Investing in stock markets

Friends. I had written that I would be starting a new post for investors in the stock markets. Many retail investors struggle with investing in stock markets as they are not aware of the details of investing in stocks markets. I hope that I would be helpful to average retail investor in providing valuable information about stock markets. You would have probably read about the principles/strategies/tips/advice about stock market investing. However those views are often biased or inaccurate. They are hardly of help to retail investors as the "objective" of those posts are not to provide accurate information to investors but personal gain of the writer. Its a sad truth. I hope I will be able to provide information that is not only accurate but relevant as well. I will start from the basics and hope to reach to more complex topics. I invite all readers of the blog to share their valuable information. However I hope that I would get more relevant comments in this thread than I got in the previous thread. If not then we cannot help it. I always remember what a dear friend once told me "All along your life you have to meet difficult people and learn how to deal with them."

How to invest in stock markets ?

There are 2 ways for a retail investor to invest in stock markets. One way is indirectly through equity funds managed by a fund manager and second way directly by opening a demat account through a broker.

I will begin with equity mutual funds. Equity funds can be of several types. In India mutual funds, ULIPs, and PMS are the types of equity funds available to a retail investor. Mutual Funds are easiest way to invest in equity markets. This is because you can invest small amounts, your money will be managed by somebody else, and you have many choices in terms of fund houses and types of schemes. Equity mutual funds have emerged as the preferred choice of small and retail investors because of these reasons.
There are a few things to remember though. Increasingly mutual funds have not been able to give market beating returns. It is usually considered that that equity funds on a average give you 12-15% returns on a extended (standard 5 year period). This fact is being increasingly challenged. I am sure if somebody was investing in equity funds through SIP and he were to calculate his return over the last 5 years he would probably have earned 8-10% return. As you can understand this return is at par with bank FDs and debt funds. The point is that stock market returns are increasingly becoming volatile. You would hear fund managers say that over a 20 year period, equity mutual funds have beaten the sensex. That logic too is not admissible. It is hard for somebody to keep on investing for 20 years without having the need to withdraw the money. Secondly there are many alternatives. PPF gives you fixed returns with tax breaks. Bank FDs offer equivalent returns with full liquidity. Therefore be informed before you invest in equity mutual funds.
My personal opinion is that if you want to invest in equity mutual funds, be prepared for the "long haul." And if you have the ability to invest regularly and hold for a long period then invest at least 25% in ETFs. ETFs are a class of funds that invest in the stocks which comprise of various indices. The NIFTY Index funds are the most common funds. They replicate the index in terms of investment.
There are several advantages of investing in ETFs. ETFs have lower management costs as they are passively managed. It is very easy for you to track and time your investments by simply following the movement of the index. And finally you do not have to be dependent on somebody else's knowledge and expertise in managing your money.

This is the first part post of my thread on equity investments for retail investors. I would like to thank the creators of the blog for providing me with the opportunity of contributing and sharing my ideas. I will cover more aspects of equity investing soon.

I would end this post with a small appreciation for Mr. Manoj "Bharat" Kumar who was recently awarded the Dada Saheb Phalke Award. Manoj Ji was or rather is one of the few idiosyncratic and original actors of Bollywood. He idolized Dilip Kumar but developed his own style of acting and film making. It is extremely rare to find somebody who was successful both as a lead actor as well as director. Manoj Ji enjoyed great success in the both the "roles". Several of his films were blockbusters, are considered as classics and remembered by the masses even decades after their release. Though he is remembered for acting in patriotic themed films he was not stereotypical.
He brought immense variety to his work. From Bhagat Singh to Jai Jawan, Jai Kisan to the basic problem of the common man in finding Ropti Kapda aur Makaan, Manoj Kumar has depicted several different stories in a very effective manner. In fact his films are milestones in Indian cinema. And he never had to rely on critics or the media for his accolades or acknowledgement. The audience, his fans know his work and his contribution to the film industry by watching his films. His work speaks for him, literally. A true genius. I am sharing a song of one of his films which does not have a patriotic theme but was a blockbuster. The song is relevant for success in stock markets. You have to invest wisely and regularly and then stop worrying about returns.

 

Dear Investors,
I am writing the next post in this thread. This is tax planning season and I thought it would be better if I can share some ideas in this thread which can help provide information on both investment in equity markets and tax planning. As I had written there are several ways through which a retail investor can indirectly invest in stock markets. One is mutual funds and the other is ULIP. At this juncture I think it would be helpful if I can compare the two.

