Should You Invest in The Stock Market if You Do Not Have Big Money?

Should You Invest in The Stock Market if You Do Not Have Big Money?

Should You Invest in the stock market if You do not have big money?

This is a general question which stops many people from investing in the stock market. Most people believe that investing in the stocks is the thing for the rich people- probably businessman, techies or finance/commerce guy- who has a lot of money to spend.

However, in actual, it is not so. Many successful investors in India started with a minimal amount. Personally, I started investing in stocks with just Rs 1,500 as a college kid. And even that felt a significant amount then.

Case Study:

Let’s assume that you started investing with just Rs 2,000 per month. This is a very small amount for a majority of the salaried/working people and it’s not going to hurt you financially.

In most cases, people tend to increase the investment amount gradually with time when then receive a salary hike or promotion. However, for simplicity, we are assuming that you didn’t raise the investment amount (nor did you decreased it). You invested the same Rs 2,000 per month with discipline.

Besides, we are also assuming that you’ll get a decent annual average return of 14% per year from your investments. (This return can be lower like 2-3% during bear phase/ lousy market and as high as 25-30% during bull market/ right economic conditions. For example- the benchmark index Nifty gave a return of above 26% last year.)

Now, let’s calculate how much wealth you would create in the next 30 years if you regularly invest Rs 2,000 per month with discipline.

Source: SIP Calculator- Paisabazaar (Feel free to try out the calculator yourself).

Your monthly investment of Rs 2,000 is expected to grow over Rs 1.09 crores in the next 30 years. This is a considerably big amount when compared to the small monthly investments that you started.

Quick Note: You might be thinking that 30 years is a too long time frame and what will you do with the money at that age. However, you must remember that these days the life expectancy in India has increased a lot. Most people are easily able to live up to an age of 80-85. So, even if you start to invest at an age of 30 and get this money when you are 60, you still have 20-25 years more to live. And at that age, this money can help you a lot in financial independence. The bigger the amount, the better it is for you.

A small investment in the stock market:

You may call me a conservative (or old-fashioned) investor, but I believe that even a tiny stake in amazing companies can bring a high return to its shareholders.

Apart from your initial investment amount, there are two critical factors which decides how much return you’ll get from your investment- 1) Return on investment (ROI) 2) Time Frame.

If you can maximize the other two factors, you’ll be able to build enormous wealth. 

Even if your initial investment amount is small, however, if the CAGR is decent and you remained invested for a long-term, you can generate a significant return on your investment.

There are many examples of small investments in the Indian stock market done in the 1990’s which later turned out to be worth over Crores in the next 25–27 years. For instance- Infosys, WIPRO, MRF, Eicher Motors etc.

Also read:

mrf share price

Source: TradingView

Conclusion:

Investing even a small amount of money in the stock market is worth it if you are ready to stay invested for a long time. Here, the power of compounding helps you to generate wealth. Even with an above average return, you can build a large corpus if the number of investing years is long.

Moreover, it’s not necessary that you’ll always invest the same amount.

The important thing here is to get started. Maybe, with time you can save more to invest. But if you do not start investing now, even then you’ll feel that this amount is too little to invest in the market.

In the end, here’s a fantastic quote by the legendary investor Warren Buffett which might teach you the power of a small investment over the long term:

 

July 30, 2018 Investment Basics 2 comments
tata motors vs maruti suzuki case study

Case Study: Tata Motors Vs Maruti Suzuki

Case Study: Tata Motors Vs Maruti Suzuki

Hi there. Welcome to the day 20 of my ’30 days 30 post’ challenge, where I am writing one blog post daily for the 30 consecutive days.

Several of my blog readers have requested me to write an analysis on the real companies using the using different financial tools. That’s why in this post I’ve decided to write a case study on Tata Motors vs Maruti Suzuki.

I have chosen these big and well-known companies to show how the performance of the companies are reflected in their respective share prices. Overall, it’s going to be a very interesting post and there are many key takeaways that you can learn from this case study.

1. Tata Motors

tata motors

Tata Motors is a big multinational automobile company in India. We all have grown up seeing Tata Motors automobiles in our lives. It was originally founded in 1945 and currently, it’s headquartered in Mumbai.

Tata Motors has a diversified portfolio in both commercial and passenger vehicles. Its products include passenger cars, trucks, vans, coaches, buses, sports cars, construction equipment and military vehicles. It has auto manufacturing and assembly plants in Jamshedpur, Pantnagar, Lucknow, Sanand, Dharwad, and Pune in India, as well as in Argentina, South Africa, Great Britain and Thailand.

Few of the popular cars offered by Tata Motors are Indica, Indigo, Zest, Bolt, Hexa, Tiago and Nano. (Recently, Tata Motors announced that it will discontinue the production of 10-years old Tata nano, the world’s cheapest car. Read more here.) Besides, the world famous luxury cars- Jaguar Land Rover (the maker of Jaguar and Land Rover cars) is also a subsidiary of Tata Motor

Overall, Tata motors is a big brand in India with a widely diversified product. So, does this makes tata motors a good investment option? Before deciding anything, let’s first look at a few of the key financials of Tata Motors.

Here’s a quick snapshot of the critical financial ratios of Tata Motors for the last 5 years.

