend Payout history of the company – It should have a healthy history of dividend payments.
Promoters History.
Companies Management capability.
Overpromising rates – people should avoid deposits which are offering return above 15%.

Conclusion

If you are comfortable with doing a little bit of research, Company Deposits can be promising investment options. Basic rule is to go with renowned names with proven track record. It’s not advisable to be invested in long term deposits as default risk increases with tenure. Enjoy the new armor in your kitty.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass, a company with the mission of providing personalized financial services. He can be reached at bimlesh@verticalgrass.com.

Top 10 Personal Finance News 2011

2011-12-26T22:53:00Z

As we say good-bye to 2011, let us summarize the top events in the area of personal finance that affect your money directly. Here’s a look at top 10 news items from InvestmentYogi (in no particular order):

1) European Debt Crisis - We all are an eye witness to the financial market volatility, both stocks and bonds, in the recent past. This is going to continue till a potent solution is not devised for this situation. Together with stock market volatility, the financial institutions that are exposed to this debt will have to write off their debt in worst case scenario, hitting their bottom line. Borrowing will get costlier and interest rate will remain quite high for some time, creating extra pressure on the economy. And as borrowing will be costlier, spending will be less resulting in prolonged recession.

2) RBI’s Monetary Policy Fails To Contain Inflation - In spite of multiple increases in repo and reverse repo rates, in the current financial year the WPI indicated rate of inflation has been 9.6%, which is abnormally high. Why it is that inflation has not been contained despite so many rate hikes.

3) Rupee Depreciates To A New Low - The rupee fell to a new low of 53.52 a dollar on Tuesday before ending the day at 53.23, with the euro’s weakness against the US unit adding to the woes of India’s currency. The euro’s fall has prompted safe haven-buying of the US currency globally and this weakened the rupee, which has already been under pressure from weak economic numbers and nervous investor sentiment.

4) New Income Tax Slabs - In 2011 annual budget, the government has brought about relief for the common man by widening the tax slabs further, along with reducing qualifying age of senior citizens from 65 years to 60 years, and introducing a high new tax slab for senior citizens of over 80 years in age (Super Seniors) who will not be required to pay taxes for income upto Rs 5 lakhs per annum.

5) Saving Account Interest Rate Deregulated - Till recently the interest on savings account deposits was governed and regulated by the Reserve Bank of India (RBI). Banks had no control whatsoever and a meagre 3.5% on the lowest amount available in the account from the 10th to the end of month was paid out. With the RBI’s recent move to deregulate this interest rate, banks now have a free hand in deciding what they wish to pay to their depositors. Here is a quick snapshot on what this deregulation is and how the move could impact you.

6) Revision in Post Office Savings Schemes - The Central Government has made some key changes to the Post office Small Savings Schemes. The revision in the Schemes and interest rates was in response to Reserve Bank of India (RBI’s) announcement on complete deregulation of savings banks deposit rates. Here are the key changes.

7) No need to file Tax Return for income upto Rs 5 lakhs (Conditions apply!) - No income-tax returns would be required for salaried persons earning up to Rs 5 lakh per annum. However, under the scheme, the salaried person wants exemption from filing IT return, has to disclose about the incomes like dividend and interest to his employer for tax deduction. Other conditions also apply. Read on.

8) Hurray! Indians can Invest in Global Markets - This year SEBI’s move to allow the Indian investors to trade in almost 24 major global indices including that of US, Europe and Asia, sitting in their comfortable homes, strengthens the proposition that everything is local now. As SEBI has opened the gates partially (You can only trade in derivatives of global indices for the time being) let’s try to figure out how exactly this arrangement works and how an individual investor can gain from this opportunity.

9) IRDA Issues Customer Centric Guidelines For Online Insurance Marketing - Insurance regulator IRDA issued guidelines on distance marketing of products to protect the interest of individuals who buy policies over phone or Internet. Insurance companies are mandated to implement the guidelines from October 1, 2011. The Compliance Officer of each insurer shall submit to IRDA, at the end of each Financial Year, a certificate confirming that the insurer has complied with all the provisions of these guidelines during the year.