Equity based ULIP (unit linked insurance plan) is a insurance policy which invests your premium in stock markets after deduction of various charges. Hence essentially a ULIP is mutual fund which provides insurance cover. However there are key benefits and costs which differ in these two types of funds.

Charges in Mutual Funds - Fund management charges, + entry/exit load.

Charges in ULIP - Fund management charges + premium allocation charges + policy administration charges + mortality charges.

benefits in mutual funds - appreciation in capital. ELSS (Equity Linked Savings Scheme) is a category of mutual fund that offers tax benefits.
benefits in ULIP - appreciation in capital + insurance cover + tax benefits.

As you can see ULIPs offer greater benefits and greater charges. You have to review the various charges of both the categories to decide if you want to buy an ULIP. However one thing is clear. If you want to invest in equity markets through a fund mutual fund is simply the best option. A ULIP should only be considered if you want insurance cover as well.

My personal opinion is that if you do not have any insurance policy and have to invest money to save tax then ULIP may not be a bad option. However you must be compulsorily prepared to invest for at least 10 years to reap maximum benefits. The reasons are simple. The longer you invest the more tax you save.That is an instant return. You give your money time to appreciate and reduce the risks with market volatility. Also as per IRDA rules premium allocation charges, policy administration, and fund management charges cannot change during the policy period. Mortality and risk charges change with time, i.e. your age. Usually ULIPs offer benefits with increasing premiums. Premium allocation charges go down or there is bonus added by the company. Hence insurance companies add incentives as you pay more premiums.

You must use a ULIP as insurance cover and for tax rebate, pay premium and be invested for the full term. I am writing this because ULIPs have a lock in period of 5 years. Once you buy a ULIP you have to pay premiums for 5 years and/or be invested for 5 years before you can withdraw the money. If you do not pay premiums regularly the policy will lapse and insurance coverage will cease to exist. However there is really no benefit in investing in ULIP for only 5 years. You will gain nothing given the market volatility. However if you invest for greater period you would save more tax, reduce the risks associated with market volatility, and enjoy full coverage for the entire period.

I would reiterate that ULIPs may not be a bad investment if you want insurance coverage with tax benefits, to add to possible returns from investing in stock markets. However if you do not want insurance coverage and/ or tax rebates there is no point in investing in them. Mutual funds are the better option.

I conclude my write ups on indirect investing in stock markets through funds. There is third option which available through PMS. You may get in touch with Porinju Veliyath and Equity Intelligence if you are interested in that. Obviously I am neither recommending Porinju nor endorsing him. I am just sharing information with you. In today's world opinion and judgement are abundant but accurate and honest information is scarce. If any of you have relevant information or queries please share them.

 

Friends,

I hope you are enjoying the weekend. I am continuing this post with a review of the important information that I have shared. As I have written, I am sharing information which is not readily available. Most of the information which is available is biased. The writer of the articles writes with the objective of not helping retail investors but to serve his own purpose.
As a matter of fact I conclude that many posts started in this thread have vested interests which is different from helping retail investors. I told this to my friends and one of my friends retorted by saying "you need to show the evidence" and since I have no evidence I can only say it is my conclusion. I would leave this your own inference and judgement to decide which post is relevant and helpful and which post has some hidden agenda which is not to help retail investors
.
In this thread my sole purpose is present information which can help retail investors make money by investing in stocks. So far I have shared the following information to investors:

1. There are two ways to invest in stock markets - One is indirectly through equity funds and second is directly by demat account.

2. Equity funds are managed by somebody else who makes investment decisions on your behalf. All types of equity funds have their own charges based on their features.

3. Common equity funds charge anything between 2-3% besides usual taxes and levies. The returns on most equity funds are not significantly better than the benchmark indices. In the last 5 years equity funds have delivered on a average returns of 10% which is almost equivalent to fixed income.

4. ETF funds or Index funds are a special category of funds which replicate the corresponding index. The NSE Nifty is the more popular index. Index funds or ETF have low management charges, (usually < 0.5%) and it is easier to track their returns and time your investment in those funds (by following the corresponding index).

5. ELSS (Equity Linked Savings Scheme) are special type of mutual funds which offer tax benefits as per the limit set by the government. These funds have a lock-in period of 3 years which means you cannot withdraw yor money before 3 years.

6. ULIP (Unit Linked Insurance Plan) is a insurance policiy which invests your premium after deducting various charges. Charges in ULIP include fund management charges + premium allocation charges + policy administration charges + mortality charges. ULIP can also be a avenue for investment in equity markets if you do not have a insurance policy.