Return on Equity Earnings per share (unadj) Debt/Equity Net Margin Book Value /Share
2017 13.0 26.2 1.0 2.8 201.1
2016 14.8 40.4 0.6 4.3 273.5
2015 25.3 51.1 1.0 5.3 202.0
2014 21.3 51.1 0.7 6.0 239.7
2013 26.3 36.5 0.9 5.2 139

(Source:  EquityMaster)

Damn, the financials of Tata Motors doesn’t looks good!!

Quick note: If you are not familiar with the terms mentioned in the above table, here’s a detailed explanation regarding the important financial ratios.

From the above table, you can notice that the Return on equity (ROE) of Tata Motors has been continuously declining for the last 5 years. Further, the earnings per share are also degrading for the same period. It went down from an EPS of 35.6 in 2013 to 26.2 in 2017.

On the other hand, if you look at the debt/equity ratio, you can find that it’s also fluctuating a lot. As a thumb rule, you should always invest in companies with a debt/equity ratio lower than 0.5 (the best scenario is when the company is debt free). However, for the case of Tata Motors, its debts are equity to quite high.

Moving on, if you look at the net profit margin, here again, you can notice a declining trend. The profit margin of Tata Motors has reduced from 5.2% in 2013 to 2.8 percent in 2017. This clearly is in sync with the declining market share of Tata Motors in the automobile industries. Once, Tata used to be a market leader in the commercial vehicle segment with over 60% customer share. However, these days there are a lot of competitors of Tatas and hence it has lost its monopoly and the profit margin along with it.

The competitive position of Tata Motors is a little complex to access because it works in both commercial and passenger vehicle segment. In the commercial vehicle segment, the key competitors of Tata motors are Ashok Leyland, Bharat Benz, Mahindra and Mahindra, Eicher Motors etc. In the passenger vehicle segments, the key competitors are Maruti Suzuki, Hyundai, Honda, Renault etc.  

If we look from the broader aspect, the Tata Group is doing really good with their prime companies like TCS, Tata Steel, Tata Chemicals, Titan, Tata tea, etc. However, the things are not similar in the case of Tata Motors. Tata Sons Chairman, N Chandrasekaran has been trying to improve the profitability of the company with the help of its MD Guenter Butschek, however, the changes are not reflecting in the financials.  

Although Tata Group has been a pioneer in the growing development of India and they have contributed a lot to India’s economy. However, just having a brand name is not enough to survive (and remain profitable) in this competitive business world.

2. Maruti Suzuki

maruti suzuki

The next company in this case study is Maruti Suzuki.

Maruti Suzuki is a leading automobile company in India. The company is headquartered at New Delhi. It is a 56.21% owned subsidiary of the Japanese car and motorcycle manufacturer Suzuki Motor. As of January 2017, it had a market share of 51% of the Indian passenger car market. Few of the popular products of Maruti Suzuki in India are Ciaz, Ertiga, Wagon R, Alto, Swift, Celerio, Swift Dzire, Baleno and Baleno RS, Omni, Alto 800, Eeco, Ignis etc.

Alto and Swift have been consistently ranked as the top-best selling cars in their respective segment (hatchback). In the last few decades, Maruti has built an amazing brand value in the automobile industry by providing best-affordable products and amazing customer service.

Now, let’s have a look at the financials of Maruti Suzuki for the last 5 years.

Return on Equity Earnings per share (unadj) Debt/Equity Net Margin Book Value /Share
2017 20.3 248.6 0 11.0 1227.3
2016 18.0 182.0 0 9.5 1013.5
2015 14.6 126.0 0 7.5 861.4
2014 13.3 94.4 0 6.4 711.6
2013 13.0 81.7 0 5.6 629.9

(Source: EquityMaster)

What!!! The difference in the financials of Tata Motors and Maruti Suzuki is like night and day.

From the above table, you can notice that how Maruti Suzuki has consistently given excellent performance. For the last 5 years, the return on equity (ROE) of Maruti has been continuously increasing. And in the same period, it’s earning per share (EPS) has increased over 3 times. That’s a real healthy sign of a fundamentally strong company.

Another, magnificent point regarding Maruti Suzuki company is that it’s totally debt free. The debt to equity ratio of Maruti is zero for the last five years.

Next, if you look at the profit margin, its also consistently increasing. From 5.6% in 2003, it has increased to 11% in 2017. This is a pre-eminent profit margin for the companies in the automobile industries.

Lastly, if you look at the book value per share, it’s also showing a healthy growth sign. Maruti’s book value per share has doubled in the last 5 years (from 629.9 in 2013 to over 1227.3 in 2017).

Overall, Maruti Suzuki has performed exceptionally well in this last five years.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

Conclusion: Tata Motors Vs Maruti Suzuki

In this post, we looked at two big companies with amazing products and a big brand name. However, from our analysis, it is clear that Maruti Suzuki fulfills the criteria of a wonderful company to invest while Tata Motors clearly not.

According to the principles of value investing, the stock price should eventually reflect the performance of the underlying company. As 5 years is a sufficiently long time for this effect to apply, let us look at the price performance of both these companies over the last five years.

tata motors vs maruti suzuki

(Source- TradingView)

The above graph exactly shows what is expected. Maruti Suzuki has performed well better compared to the Tata Motors over the past 5 years. Maruti has increased the share price over 7-fold in this time frame. Whereas, the stock of Tata Motors is trading at a loss of around 10% compared to what it was trading 5 years ago.