10) The Rise And Fall of Gold - Global prices of gold have been steadily going upwards since last decade. In September this year, Gold prices saw a correction of around 6% from the peak and have fallen sharply along with Equity. In the short-term, experts say there will be a slow rally in gold prices; in the long-term however, gold prices will be largely determined by currency prices and inflation rate. Lower the reserve currency (presently, US Dollar) and higher the inflation rates, the higher the price of gold and vice versa.

European Debt Crisis

2011-12-26T06:36:28Z

One fine morning you come to know that you can get personal loan at 3% interest. What will be your next move if you were contemplating taking a personal loan at the rate of 16% the previous morning? Persons who do not require a loan will also start thinking about going for a loan. Suddenly, there is a long queue of loan seekers. Economy is doing great. So, banks sanctioned the loans without much ado. But, as the fate has pre decided it, at the time of repayment, there was deep recession. So, the whole debtor lot who spent mindlessly at the time of low interest rate did not have enough earning to pay the debt and are on the verge of default throwing the whole economy on the path of even deeper recession. None of the characters and events in the above story is figment of imagination, but it’s the true story of European debt crisis.

What is this crisis all about ?

Unification of Europe as one economic zone resulted in birth of currency Euro. Countries comprising European Union were of varying size and economic strength. Some countries like Greece and Portugal whose economy was not so strong are the part of union too. As Euro was the single currency throughout European Union, there was no fear of local inflation and banks were happily lending to economically weak and strong without any discrimination. World economy was in good shape and hence the direct correlation of economic strength and repayment strength was not evident. This miscalculation raised its head with vengeance when the world economy slipped into recession. Although, there were some universal rules for lending, there was an absence of well-defined guidelines regarding spending. Weaker economies of the union took advantage of this loophole and overspent using borrowed money. This is the current situation in Europe and if Greece defaults on repayment, we will slip into even deeper recession.

What is being done to avoid the crisis ?

Stronger economies of the Union like Germany are pushing hard for stringent spending guidelines so as to avoid such crisis in future. Under new environment, countries spending will be made directly proportional to their economic strength to pay. This proposition is not going to solve the current crisis and is hailed as precautionary step by various analysts. One of the proposed immediate actions to fix the crisis as being discussed is issuance of Euro bonds which will be backed by whole European Union. There are many other propositions being discussed but each has its own groups of pro and anti-based on economic implications.

How you will be affected ?

We all are an eye witness to the financial market volatility, both stocks and bonds, in the recent past. This is going to continue till a potent solution is not devised for this situation. Together with stock market volatility, the financial institutions that are exposed to this debt will have to write off their debt in worst case scenario, hitting their bottom line. Borrowing will get costlier and interest rate will remain quite high for some time, creating extra pressure on the economy. And as borrowing will be costlier, spending will be less resulting in prolonged recession.

Conclusion

It’s recommended not to go for fresh investments in financial market till some clarity appears in the whole scenario.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass. He can be reached at bimlesh@verticalgrass.com.

Panic Selling - How to be a winner at time of market crash

2011-12-21T06:14:26Z

Some body on the street greeted a broker and broker said “Well”. People standing close to him over heard it as “Sell” and suddenly everybody was selling on the street. Result was a market crash and in post market analysis, nobody had a clue regarding the reason of huge sell off. This was a small story about Panic Selling. You just follow the herd without even thinking once regarding the mad rush. Your emotions completely overpower your intellect and next morning is a morning of remorse. What should an individual investor do in such situation? From where should he accumulate the courage to stand steady in times of turmoil? Let’s try to understand the psychology behind panic selling and devise some basic sanitary checks so as not to get swept away.

What is Panic Selling?