You may consider the following options:

1. Invest in mutual funds with a long term view ( > 5 years). In short term there may be volatility which can affect your returns. If you have made decent profits review your investments and book profits.

2. Consider investing a portion of your corpus in ETFs because of their features.

3. Consider investing in a ULIP when you do not have a insurance policy and want to save tax. Review the charges extensively. Unless you do not have to meet both these objectives do not invest in a ULIP. Investing in a ULIP must be done with a minimum of 10 year view. Remember ULIP is a insurance product so if you do not pay the premium on time the insurance cover will lapse. Hence do not focus of the only the return but also on the insurance cover as well.

7. PMS (Portfolio Management Services) a type of fund where your money is invested in a dedicated fund. These are essentially the Indian equivalent of "hedge funds" which is privately held. For greater details you can always contact Equity Intelligence or Porinju Veliyath.

In today's world nothing of value is free. Even friendship comes with a price or so it seems. I am sharing this information without any expectation. It is as free as one of the commercials claimed "the best things in life are free". Well there was certainly no charge for watching the commercial.

However this information is unbiased and practical. I hope I will be of help to investors and help them make money from their hard earned money.

I conclude my posts on investing through equity funds. In the next series of posts I will write about direct investments in equity markets. I know that retail investors are presented with a barrage of information which leaves them confused. This post will present the actual investment ideas and give practical information which can help in making the right decisions about investing in stock markets. This is thread about "Investing in stock markets".

How to buy stocks ? When to buy ? What to buy ? When to sell ? When to hold ? This post will tell you all. And all of this is free. I do not want any donation, and there are no advertisements to click on. You do not have to spend any money.

However I am sharing this video which is an ad film. This benefits of this post and the benefits presented and claimed in the ad are very similar. The ad tells you what you can gain by reading this post.

However I have no information about the product advertised. Hence the usual disclaimers apply. Please review all information before acting on any information or content of this post.

 

Very good write up of investing strategy. Useful and knowledgeable for all.

 

I hope everybody enjoyed the long weekend and are back on their business. I am now beginning my post on direct equity investment. Direct equity investment has proved to be challenging for retail investors as they struggle with market volatility. There was time when Nifty reached 9000 on hope. There was a time when it crashed to 6800. And then it recovered to 7700 and today it cracked another 100 points. This market volatility is what challenges retail investors and they end up losing money. They buy at "highs" on euphoria and sell on lows in "fear". In the process losing money and getting demotivated about equity investing.

However with the right strategy and approach retail investors can also do well in the market. There are many than enough information about the broad principles and guidelines for the investing. There are many success stories of successful investors but what is the practical approach that everybody can follow ?

I hope that with this blog I will share the approach which is required for profitable investing in stock markets. This will be not be about the principles, guidelines etc etc but actual approach that is required which can be put to use. Of course I am not debunking the strategies which are shared in other sources. I am just distilling the information to formulate a approach for the readers. I do hope they will benefit from this post.

What is the most important question or the biggest challenge when it comes to investing in stock markets ?

As a retail investor the biggest challenge that I thought I faced was which stock to buy ?

Please consider this seriously. Everybody would say that this is the "all important question" and nothing else matters. If we are successful in picking the right stock nothing else would matter. This blog, news channels, experts, would all become useless. A good stock can do wonders and bring hefty returns in a short duration. But which is that stock ? How to find that stock ?

However this is the not the most important question. For the simple reason that nobody can predict the future. No expert, no fund manager can be accurate with his investment. Less so a retail investor with little or no knowledge. Hence before you scratch your head trying to find the "multi-bagger stock" (which is virtually impossible to find) ask two equally important questions which are

How much money will I invest in stock markets ?

How long will I stay invested after buying any stock ?

These questions are really important and actually matter a lot. These two questions will definitely impact your returns from stock market and any retail investor must decide and think about this before s/he starts investing in stock markets.

Since this is post is written with a view for beginners I would go slow. I conclude this post by posing the first two important questions for investors. Slowly we would delve into more details. However I would encourage every reader to read this post and think about the questions which have been raised.

In the next post we will try to find answers to these questions.

 

Friends I would begin with the main questions we face .

What stock to buy ?

In a universe of more than 5000 stocks listed on BSE this is easy as well as hard to answer. But in my opinion it is better if we consider these two questions first.

How much money will I invest in the market ?

How long am I prepared to hold a stock I buy ?