Quick Note: If you are new to stock market and want to learn stock market investing from scratch, feel free to check out my online course here.

Bottomline:

From the above case study, you can learn that it’s not a rocket science to analyze stocks.

Selecting a winning stock is not a gambling. The returns from the stocks are in line with the performance of the underlying company. If you treat stock as a company and perform a smart analysis before investing, then I assure that the results will largely be amazing. Value investors simply win over the long time frame.

That’s all for this post. I hope it was useful to you. Happy Investing.

July 29, 2018 Investment Basics, Stocks 15 comments
Is Mr. Market Ripping you off

Is Mr. Market Ripping you off?

Hi there. Welcome to the day 18 of my ’30 Days, 30 Posts’ challenge- where I’m writing one post daily for the 30 consecutive days.

Today, I’ve got an amazing opportunity to introduce you to one of my old friend- Mr. Market. Many of you might already know him. However today, you are getting an amazing chance to personally meet him.

Mr. Market: My old Emotional Manic Friend

First of all, I would like to mention that Mr. Market is a fictional character created by the father of value investing- Benjamin Graham in his best selling book- “The Intelligent Investor’. Knowing this character can radically change the way you look at investing.

Quick Note: If you haven’t read ‘The Intelligent Investor’ book yet, I’ll highly recommend you to read this wonderful book. This is one of my favorite books on investing.

In the book ‘The Intelligent Investor’, Benjamin Graham tells a story of a man whom he calls Mr. Market.

mr. marketHere, Mr. Market is the business partner of yours (Investors). Every day Mr. Market comes to your door and offers to either buy your equity in the partnership or sell his stake.

But here’s the catch: Mr. Market is an emotional maniac person who lets his enthusiasm and despair affect the price he is willing to buy/sell shares on any given day. Because of his nature, some days he’ll come to the door feeling jubilant and will offer a high price to buy your share of the business and demand a similarly high price if you want to buy his stake.

mr market emotionalOn other days, Mr. Market will be inconsolably depressed and will be willing sell his stake at a very low price, but will also offer to buy your share at the same low ball offer if you want to sell your equity.

Overall, when he is in a good mood, he gets greedy and quotes ridiculously high prices. But when he is feeling depressed and emotional, he is willing to sell you the same stocks for rock bottom prices.

On any given day, you can either buy or sell to Mr. Market. But you also have the third option to completely ignore him i.e. you don’t need to trade at all with Mr. Market. If you ignore him, he never holds it against you and always comes back the following day.

What should you do with Mr. Market?

An intelligent investor will attempt to take advantage of Mr. Market’s emotional behaviors by buying when he is depressed and selling to him when he is maniacally optimistic.

There is no need to feel guilty as otherwise, Mr. Market will ‘willingly’ rip you off during his peak times. Moreover, you do not feel pity because Mr. Market is the one who is setting the price. As an intelligent investor, you should do business with him only when it’s to your advantage. That’s all.

The key point to note here is that though Mr. Market offers some great deals from time to time. The investors just have to be alert and ready when those offers come up.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

How to apply this to your own investment strategy?

Like Mr. Market, the stock market also behaves in the same manner.

The market swings give an intelligent investor the opportunities to buy low and sell high. Every day you can pull up quotes for various stocks or for the entire market as a whole. If you think the prices are low in relation to value, you can buy. If you think prices are high in relation to value, you can sell. And if prices fall somewhere in the grey area in between- you’re never forced to do either.

This is a value-oriented disciplined investing. Don’t fall victim to irrational exuberance. Don’t panic, don’t sell. Remain calm during the hyperboles of the market’s daily fluctuations.

July 27, 2018 Investment Basics 2 comments
decrease in the Promoter’s share a bad sign for the investors-min

Is a decrease in the Promoter’s share a bad sign for the investors?

Is a decrease in the Promoter’s share a bad sign for the investors?

One of the biggest corporate scams in the Indian stock market where thousands of investors lose their money was the Satyam Scandal.

In this scandal, the Satyam computer services chairman Ramalinga Raju confessed that the company’s accounts were falsified and they manipulated the reports of Rs 14,162 crore in several forms.

The confession was shocking for the both corporate and the investing community. However, if the investors had carefully looked at the shareholding pattern of the company, they might have realized that something terrible was cooking inside.

During the scandal period, the promoters were gradually decreasing their stakes from their own company year-after-year.

satyam scandal

A look at the shareholding pattern of the company over the years reveals that the promoters held 25.60 percent equity as of March 2001 but reduced their stake every subsequent year (Ramalinga Raju sold 4.4 crore shares in the 2001-08 period). By March 2002, the promoter’s stake got reduced to 22.26 percent and further down to 20.74 percent as of March 2003. As of September 2008, the promoters held only 8.61 percent stake -which was the latest figure available.

Read more here: Satyam promoters gradually reduce stake -Economic Times

The continuous decrease in the promoter’s share in Satyam Computers was a warning sign which most shareholders ignored and later resulted in losing their money.

When a decrease in the promoter’s share a bad sign?

As a thumb rule, a continuous decrease in the promoter’s share from their own company is not a healthy sign.

This is because the decreasing stake means a low confidence of the promoters (who are actually the owners) towards the future of their own company.