Panic selling is an impulsive response from investors where they are completely driven by fear of losing their hard earned capital. Sellers are least bothered about the price they are getting for the asset and they just are in a hurry to sell their holdings. All the lessons regarding fundamental and technical analysis is dumped at this moment and investors react simply out of emotion and fear. Almost all market crashes are caused by panic selling. The situation sometimes is so worse that even regulators pause trading for some time so that people get some time to analyze the real scenario.

How Panic selling takes place?

This picture depicts what happens at the time of Panic Selling. Panic selling really starts a downtrend only if a long-term trend is established and confirmed with technical or fundamental factors. But, most of the time it’s not the case and market reverses it’s direction after few days.

Hidden opportunity for Investors?

If you are regular stock market investor you must have experienced this situation quite a few times. We will try to figure out if a trend change is going to occur or it’s a hoax call and how one can capitalize on it. So whenever you see such reaction ask following questions before following the herd:

Has the economic outlook changed?
What was the actual news which created panic and its real significance?
Will the news impact stock market as a whole or it will impact some specific sectors?
Has the long term support zone of market been breached with convincing volume?

If the answers to above questions are in negative then possibly it’s the best time to jump in the market on another side of the trade. Wait for the panic to subside and buy aggressively to reap superior rewards. This is the right time to enter stocks with sound financials as you might not get them so cheap in near term. Be careful if the answers to above questions are positive as this might indicate a trend reversal and it’s better to sit on the sidelines.

Conclusion

If you are an informed investor, Panic selling creates great buying opportunities. Those who are eager and willing to make their hands dirty by doing some macro analysis of the situation and who can control their emotions are going to emerge as winners. You only need to be cautious regarding actual trend reversals.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass, a company with the mission of providing personalized financial services. He can be reached at bimlesh@verticalgrass.com.

How to start investing - Beginners guide to Stock Market Investment

2011-12-20T06:36:41Z

Let me begin with the explanation of why exactly I am writing this basic article. I get a lot of queries on my mail from beginners who are quite willing to do investment planning but there is no authentic source of information for them. There are no genuine hand holders who are there to give them the initial start. Mind you, stock market investment is a self learning game and you need to put a lot of effort if you want to become a professional. So, if the start is not good, you might not end as a winner. No body is going to make money for you in this world. You might not have born rich but it’s you who will have to choose if you want to die rich. As every journey starts with the first step let me help you in understanding where and how to start. This article is a compilation of most frequently asked questions from the beginners.

How to buy a stock?

To buy your first stock, you need three basic things which are listed below:

DEMAT account – Demat account is an account meant for holding the stocks in dematerialized format. No need to worry about the demat account as you can open this account in almost all the banks and the procedure is as simple as opening a savings account.
Trading account – Demat account and trading account are linked. Through trading account, all the money involved while buying and selling stocks is managed. Again, no need to worry, as all the banks provide this service too.
You need to have money and knowledge too.

For getting demat *** trading account, you can directly approach a bank or your stock broker will help you in opening these accounts.

What is the minimum amount I need to start investing in stocks ?

You will be surprised to know the answer. The absolute minimum amount will be something around Rs 25 to Rs 30. Wait as the surprise is not yet over. The major percentage of above amount is Transaction cost (Brokerage you pay for buying or selling a stock). This is a theoretical absolute minimum. Now let’s work out the practical amount in real life scenario.

Action	Amount (Rs)
Opening Dmat *** Trading Account	0 to 500 (One time charge)
Buying a Stock	Stock Market Price (Varies from less than Rs1 to more than Rs 1000). For Practical calculation let’s say stock price is Rs 100.
Transaction Cost + Other charges	1 % of total amount (approximate)

Final Calculation

Based on data in above table, maximum amount needed to buy your first stock = 500 + 100 + 1*100/100 = 601.

So, practically you need Rs 601 to buy your first stock whose market price is Rs 100. This amount gets lesser or bigger with the choice of Stock (Market price of stock) you make.

What is an ideal amount to start with ?

From the above calculation, you have a fair idea about the minimum amount needed to start investing in stock market. In simple terms, it’s basically the stock price which you need to have in your pocket. As the account opening fee is a one time fee and the transaction costs are very less as compared to the stock price. Keeping in mind that you are just a beginner, I would suggest you start with a balance of Rs 5000 in your trading account.

