Basic rules of investing in the stock market

 Any beginner in the stock market should start with blue chip stocks as the risk is lower for such stocks, compared to mid cap or small cap companies.

After Life insurance, by and large the most preferred instruments wherein Indians park their surplus cash are fixed deposits or government savings schemes. While this allows their money to be largely secure from the stock market, it also keeps them away from the prospect of earning high returns. In this context, let us discuss the essentials of investing that would help investors to be ready for investing in the stock market.

Analysis

Any investment strategy is based on the analysis of the financial instruments on offer. The investor needs to understand the business of the firm whose stock he plans to buy in the market. One should understand how the company carries out its business, its strengths and weaknesses, its growth prospectus etc. The investor should also go through the financial statements of the company and how well the management is managing the affairs of the company. One needs to understand from where the company is generating cash and where it is being utilised. Investors must understand the prospects and the value of the firm and compare it with the current market price of the stock. If the stock is undervalued, the the investo can invest in that stock.

Look at blue-chips stocks

Any beginner in the stock market should start with blue-chip stocks. The term "Blue-Chips" comes from the game of poker where the blue chips command the highest value on the table. Similarly, a blue-chip company is renowned, well-established, and financially stable company. Investors who are new to the stock market can start their journey by investing in such companies as the risk factor is lower for such stocks, compared to mid cap or small cap companies. Although the mid cap and small cap companies have higher returns, they are also more volatile than these blue chip stocks.

Cashing in or Cashing out

One of the most important, but an often forgotten, aspects of investing in the stock market is the exit strategy. Beginner investors tend to keep their stocks on their portfolios as their babies and do not let go even when the stock price hits the roof. This reluctance to sell a stock happens because they do not have an exit plan ready. Exit plans are necessary for both situations- stock prices moving upwards or downwards. If the stock prices move upwards, the investors should cash in after it has breached his expected returns margin. If need be, the same stock may be again purchased and kept in the portfolio, if the stock is undervalued and if it can go upwards in future.

Diversification

Though we all know the adage "Never keep all your eggs in the same basket", yet it is not executed in the stock market context. Diversification is the method by which we can maintain out returns while reducing the risks of our portfolio. Diversification means investing in different companies from different industries whose prices do not move in the same direction. It also means investing in different industries which are not connected to each other. Diversification reduces the impact of market volatility in the investor's portfolio.

 

Spend or Save? Finding the Perfect Balance

 Adopt the 50:30:20 rule by allocating 50% of your income to essential expenses, 30% to buying things you want and 20% to savings for the future.

To save or to spend, this is a question that goes through our minds during the annual festive and wedding season. Wisdom states saving money is important to protect ourselves against future worries about money. At the same time, you need not necessarily turn down short-term indulgences because spending on thing/activities we want and need can bring us happiness. So what is the balance? You just have to spend responsibly. Consider the below mentioned pointers for making good spend versus save decisions.

Major pointers to check

Ensure that you have an adequate emergency fund. You should have an emergency fund which will cover three to six months of expenses. Saving for retirement is a continuous process when you are on the job and so check that the process is a continuous one. Make sure that you donot have debts, especially credit card outstanding etc.

How can we balance?

There are multiple ways through which one can balance between spending and saving. Let us see a few of them:

Shop smart: Instead of making impulse purchases at high end stores, shop smart and look for savings; this actually adds another layer of thrill to the shopping process, nothing feels better than getting that feeling of a shoping reward and knowing you saved money in the process.

Make use of the offers: There is nothing wrong with making a big-ticket purchase such as buying an item you have always wanted, but consider the same while brands are offering some special offers or discounts.

Sell the things you do not need: If you are just coming out of an uncontrollable spending habit then you probably have a lot of things you actually do not use and they are simply lying around occupying space. Sell those items/ things that you do not need or use, put half this money into savings an then have half to spend on things you actually need. Repeat this process whenever you have too much stuff, but remember to leave the savings in the emergency fund untouched.

Buy memories than things: Instead of buying 'things' one could always think of buying 'memories'. Invest in spending time with your family and deepening relationships with close friends. Money cannot buy happiness, but it can help you spend more time with the people who make you happy.

Use a standard budgeting rule: Rather than thinking of spending and saving as an all or nothing, mentally allocate a portion of your income to both. You could use the popular 50:30:20 rule by allocating 50% of your income to things you need as your essentials such as rent, bills, food etc., 30% to things you want such as those new shoes and dinner in a nice place and 20% to your savings for the future.

To conclude, definitely you should save your future  but immediate spending has a feel good factor and you can justify it to yourself with excesses about living in the here and now. Clearly, there is no straight answer for the question whether to save or to spend. Assess your own personal financial situation, examine your current and future spending needs and income, and then spend responsibly in an effort to maximize your long term financial security.

Six Kinds of Hybrid funds: Know what’s best for you

A hybrid fund is a type of mutual fund that invests in a mix of asset classes within the same fund. Depending on the type of fund, it can be combination of two or more asset classes that includes equity, debt, gold and also international equities in varying proportions. There is little to no correlation between these asset classes, which can enable an investor to artfully balance risk and return at all times through flexible rebalancing.

            Understanding the broad contours of a hybrid fund makes it easy to easy to see their relevance in an investor’s portfolio. At the same time, it is not a one-size fits all approach. Bucketed based on the asset class allocation and risk factor, each has a different investment style and purpose. In order to pick the right fund for your portfolio, remember to first understand and assess each type.