The promoters are the insiders, and they have the best knowledge of their company. They understand the product/services offered by their company, its demand in the market and the future growth potential. Further, they are also regularly updated on the finance of the company. They know how much revenue and profit their company is generating and how much financially strong/weak they are.

Therefore, if the promoters are optimistic towards their company’s future and have a clear vision/goal for its growth, they will not want to sell their shares or reduce the stake in the company which they themselves started.

In short, if the promoters are continuously decreasing their stake, then you might need to investigate further and take cautionary actions.

Also read: Shareholding Pattern- Things that you need to know

When the decrease in the promoter’s share actually  ‘NOT’ a bad sign?

If the promoters are openly mentioning the reason why they are reducing the stake or if the decrease in the promoter’s share is just one-time activity, then it might not actually be a bad sign.

Here, maybe the promoters are planning for a new venture, new acquisition, a new company or just to buy a new house. Everyone has the right to use their asset when they need it. If the promoters have some different plans, then they might sell their stakes to raise capital, and it’s not a warning sign.

For example- During May-June 2018, RK Damani- the promoter of Avenue Supermarket (Dmart Stores)- offload 62.40 lakh shares, or 1 percent equity.

rk damani avenue supermart

Was this a sign of trouble for the shareholders?

No!! RK Damani was selling his shares to meet the Minimum Public Shareholding (MPS) norms.

Everyone knew this reason, and hence the decrease in the promoter’s share couldn’t be taken a lousy sign here. (Nevertheless, the script still fell 5.23 percent after this announcement).

Similarly, if you follow the international market, you might have heard that in April’17, Jeff Bezos, the owner of Amazon company sold $1 Billion worth shares of Amazon. Should the shareholders panic and sell off their shares too in such a situation?

No! At that time, Jeff Bezos was selling the shares to fund his Blue Origin rocket company, which aims to launch paying passengers on 11-minute space rides starting next year. Overall, the company fundamentals remained the same. Just because the promoter holdings decreased, doesn’t mean any danger sign.

Conclusion

A decrease in the promoter’s share might not always a bad sign. Here, you need to investigate why the promoters are selling their shares. If the reason is genuine, then you might not need to worry.

However, if the stakes are continuously decreasing and you can’t find any reason- then you might need to look into the matter seriously.

July 26, 2018 Investment Basics 4 comments
mutual fund terms

23 Must-Know Mutual fund Terms for Investors.

23 Must-know mutual fund terms for investors:

Investing in mutual funds can be a good alternative for the people who are interested to invest in equities but do not have much time and knowledge to invest individually. As mutual funds as professionally managed, can sit back and relax. However, there are many frequently used mutual fund terms that investor should know so that they can at least understand ‘how’, ‘what’ and ‘where’ of mutual fund investing.

For example- here is the fund description for IDFC Focused Equity Fund-Regular Plan (G) —

mutual fund terms

Source: Moneycontrol

If you are a beginner, there may be a number of terms mentioned in the above table with which you might not be familiar. For example- Open end, Entry load, exit load etc.

In this post, we are going to discuss such key mutual fund terms that every investor should know to make an informed investment decision.

Also read: What is Mutual Fund? Definition, Types, Benefits & More.

23 Must-Know Mutual fund terms for investors-

Here are the 23 most frequently used mutual fund terms that every investor should know.

1. AMC: It stands for Asset Management company. They are financial institutions that manage multiple funds like HDFC mutual fund, SBI Mutual fund etc.

2. NAV: It stands for Net Asset Value. This is the unit price of a fund. When a fund comes out with an NFO (New fund offer), it announces a price (generally Rs 10). Later, depending on the return of the investments, this price could rise or fall.

It’s similar to the share price. For example- Shares represents the extent of ownership in a company. Similarly, NAV represents the extent of ownership in the mutual fund. 

3. AUM: Asset under management is the total value of money that investors have put into a particular mutual fund. Top mutual fund companies in India manage thousands of crores of rupees.

top AUM India

(Source: Moneycontrol)

4. Funds: These are individual schemes with specific goals and investment philosophies. For example- HDFC Index equity fund, Sundaram selects mid-cap fund etc.

5. Portfolio: The portfolio shows all the investments made by a fund (including the amount in cash). For example, if a fund has invested 80% of its total value in 40 companies and has kept remaining 20% of the amount as Cash (for a better opportunity in future), then this 40 companies and cash consist of the portfolio of that fund.

6. Corpus: This is the total amount of money that you’ve invested in a fund. For example- Let’s assume that you bought 10 quantities of a mutual fund where each unit is worth Rs 100. Then, your total invested amount with the fund is Rs 1,000. This is referred to as the corpus.

7. Expense Ratio: It is the annual fee charged by the mutual fund scheme to manage money on your behalf. It covers the fund manager’s fee along with other expenses required to run the fund administration. A lower ratio means more profitability and a higher ratio means less profitability for an individual investor. Generally, an expense ratio for an active fund can be between 1.5-2.5%.

expense ratio

(Source: Cleartax)

8. LOAD: It is the fee that is charged when you buy or sell a unit of a fund. The load is a percentage of the NAV. Generally, a fund can charge an entry or exit load.

9. Entry load – This is the initial fee that you pay while entering a mutual fund. Here, you pay a percentage of the NAV. For example, if the entry load of the fund is 2% and you are investing Rs 10,000. Then it means that you pay Rs 200 as the entry load and Rs 9,800 will be invested in the fund.