What are the options of entering stock market ?

There are two primary roots of entering the stock market:

1. Mutual Funds – For beginners, No Time, No Research

2. Stock Market – For Seasoned investors and frequent traders

Conclusion

Treat this amount (Rs 5000) as the cost of learning a new course. Don’t panic, if you loose this amount as the loss will teach you some great lessons. Be in the game for some time and see if you can handle the pressure or not. Parallel to this, keep on enhancing your investment skills by talking to experienced people, reading books, browsing internet etc. I hope you will like this game.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass. He can be reached at bimlesh@verticalgrass.com.

L&T NFO Short Term Debt Fund

2011-12-12T06:53:24Z

The Indian debt market has witnessed a sharp rise in interest rates in the last 18 months. RBI’s rising Repo rate to curb inflation and tight liquidity norms for banks, have contributed to this rising interest rate. At this juncture of the debt market, L&T is out with its short term debt fund issue, open to both individual as well as institutional investors. With positive market expectations of the debt market, and Corporate Deposits, Commercial Papers and NCDs, already generating a six to nine month yield of around 9.5%, this L&T fund issue is worth considering.

Issue Open Date: December 07, 2011

Issue Close Date: December 21, 2011

Understanding Short Term Debt Funds

Short term debt funds are mutual funds that invest in fixed income securities of short maturities. The portfolio primarily comprises of government securities, treasury bills, commercial papers and other money market instruments. Short term debt funds possess low risk and are generally preferred by investors seeking steady returns.

Overview of L&T Mutual Funds

L&T Mutual Funds is an AMC backed by L&T Finance, and is one of the premier fund houses in India. The fund house has around Rs. 5,000 crores under its management with various schemes catering to diverse investor needs. With L&Ts efficient portfolio management techniques, the AMC has been making investments in quality instruments, to generate positive returns to investors.

Investing in the L&T Short Term Fund

The scheme is an open ended scheme with an investment objective to generate returns from fixed income securities of short term maturities. This scheme is positioned primarily for investors with a short term investment horizon. The average maturity period of the scheme would be maintained at three years.

Scheme Specifications

Nature of Scheme	An Open Ended Debt Scheme
NFO Issue Price	Rs. 10 per unit Rs. 10 per unit during New Fund Offer and at NAV based prices after the scheme re-opens for ongoing sales
Minimum Application Amount	Rs. 5000 and in multiples Rs 1 thereafter.
Benchmark	CRISIL Short Term Bond Fund Index
Options	Dividend (Payout & Reinvestment), Quarterly Dividend (Payout & Reinvestment), Growth, Bonus

Portfolio Composition

The fund would allocate around 65% to 100% in debt and money market instruments of residual maturity up to 24 months. These investments would be low risk in nature. The balance investment from 0% to 35% would be in debt instruments with residual maturity greater than 24 months and less than 60 months, with a low to medium risk profile. The scheme may also invest in securitized debt of up to 50% of the portfolio.

Load on the Scheme

There will be no entry load charged on the scheme. For all redemptions before 6 months of investing in the scheme there would be an exit load of 0.5%. No exit load would be applicable if redeemed after 6 months.

Who Should Invest in the Scheme?

The volatility in the equity market coupled with the current scenario of rising interest rates in the Debt market, have surely made investments in fixed income securities more attractive and a safer bet to generate positive returns. For investors seeking to park their funds for one to two years, and those with a low to medium risk appetite, L&T’s short term debt fund would be an ideal investment option. And with L&T Mutual Fund’s satisfactory past performance in its various offerings, one could expect good fund management, positive returns and definitely a promising investment.