Conservative Hybrid Fund:       

            A conservative hybrid fund invests only about 10-25% of its total assets in the stock markets i.e. equities. The remaining portion in invested in debt instruments that includes corporate and government bonds and non-convertible debentures. While the debt investment aims to provide regular and stable income from coupon payments, the equity portfolio has the potential to generate better returns through capital appreciation and dividends over time. If you are a risk-averse investor with moderate returns expectation, then this category of hybrid funds is likely to suit your investment style.

Aggressive Hybrid Fund:

            This category of hybrid funds is at the other end of the spectrum compared to a conservative hybrid fund and is good for investors who have a higher risk appetite. The mandate is to allocate 65-80% to equity across market capitalization (large-cap, mid-cap & small cap) and the remaining to debt and other asset classes. The category is ideal for investors who are looking for equity like return (as 65%-80% is invested in equity) but with lower volatility (balance 20-35% is invested in fixed income). But as the underlying is heavily tilted towards equities, investors should consider this product for a period of more than 5 years.

Dynamic Asset Allocation Fund:

            A balanced advantage fund or a dynamic asset allocation fund is hybrid mutual funds which increase/ decrease allocation between equity and fixed income based on certain pre-defined valuation parameters. An investor can invest in balanced advantage funds if they want to avoid timing the market levels. The fund balances between equity and fixed income instruments depending on market conditions to earn reasonable return with low volatility as compared to pure equity funds.

Arbitrage Fund:

            Arbitrage funds take advantage of the price differential of a stock either on two different exchanges or between two different markets (the cash & derivative market). By creating an arbitrage position, the fund manager ensures that the spread between the two markets is captured and this translates into returns for the investor. With the advantage of equity taxation, an arbitrage fund can be an investor’s choice for parking short term surplus liquidity and earning decent returns.

Multi Asset Allocation Fund:

            Going one step beyond your traditional hybrid funds, the multi asset fund invests in at least three different classes with a minimum of 10% allocated to each. A mix of three asset classes can help the investor attain the goal of asset allocation via a single product. Since every asset class behaves differently, diversification safeguards the portfolio against downside emerging in a single asset class. A mix of asset classes which have low correlation amongst them is a good way to generate decent returns with low levels of volatility.

Equity Saving Fund:

            The equity savings fund is another way of diversifying the portfolio as the fund is a prudent mix of equity, debt and arbitrage. An equity savings fund does just that, by allocating a minimum of 65% in equity and arbitrage positions and the balance in fixed income instruments. The arbitrage positions create a hedge in the portfolio and the focus is to generate regular income, whereas the allocation to equity focuses on capital appreciation. Because of this, the funds equity exposure is partially hedged and the volatility is reduced as compared to the completely unhedged equity exposure in aggressive hybrid fund. The fund also offers equity taxation.

                        Each type of hybrid fund has a unique investment style. Investors must compare these plans via their investment needs and pick the one that best address them.

Equity fund-of-funds is a Prudent Investment

 Retail investors often try to time the market which is not the optimal strategy most of times. Investor should map their equity allocation to their long term financial goals and stagger their investments to achieve the best results from equity.

            The sharp rise in markets and overall improvement in the economic environment has led to investors putting more money in equity mutual funds. The mutual fund industry has also gone into overdrive and has been launching a slew of NFO. However, it is best to advise caution to the retail investors. With valuations at a premium, especially in the midcap and the small cap side, there is a significant possibility of new investors facing disappointment (in terms of returns) in the near term and pull out money at the wrong time, out of fear; if the markets correct sharply. Over the long term, as the understanding of equity as a long term asset class (and not a short term speculative avenue) increases, flows to the equity mutual funds should improve structurally.

            Many conservative investors are opting for hybrid funds now to compensate for lower returns in fixed deposits, as well as to get a flavor of equities. We may see this trend continue going forward. Even balanced hybrid fund and dynamic asset allocation funds tend to be equity biased as and when they try to generate better returns and alpha. While achieving these objectives, these hybrid funds invariably end up taking more risk, which may not always match the risk profile of conservative investors. If these preferred hybrid fund categories are not able to provide downside protection through the stock market volatility as expected, conservative investors may not be comfortable staying on.

                Floating rate bonds are a good investment choice in a rising interest rate environment. As market interest rates move up, coupon rates on these bonds reset to higher levels. However, there is limited stock of quality floater securities available in the Indian debt market and secondary market liquidity is much desired in this segment. So, it would be extremely difficult with an increase in the AUM size in this narrowly focused category to not compromise on the portfolio quality.

                Investors often buy different equity mutual funds to diversify but inadvertently buy funds with similar strategies and portfolios. Diversification in the mutual fund portfolio needs to be backed by proper research. Ideally, 15% allocation should be towards a well-managed value fund, 15% to an ESG focused equity fund and then a layer of 5-6 equity mutual funds diversified across caps and styles.

                Value funds aim to ignore short term market movements and wait patiently for value to emerge as it allows them to generate steady returns over other equity mutual funds is that the companies that are strong on ESG have relatively better long term financial prospects. Whereas, an equity fund-of-funds is a prudent investments option to build the major portion of your equity portfolio is just by investing in one fund. This fund gives investors exposure to funds that are actively managed and lets them rely on the fund manager’s capability to take advantage of the correction and build a robust portfolio.