10. Exit load – This is the charge for redeeming your unit i.e. this is that amount that you have to pay (as fees) when you sell your fund. Generally, the exit load is applied if you decide to sell your shares before a specific time period. Usually, it’s 0.5% when you withdraw before 365 days. For example, let’s say that the exit fee of a fund is 0.5% and the current NAV of your fund is Rs 10,000. Then, you’ll have to pay Rs 50 as the fee and you’ll get back Rs 9,950.

11. Redemption: Selling your fund back to the fund house (not to the general market) is called redemption. While redeeming, the value that you’ll receive is equal to NAV – exit fee. 

12. SIP: A Systematic Investment Plan refers to periodic investment in a mutual fund. For example, the investor can invest a fixed amount (say Rs 1,000 or 5,000) every month, every quarter or six months to purchase some units of the fund. SIP helps in investing automation and it brings discipline to the investment strategy.

13. Lock-in Period: This is applicable for the Tax-saving funds. There is three years lock-in period for tax-saving mutual funds in India.

14. ELSS: It stands for Equity Linked Saving Schemes. ELSS is a diversified equity mutual funds with a tax benefit under Section 80C of the Income Tax Act (the maximum tax exemption limit is Rs 1.5 Lakhs per annum, under section 80C). However, to avail of the tax benefit, your money must be locked up for at least three years.

15. Open End Funds: The majority of mutual funds in India are open-end funds. These funds are not listed on the stock exchanges are available for subscription through the fund. Hence, the investors have the flexibility to buy and sell these funds at any time at the current asset value price indicated by the mutual fund.

16. Closed-End Funds:- These funds are listed on the stock exchange. You cannot buy/sell units form the fund house- but only from investors. They have a fixed number of outstanding shares and operate for a fixed duration. The fund is open for subscription only during a specified period. These funds also terminate on a specified date. Hence, investors can redeem their units only on a specified date. This is complex compared to the open end funds.

17. Equity Funds: These are the funds that invest in equities (shares of a company) which can be actively or passively managed. These funds allow investors to buy stock in bulk with more ease than they could purchase individual securities. Equity funds have different key goals like capital appreciation, regular income or tax-saving.

18. Diversified Equity mutual Fund: This is a kind of mutual fund that invests in equities (stocks) of various companies in various sectors. As the investments are diversified across different sectors, it is called a diversified equity mutual fund.

Also read: The Essential Guide to Index Fund Investing in India.

19. Debt Funds: These are funds that invest in debt instruments (fixed return investments like bonds, government securities etc).

20. Balanced Fund: A fund that invests in both equity (shares) and debt instruments (bonds, government securities etc) is known as a balanced fund.

21. NFO: A New Fund Offering (NFO) is the term given to a new mutual fund scheme.

22. CAGR: It stands for compounded annual growth rate. This is the percentage of return per year which is compounded (not simple).

23. CRISIL Rating: It stands for credit rating information services of India. CRISIL ranks the mutual funds in India based on its research. Obviously, a higher ranking is better. (Read more about CRISIL Mutual fund ranking methodology here)

That’s all folks. If I missed any key mutual fund terms that are frequently used, feel free to comment below. #HappyInvesting.

July 25, 2018 Investment Basics, Mutual Funds 3 comments
latest financial news

How to stay updated with the latest financial news, effortlessly?

How to stay updated with the latest financial news, effortlessly?

Stock market investing is a dynamic activity. Here, things change fast and that why you need to keep yourself updated with the latest financial news.

There are hundreds of phenomena happening daily in the stock market. From the stock related news like corporate announcements, quarterly results, board meetings, etc -to the big scale news like fluctuation in crude oil price, Indian currency rate, local and global economy, etc -you need to remain informed with all of these.

In this post, I’ll walk you through the best mediums to keep yourself updated with the latest financial news and happenings in India and the world.

General approaches

When a newbie enters the stock market, he/she will energetically subscribe to a popular financial newspaper and start reading it daily. However, this process will hardly continue for a week or two. After that, although the newspaper subscription will continue- but they will just pile up in the corner of a room.

This happened to me too. At that time, I was in college and I subscribed to the Hindustan business newspaper. I thought that this will help me to remain updated with the latest financial news. Nevertheless, it turned out that I hardly read any newspaper in the morning as I’m not a morning person (usually I wake up after 9 AM). Further, after the classes, I just didn’t get any time to read the newspaper as I was much involved in extra-curricular activities (including sports). Many a time, I also tried to read the newspaper in the classroom.. and it didn’t end well.

Overall, there was a huge pile of unread newspapers in my hostel room by the end of the sixth month. Later, I decided that I won’t waste any money on the newspapers again as I knew I wouldn’t be able to give enough time to sit on a couch and read that newspaper.

Nevertheless, reading a newspaper is not the only option to remain updated with the latest financial news. I prefer reading stories/news on mobile apps and websites. They are cheap and easily fit into my schedule. I could read the news anytime (whenever I’m free or have some extra time). Further, apps are also a good source for instant alert/notification. Overall, reading news on mobile apps turned out to be my style.