How to Invest In the Scheme

Application forms for the issue are available at the offices and branches of the AMC and the CAMS Service Centres (CSC). Payment for purchase of units will be accepted only through a cheque or demand draft (i.e. in case of “Regular Application”), drawn in favour of “L&T Short Term Debt Fund” and payable at the centre where the application is lodged, or account to account transfer instructions (in case availing of “Direct Deposit Application Facility”). Investors need to comply with Know Your Customer (KYC) norms when completing the application form. Apart from this traditional way, investors could also invest online through www.lntmf.com and other associated Depositary Participant websites.

Author

Ramya Ramachandran

FDI in Retail

2011-12-07T07:00:44Z

FDI cat is out of the box again and it seems everybody is concerned about it, be it common man or the Prime Minister. It has in some way overshadowed Anna’s anti-corruption movement too. Some are debating for its implementation, as according to them, it will bring better operating efficiency for retail firms and will eventually bring down inflation. People against it are arguing that it will kill the local retail market and will lead to widespread unemployment. As the buzzword for now is FDI in retail sector, it will be wise if we explore it a bit and try to figure out how we can take some smart investment decision in its backdrop.

What is FDI in Retail Sector?

In simple terms, FDI in retail sector is an economic reform, allowing foreign companies to acquire up to 51% stake in Indian multi brand retail ventures like Pantaloon, Shoppers stop etc. The stake can go up to 100% for single brand stores. Indian Government has issued some guidelines which need to be fulfilled by foreign investors like WalMart before they can take controlling interest in Indian retail firms.

Why People are against it?

It’s basically the fear of collapse of local retail sector and unemployment which is causing the panic. If multinational companies open stores in small cities, then the local traders of this place will have to forcefully close their shops, as it will be very difficult for them to compete with cash rich foreign companies. As Indian manufacturing or other sectors cannot consume whole of this displaced workers in current scenario, it will prove disastrous for unorganized retail sector.

Why government is favoring it?

This step is hailed as one of the most important economic reform which will send highly positive signals regarding India in global market. FDI will spur competition in the retail industry and it will enable consumers to receive goods at cheaper prices which will ultimately check inflation.

What should you do as a Smart Investor?

For a smart investor, the right topic of research now is which stocks will benefit from this policy decision. The sentiment regarding stocks of retailers has been positive after this announcement, which is clearly evident from the price rise we have seen in stocks like Shoppers Stop, Pantaloon retail and Trent. Market is anticipating that the retailer’s growth plans can be funded by the fresh equity infusion. Investment in these companies is recommended as they will benefit a lot in the long run. Another group of companies which we should not ignore is the pharmaceutical retail companies which invaded the market with vengeance like Apollo. You should also keep a watch on some big names of this field like Reliance (Reliance fresh, Reliance Footprints etc.), Bharti (Easy day) and Aditya Birla group (More).

Conclusion

Some of the stocks like Pantaloon and Shoppers Stop have run up a lot after this news flow, so it’s recommended that investors should pause till the prices cool of and the contention regarding the policy gets cleared. Investors should wait for a pullback to enter these stocks as a lot depends on government’s will power to get this policy passed in the parliament.

Author

The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at bimleshs@gmail.com.

American Depositary Receipts - What should you know?

2011-12-07T06:17:53Z

Whenever we listen to any business channel, we normally find analysts discussing the price fluctuation of American Depositary Receipts (ADRs) of Indian companies. Why they are bothered about ADR’s which trade in the US market? As a smart stock market investor, let’s try to figure out what’s so special about ADR’s and how to utilize this knowledge to maximize our profit in stock market.

What are ADRs?

ADRs are dollar denominated certificates (similar as stocks) which trade on American Stock Exchange but the company which they represent are not based in America. The company is a foreign corporation which is not listed on American Stock Exchanges. ADRs are issued by banks and are issued against shares of foreign company held by bank in overseas market. The foreign corporation is bound to provide correct financial information to the sponsor bank.

What are the types of ADRs?