I write this because nobody is an expert in predicting the future. Market volatility has increased by the day. Nobody can predict the movement of any stock with confidence. I give you an example. Sugar stocks are rallying like anything. Dwarikesh Sugar has risen by 900%. Others have risen sharply as well. What has changed ? And who would have predicted this rally six months ago. Now when the prices are at 52 weeks high suddenly analysts are suggesting to buy sugar stocks. Of course I am not going into analysis of why these stocks have risen and whether they rise further.

The simple point here is it is very hard for any retail investor with limited information to accurately predict movement of stocks. And hence finding the high returns stock is challenging. In fact going by common information you might purchase a stock at highs and end up selling at lows.

State Bank of India fell to as low as 150. Now it is close to 200. Hence predicting the movement of stock in the short term is very challenging.

If you can identify a stock which gives great returns after your purchase you are either very lucky or are very good stock picker. In either case this write up is not for you.

Hence you must decide on the time frame of investing. I am not suggesting you hold a stock for 10 years or for 1 month. However the time you choose to invest will not only help tackle the volatility but also select the correct stock to buy and most importantly reduce the risk of investing in equity markets.

The answer to the next question "How much money I should invest ? " is also very critical to reducing risk. A I wrote SBI had fallen to 150 to only rise back to 200. If you had invested money in the stock before the fall and needed money you probably would have had to book at losses. On the contrary if you had money to invest during the crash you would be looking at gains. Hence the amount of money you want to invest in stock in a given time say a year or 3 months is very important.

Also both the questions " How long will I hold a stock ? and How much money I will invest are easy ? are easy to answer from a individual perspective and greatly reduce your risks in the market.

Hence for any retail investor the question order should be

How long will I hold a stock I buy ?

How much will I invest in that stock ?

And then which stock will I buy ?

I conclude this post with these three questions. In my next post I will try and answer these questions from a retail investor's point of view. Any suggestions and comments are welcome.

 

There are two realities of investing in a stock market.

1. There is a risk of loss of capital. A 100 rupees stock may become 80. Then it may become 60. Nobody predicted that a day will come when HDFC Bank's m-cap will exceed the combined market cap of SBI and ICICI Bank but the day has come.

2. There are no assured returns in stock market. There is no analyst in the world who can predict the returns of any stock with guarantee. Its all probability and based on the current analysis of the future. There are too many things which affect a stocks performance hence be prepared for volatility.

How long will I hold a stock I buy ?

It is very important to decide your time frame. You may hold a stock for a week. You may hold it for a month or you may hold it for 10 years. Your holding period is very important in deciding your stock. In case your holding period is short you follow the short term trends. In the short term the movement of stocks is driven by news and speculation. However in the long term the fundamentals of the stock matter the most. Hence the holding period helps you identify the nature of stocks you want to buy. In the short term technical analysis is helpful in indicating the movement of the stock. Also news, rumor, results also play a part. Hence investing a making a gain in the short term is a challenge. However if you identify a good stock and be invested for the right period (certainly more than a year) the chances of making money in the stock increase many times.

How much money will I invest in a stock ?

Your investments in the stock market are decided by the time frame. As I said stock markets are volatile and can always lead to losses. Hence whenever you invest decide on your allocation. What amount of money can you spare to invest after you have enough to meet other needs. You may create a corpus for investment for long term. You may create a corpus to invest in the short term but always be decide on the amount. Investing random amounts over unspecified period of times is bad and confused strategy which is likely to yield losses.

After you have decided on your investment corpus and investment horizon then start looking for the stocks you want to buy. Wit set investment horizons and amount you will do far better in selecting a stock.

Which stock to buy ?

There are thousands of stocks to buy in the stock market. Each company is different from other and every stock has its strength and weaknesses. Then what should you do ? You should buy a quality stock.

No matter whatever so called experts say it is never difficult to identify a good stock. In the Indian market a HDFC Bank or ITC or Infosys is never hard to identify. Buy these good quality stocks.

As a investor your first few steps should be strong and sure. If you buy "risky" stocks be prepared to face the consequences. Buying into unknown unproven companies by acting on tips should only be followed when you a seasoned investor not a greenhorn.

Now we can summarize what can be good strategy for retail investors.

Begin by buying a stock with at least two year horizon.

Begin by buying a high quality stock.

Never invest all your money at one go. Invest amounts periodically.

So what are you waiting for. Jump into the stock market and prove yourself. No more "dekhte hain". Ab "kharidte and bechte hain".