Anyways, which medium you choose to keep yourself updated with the latest financial news totally depends on your preference.

newspapers

For example, my father likes to read the newspaper daily in the morning. And if any day, the newspaper doesn’t come (because of whatsoever reason), he feels like his day is incomplete. I tried convincing my father to use financial apps to read the news by installing a few good mobile apps on his mobile. But at the end of the day, he prefers reading a hardcopy newspaper. And I totally understand it.

In short, everyone makes their own choices. What matters more is that you remain updated with the latest news using whatever medium you prefer. 

Different mediums to read the latest financial news.

Here, I’m going to suggest a few best newspapers, websites, apps and other mediums to keep yourself updated with the latest financial news. I’ve tried most of them and found useful. Besides, you do not need to try everything listed below. Just find out which one you prefer (or which suits your lifestyle) and stick to it.

— Newspapers:

Here are some good newspapers that you can subscriber for reading daily financial, business and economy news.

Quick Note: Although the hard copies of the below-mentioned newspapers are easily available everywhere, however, I’ve also included the links to the online ePaper for these news agencies. 

Also read: 7 Best Newspapers for Stock Market India to Read!

— Websites:

Few good websites that you should bookmark on your laptop/desktop browser to read the latest financial news–

Quick Note: You can also subscribe to the Bloomberg quint Whatapp broadcast to receive the latest news on your mobile. They usually send 5-8 important daily news on WhatsApp and its fun to read. Just send a ‘START’ message on +4915792397922 to activate the broadcast. Read more here: News On The Move BloombergQuint Is Now On WhatsApp

Also read: 7 Must Know Websites for Indian Stock Market Investors.

— Mobile Apps

Some good apps that I’ll recommend you to download to receive the latest financial news related to business and stocks are Moneycontrol, Economic Times, Edelweiss and Equity Pandit.

Also read 7 Best Stock Market Apps that Makes Stock Research 10x Easier.

— Google Alerts

Google Alerts is a content change detection and notification service, offered by the search engine company Google. In simple words, if you set an alert for any company on google alerts, then Google will send you all the important news published on the web related to the company directly in your email.

You can set google alerts for the different companies and industries to receive daily news regarding them. (Quick Tip: I use google alerts to get notifications for the stocks that are in my portfolio or the ones that I’m tracking).

Read more here: How to Use Google Alerts to Monitor Your Portfolio?

Bottom line:

Keeping yourself updated with the latest happenings in the financial world is an essence to become a successful stock market investor. You might not be surprised to know that the biggest investor of all time, Warren Buffett, reads 4-5 newspapers daily in the morning.

Nonetheless, with the advancement of the internet and technology, there are a number of mediums available today to keep yourself updated with the latest financial news. Choose a medium that suits you the best and stick to it. #HappyInvesting.

July 21, 2018 Investment Basics 1 comment
index fund investing in india

The Essential Guide to Index Fund Investing in India.

The Essential Guide to Index fund investing in India:

Hi. Welcome to the day 11 of my ’30 days, 30 posts’ challenge- where I’ll be writing one interesting post daily for the 30 consecutive days. In the last couple of days, I received multiple emails to cover the topic- Index fund investing in India. So, today’s post is based on the public demand.

Here are the sub-topics that we are going to discuss in this post.

  1. Introduction
  2. What is an index?
  3. What are index funds?
  4. Pros of Index funds
  5. Cons of Index funds
  6. Why are Index funds more popular in developed countries?
  7. Conclusion

It’s going to be a long post as I’ll cover everything from the perspective of a beginner. However, I guarantee that it will be worth reading. So, without wasting any more time, let’s get started–

Introduction

More than 5,000 companies are publically listed in the Indian stock market. Therefore, selecting a few good stocks to invest can be a cumbersome work for any fund manager. There are two popular approaches to managing a fund- Actively managing and passively managing.

In an active fund, the fund managers choose the stock to invest based on the goal of that fund. Here, the manager tries to beat the market by choosing better stocks. Nevertheless, the problem with active funds is that the return on these funds depends on the goal and efficiency of the manager. Moreover, even if you are able to find a good fund with a coherent manager, still there is some danger of what might happen in the case the manager quits and moves to some other fund house. 

On the other hand, passive funds are process driven. Here, the fund invests in an index and the manager doesn’t have to choose the stocks to invest.  For a passive fund, even if the manager leaves, it won’t create much trouble. 

Anyways, before we start discussing index funds in details, let’s quickly brush up the basics.

What is an index?

Since there are thousands of company listed on a stock exchange, hence it’s really hard to track every single stock to evaluate the market performance at a time. Therefore, a smaller sample is taken which is the representative of the whole market. This small sample is called Index and it helps in the measurement of the value of a section of the stock market. The index is computed from the prices of selected stocks.

For example- Sensex, also called BSE 30, is the market index consisting of 30 well-established and financially sound companies listed on the Bombay Stock Exchange (BSE). And Nifty, also called NIFTY 50, is the market index which consists of 50 well-established and financially sound companies listed on National Stock Exchange of India (NSE).

Read more here— What is Sensex and Nifty?

A few other popular indexes in India are Nifty next 50, BSE Smallcap, BSE midcap, BSE S&P 500 etc.

What are index funds?

Index funds are a passive investment strategy that attempts to generate similar returns as a market index. These funds try to replicate the performance of a specific index by entirely copying the stocks in the same composition as of the index.