There are basically three types of ADRs:

Level 1 – Most basic types of ADR and are used for gauzing interest for companies securities in American market. The company doesn’t qualify for an ADR and are not listed on the exchange. These ADRs trade mainly in OTC market.
Level 2 – These ADRs meet the regulatory requirement and are listed on the exchange. The listed company must provide financial information and quarterly statements to its shareholders as per American accounting standards.
Level 3 – This is ideal form of ADR and here foreign corporation can float IPO for its ADR in American market. Issuer can raise capital easily and becomes globally renowned. Reporting requirements are same as that for Level 2 ADRs.

What is the need of ADR?

ADRs were created because of the complexities involved in trading of shares in foreign market and the difficulties related to trading at different prices and currency values. ADR’s provides a means of global diversification for American investors who don’t want to participate directly in overseas market because of legal issues and risks. From the perspective of the foreign company which lists their ADR on American market, they get an easy access to foreign capital. It provides a shield against hostile bidders and makes the company famous in international market.

Why you should track it?

As a stock market investor you should be aware of the price movements of the ADR’s of Indian companies in US market. This strategy is more suitable for an investor who is having a short term investment perspective. Sudden price movements of the ADR’s should not be ignored and entry and exit strategy should be devised accordingly. ADR’s trade as stocks, so one can use both technical and fundamental analysis to analyze them.

Conclusion

From now onwards, try and make it a habit to browse through the ADR prices in the morning before market opens. As American market reach and knowledge is quite accurate, sudden price movements in ADRs gives clear indication that something good or bad is in the offing. Keeping a watch will definitely help you in taking informed decisions and will enhance your portfolio return.

Author

The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at bimleshs@gmail.com.

How to benefit from Exchange Rate Fluctuation in stock market

2011-12-02T06:05:00Z

Nothing is unidirectional in this world. Similar is the case with exchange rates. Sometimes you hear that rupee has opened at 43 against dollar and after few trading sessions, it starts trading at 45 or even 50 at times. There are a lot of factors which are responsible for this dynamism of exchange rate including Government Policies, Interest Rate and demand and supply balance. Most of the factors are beyond the control of an individual investor and he has only a spectator’s role to play. One of the good points in this whole story is that if you are an informed investor, you can sense the direction of movement of exchange rate well in advance by understanding the basics of currency fluctuation theories. As you can sense the direction, why not to use this opportunity to extract some benefits from it? In this article, we will try to figure out the impact of currency movements on some exchange rate sensitive sectors in Indian stock market based on which an individual investor can take some smart decisions for short term.

Impact of Exchange Rate Fluctuation

Broadly speaking we can divide the companies into two groups which are majorly impacted by currency movements:

a. Net Exporters

These are the companies that sells products to outside world and receive money in foreign currency terms (be it dollar, pound, euro). Whenever rupee is strong as compared to these currencies, they are exposed to translation loss. This is because they are able to buy fewer rupees with same amount of foreign currency. This translation loss hurts them as they have to bear the raw material cost is in terms of rupees. If the rupee gets weaker as compared to foreign currency, the scenario reverses resulting in overall gain for the exporters.

b. Net Importers

These are the companies who buys product from outside world and pay in terms of foreign currency. Whenever rupee is strong, they can buy more foreign currency with it resulting in overall translation gain for them. In case of weaker rupees the situation reverses and there is an overall loss.

Choosing the sectors to invest

Now we know the broad impact of currency movement so let’s focus on the sectors where one should take exposure in case of anticipated currency movement (up or down)

Information technology (Infosys, TCS, Wipro)

This is one of the sectors which are most sensitive to exchange rates. It falls into category of net exporter hence benefits from rupee going weak. This is one of the recommended sectors to take exposure for short term as the stock price movements are in the tune of 4 to 5% in very short span of time.

Textiles (Arvind Mills)

This sector is a net exporter and receives most of the payment in dollar terms. It benefits once the rupee gets week.

Petrochemical (Reliance)

Earnings in most businesses are linked to dollar as the key input, crude oil is purchased in USD. Rupee appreciation benefits this sector in short and long term.

Pharma (Ranbaxy, Dr Reddy’s Labs)

This sector has exposure both in terms of export and import. They earn foreign currency through exports but they need it for imports too. This sector is a tricky one with respect to exchange rates.