For example, if an index fund is benchmarked to Nifty 50, it will buy all the 50 stocks in the Nifty index in the same proportion as nifty 50.  Here is another example- Reliance Index -Sensex -Direct (G) fund is benchmarked to Sensex. Hence, it copies all the 30 stocks of Sensex in the same proportion. Therefore, its return will be similar to Sensex.

A few of other popular Index funds in India—

(Source: The Best Index Funds for 2018 -GROWW)

Pros and Cons of Index fund investing in India

No investment strategy is perfect. Here are a few advantages and disadvantages of index fund investing in India —

Pros of the Index funds-

  • Low expense ratio– As these funds are passively maintained, the expense ratio of index funds are relatively lower compared to the active funds. This ratio can lie somewhere between 0.2-1.2%.
  • No dependency on the fund manager – In the index funds, the stocks are not picked by the fund managers. These funds are merely copying the index. That’s why even if the fund manager of an index fund quits, it won’t create any havoc (unlike actively managed funds).
  • Easy to understand and select the funds — For the active funds, you need to read and understand the reason why the fund manager believes any stock can perform well in future. And this can be a very tedious job.  On the other hand, the stock selection in the index fund is quite straightforward.

Cons of the Index fund-

  • No flexibility to the fund manager— In an index fund, the managers cannot pick stocks of their choices. So, even if he/she knew some amazing stocks- the fund cannot invest in it.
  • Index funds can’t beat the returns from the market: The best an index fund can do is to match the returns of the specified index. Nevertheless, if you subtract the expense ratio and other charges- the returns are even lower.
  • Have to stick with the poor stocks: An index fund can’t sell a stock which is a part of the index. For example, if a fund invests in the Nifty 50 stocks- even if some of the stocks (out of 50) are not performing well/doesn’t have good potential, still, the manager can’t sell that stock. An index fund has to keep as the stocks similar to the index in the same proportion.
  • An index fund holds all the risks associated with the asset class: If a particular index has some definite set of risks, then the associated index fund will also have the same risks.
  • Tracking Error in Index funds: Many times, the index fund does not perfectly track the composition of the fund. This can be because of a number of reasons like the difference in the time between accepting investment and buying stocks, rounding off the stock units, dividend adjusting etc.

In short, index fund investing in India has both pros and cons- as discussed above. Nonetheless, there’s one additional sub-topic regarding index fund investing in India, that you should also know.

New to stocks and confused where to start? Here’s an amazing online course for the newbie investors: INVESTING IN STOCKS- THE COMPLETE COURSE FOR BEGINNERS. Enroll now and start your stock market journey today!

Why are Index funds more popular in developed countries?

There are various studies that suggest that investing in index funds outperforms actively managed funds over the long-term. But most of these studies have been made in developed countries like US, UK, etc. And hence, the conclusion might not be the same for the developing countries like India.

For the developed countries, the stock market is somewhat efficient and they have a broader index. In addition, the expense ratio for the Index funds in the US is also quite low (less than 0.2% for most of the funds). That’s why people prefer investing in the passive index funds in the developed countries.

However, India is a developing country. It has a lot of opportunities outside the index fund that an active fund manager can explore. Moreover, there are a number of active funds in India which has consistently beaten the market. And that’s why active funds are more popular than index fund investing in India.

Also read: Is the stock market efficient?

Conclusion:

Index fund investing in India is a good alternative for people who like a straightforward way of investing in funds. These funds have no dependency on the fund manager, a pre-set defined stocks and a low expense ratio compared to the active funds. The best part- unlike active funds- Index funds are easy to select. 

July 20, 2018 Investment Basics, Mutual Funds No comments yet
stock research reports

How to Find Stock Research Reports of Indian Companies? [For FREE]

Are you looking for the best sites for the stock research reports of Indian companies to analyze? Then you’ve landed the right place.

In this post, we are going to discuss how and where to find the stock research reports of Indian publically listed companies for FREE. But before we learn where to find the stock research reports, let’s first understand the advantages and disadvantages of reading research reports.

Pros and cons of reading stock research reports:

Frequent reading of the research reports of public companies has both advantages and disadvantages. Here are the few common ones–

Pros of reading research reports:

  • You can develop analytical skills: If you continuously read the stock research reports, you can learn the approach that the analyst used to analyze the stock and his/her stock data interpretation techniques. 
  • Saves time to collect data: If you are new to the stock market and do not know where to obtain the company data for research, then stock research reports can help you a lot. These reports contain many essential stock data in a customized format.
  • You can get an extra opinion: By reading the research report of a company by different analysts, you can get an additional opinion- which can help you avoid the confirmation bias.

Cons of reading research reports

  • You might get influenced by the opinion of the analyst: It is very common to get influenced by the buy/sell opinion of the analyst after reading the report. And this might not always be profitable for the investors.
  • Paralysis by Analysis: Sometimes reading multiple research reports might make your investment decision ‘complex’ and ‘indecisive’. If three analysts are giving buy call and the other three are arguing to sell, then it might be little tricky to decide which step to take.

How to make the best use of stock research reports?

The best way to effectively use stock research reports is to read the analysis and ignore the section where the analyst makes his/her recommendation (buy/sell call). Take your own independent intelligent decision after reading the report.

Moreover, it’s not difficult to make your investment decision- once you get used to reading and understanding the research reports. If you start reading even 2-3 research reports per week, you can develop good analytical skills within a few months. 