Auto (Maruti, M&M)

This sector has considerable amount of income from export of vehicles. It benefits from rupee weakening but there is one more angle to it. Sometimes the parts they use for assembly are imported. The one who uses more indigenous parts benefits the most in case of rupee depreciation.

Summary of Buy/Sell decisions in Stock Market

Sector	Category	Rupee	Exposure
Information Technology	Exporter	Strong	Sell
Information Technology	Exporter	Weak	Buy
Textile	Exporter	Strong	Sell
Textile	Exporter	Weak	Buy
Petrochemical	Importer	Strong	Buy
Petrochemical	Importer	Weak	Sell
Pharma	Exporter/Importer	Strong	Tricky
Pharma	Exporter/Importer	Weak	Tricky
Auto	Exporter	Strong	Sell
Auto	Exporter	Weak	Buy

Conclusion

There are a lot of other sectors which might get affected based on their foreign currency exposure. This article has covered some important sectors so that you take an informed decision. If you want to analyze a particular sector of your choice you need to concentrate on few basic points like if the company is a net exporter or net importer and how much hedging company does to protect against exchange rate fluctuations.

Author

The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at bimleshs@gmail.com.

Technical Analysis – Why it’s needed.

2011-11-28T06:35:38Z

Gone are the days when market used to be in continuous uptrend or downtrend. In those days Buy and Hold policy used to be the best one. Contrary to that now a day’s volatility is the most dreaded buzzword in stock market. If you stick to the same old policy of buy and hold, you will not even be in a position to beat inflation. If you are a diehard fundamentalist then please check the return of your portfolio since 2008. It should not surprise you if you are sitting on loss by following the buy and hold mantra. If you are little bit convinced now then it’s the right time to change the investment strategy and add a pinch of technical analysis to it so as to generate superior returns. In this article we will try to figure out how following basic steps of technical analysis can help you in taking prudent decisions.

What is Technical Analysis?

Technical analysis is a tool used by traders and investors to figure out the direction of prices of a security through the study of past market data, primarily price and volume. Although this method is not fool proof but it acts as one more weapon in your kitty. Mastering the art of using this weapon will definitely enhance your returns and forbid you from committing silly investment mistakes.

Basic Steps of Technical Analysis

Spotting the trend

Using technical analysis it’s easy to find what’s the general trend of the market? It’s always beneficial to know if the market is in uptrend or downtrend. Buy and hold policy will play for you if you are in up trending market. Keep on sniffing for the start of the downtrend as that’s the right time you book profit and be cash rich. Once the downtrend is over, you can again enter the market and ride it till the top. As the market is very volatile these days, you will get many chances of entry and exit. So, be patient and enjoy the capital appreciation.

Finding support and resistance

Once you are sure of the trend of market, the next step is to find out the right entry and exit point with respect to specific stocks. Let’s say, you like a particular stock A and you want to buy it. Technical analysis suggests that you should not blindly invest in the stock. You should first try to find out what’s the best price at which you can get it. If you are ready to make your hands dirty, you can very easily find out the support price of the stock. In a volatile market, it’s very common for stocks to test their support prices. Just wait for few sessions and you will get a chance to enter the stock round its support price. Similarly, you can find the best price at which you should get out of a position which is the resistance of a stock. You can buy at support and sell at resistance to keep things simple. Ride this sine wave of support and resistance to reap great rewards.

The First Step

Technical Analysis takes into account that the markets are driven not by fundamentals but the human minds perception of fundamentals. As a technical analyst you need to study the following data:

· Price – Present & Historical

· Volume – Present & Historical

· Market Breadth – Present & Historical

If you don’t know where to start from then take help of an advisor or friend who practices this art. A lot of material is available online and a lot of good books are available too. It’s worth investing few bucks and hours in learning this art.

Conclusion

Using technical analysis one can find answers to the following questions

1. When to enter the market.

2. Which stock to buy and at what price.

3. When to book profit .

4. Which stock to get out from so as to minimize loss.

Answers to above questions are a sure shot way of being successful in stock market. So, it’s better to roll our sleeves up and be ready to learn the art of Technical Analysis and mind you, it’s not as tough and confusing as it sounds.

About Author

The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at bimleshs@gmail.com.

To start your analysis:

http://www.investmentyogi.com/how-to/default.aspx

Contrarian Investing – Pros and Cons of it

2011-11-25T16:00:00Z

Contrarian, as the word implies, is the quality or the preference for taking a position against the majority or the crowd. It is typically associated with rebellion or dissent. In stock market, the meaning is different. A contrarian investing is an investing style which advocates taking position against the crowd.

Hence when the crowd panics and start selling, the contrarian investor enters for buying. Similarly when the crowd starts buying, the contrarian investor starts selling. It is very similar to what Warren Buffet says “be fearful, when others are greedy and be greedy when others are fearful”.

Contrarian Investing – A primer

Why do contrarian investors go against the crowd in the investing world? Aren’t we taught about the “wisdom of the crowd” or “efficient market theory” where the crowd’s decision is right and market prices the stocks correctly?

The markets are efficient when it comes to pricing stocks and crowd is generally right about its behaviour. However, these hypotheses are true in long term. Market does mispricing and crowds do exaggerate the situation in the market in short term. This is where the contrarian investors step in and exploit the short term gaps crated by the market in pricing stocks. This mispricing because of crowd behaviour in short term is what keeps contrarian investing such an attractive proposition.

Notes from the Dalal Street

Take the crash of 2007-2008. The fear was magnified because the crowd got panicky after Lehman’s collapse, slowdown in US market, and crashing of few banks in western countries. These events created good short term mispriced equities in the market. Contrarian investors invested in such times and by 2009 end, they made good money because by that time market realized its folly and corrected it by bringing some of the stocks at prices equivalent to the prices before the crisis. ICICI bank came down to 300+ because market magnified the impact of US crisis on Indian banks. Infosys came down to below s 1500 because market magnified the impact of US slowdown on IT companies.

Recently too, we can see the similar trend when Sun TV stock was beaten down because of regional politics of tamilnadu. The stock saw extreme fluctuation in a matter of few days.

Pros and Cons of contrarian investing

A contrarian investor goes against the crowd. It takes extreme guts and faith in one’s ability to be a contrarian investor. If you have faith and enough guts, nothing is impossible. However, you should understand the pros and cons of contrarian investing style.

Pros –

Contrarian investing can be extremely rewarding experience. Usually market magnifies events that impact stock prices. A sane investor following the philosophy of contrarian investing can take advantage of the situation and can make good money.

Contrarian investing also keeps the sanity in the market. When everyone is selling, contrarian investors buy in hordes and balance the market. Similarly when everyone is buying into the eternal bullish market story, contrarian investors keep a tab on the irrational exuberance by offloading their shares.

Cons –

There could be times when crowd dumping a stock is for good reason. There could be concrete information about revenues expected to go down or margin expected to face severe strain. In such cases, blindly following contrarian investing strategy can backfire. Hence investors should know the underlying reasons behind the fluctuation in prices. The point here is that there could be multiple reasons why stock prices go up and down. One of the reasons is pledging of shares by the promoters. This news does not come in media very often. Hence investors have to be pro-active in tracking such news in order to become a successful contrarian investor.

Price of stock is a different phenomenon. The rise and fall in prices needs to be monitored closely by the investor. There can be situations when the rise fall in prices did not match with the news. Understanding the correlation between price fluctuation and events requires expertise that will come by trading for a long time. It is very difficult to learn this by being in market for a few quarters or years. Hence a new investor or investors with less experience may lose money in this strategy.

Finally

Contrarian investing requires more than just going against the crowd. The crowd behaviour in the market is generally right. It is only in short term that crowd behaviour exaggerates the events impacting the market and creates mispricing. Learning to understand mispricing is the key.