Note: If you are new to the stock market and want to start your investing journey, here’s an amazing online course– ‘HOW TO PICK WINNING STOCKS?’. Enroll now to enter in the exciting world of stock investing.

Best websites to find stock research reports of Indian companies for free:

There are two easy approaches to find the stock research reports of Indian companies. First, simply google the company whose report you want to study. You will get many useful links to research reports. However, this approach might be a little inefficient for the beginners.

The second method is to get the research reports from a few financial websites who collect this information. There are the two best websites where you can easily find the stock research reports of Indian public companies.

1. Trendlyne

trendlyne

Website: https://trendlyne.com/research-reports/all/

Here are the steps to find research report on Trendlyne website:

  1. Go to trendlyne.
  2. Select ‘REPORTS’ on the top menu bar.
  3. Search the stock name whose report you want to read.
  4. You’ll get a complete list of the research reports by different brokers/analysts.

2. Marketmojo

Website: https://www.marketsmojo.com/

Here are the steps to find the stock research reports of Indian companies on Market Mojo–

  1. Go to market mojo and create an account/log in using your email id.
  2. Select ‘RECOS’ on the top menu bar.
  3. You will the complete list of the research reports and recommendations. 
  4. Further, for finding a specific stock report, use the search bar on the header.

Also read: 7 Must Know Websites for Indian Stock Market Investors.

Bottomline:

One of the most significant skills required to succeed in the stock market is to analyze stocks and make an informed decision. Although, it’s not easy to read ten-twenty page stock research report, however, with practice and experience you can improve your analytical skills. Nonetheless, reading the stock research reports of companies can help you a lot to understand the different analysis approaches.

July 19, 2018 Investment Basics No comments yet
Habits To Overcome Poverty and Become Rich

3 Simple Habits To Overcome Poverty and Become Rich.

“You are the master of your destiny. You can influence, direct and control your own environment. You can make your life what you want it to be.” ― Napoleon Hill, Think and Grow Rich

We all have heard numerous stories about people who started from scratch and with empty pockets but turned out to be millionaires and billionaires.

What makes these people different from us? Have we really accepted our so-called “pre-written” mediocre fate? Sadly yes. Like it or not, but these behavior and habits do play a life-altering role. To be in a much better place, financially, we have to stick to a previously written set of rules; don’t worry, there are very easy to follow. We can always look for inspirations from those who have gone through similar phases.

In this post, we are going to let you know about some life-altering habits that will make you have a tighter grip on your financial aspects. However, some pieces of advice work for some people while they don’t for the other set of people. In that case, take your pick wisely!

Who’s actually poor?

The notion of being poor is actually quite subjective. But moving forward, we have to establish who we are considering poor?

A person having insufficient wealth to meet the necessities or comforts of life or to live in a manner considered acceptable in a society. (Quick note: Being poor is different than being broke. Poor is a long-term situation. While broke means that you have no money, but it’s a temporary situation.)

Needless to say, nobody prefers to be poor or would want to live a life of misery. But this world is full of terrific examples of people who were born poor but ended up becoming super rich. Fancy!

Nonetheless, if you are not satisfied with your financial mobility/stability right now, you can always move past this phase and search for better opportunities. Always remember; good things come to those who fight for them.

Quick Note: There was a famous survey posted by the Wall Street Journal regarding how to get rich. Here’s the result of the poll. Carefully observe the manner by which people think they can get wealthy.

rich vs poor

3 Simple Habits To Overcome Poverty and Become Rich

Let us now see what all habit you need to incorporate into your daily life in order to make financial stability follow you.

1. Change Your Mindset:

“The starting point of all achievement is DESIRE. Keep this constantly in mind. Weak desire brings weak results, just as a small fire makes a small amount of heat.” ― Napoleon Hill, Think and Grow Rich:

After a while, you’ll definitely understand that life is nothing but a game of mindset. If you are considering your situation to be the end game then sorry to burst your bubble there, it is definitely not. Even if you have a chance to tilt-shift your mindset, why not focus on positive aspects then? Your financial position is not fixed, it never will be. There’s a simple rule in life that follows everywhere and hence in the financial world as well: change your mindset and see things rolling back to you quickly.

Changing your mindset also does relate linearly to changing your environment. If you are stuck in a toxic environment filled with alcoholics and gamblers all around, you already know where you are lacking. Looking for a solution? Change your location by choosing a better surrounding and environment around you. Simple, right?

Also read: 3 Amazing Books to Read for a Successful Investing Mindset.

2. Be a little Analytical about Your Financial History:

We understand how long a chain of debts can become roadblocks when it comes to having a grip on your financial status. That’s pretty normal even. What’s not normal is not analyzing where your money is going or how long has it been going. The solution is both simple yet tricky; use analytics as an end game.

Every repetitive history has a loophole if it doesn’t seem to work out. Find yours. Keep looking for better investment options while considering the safety factor, of course. Moreover, make sure that you don’t get trapped in the web of “easy money” through illegal sources. It is never, I repeat, never an option. If you look up to someone who manages his/her financial structure quite tremendously, don’t feel shy about striking a conversation with them.

Unload your pressure of debts and other faulty saving scheme and drop out the traditional ways that don’t work well in the current scenarios.

3. Live Within Your Means

Interestingly, if you notice the survey mentioned earlier, luck ties savings in the poll.  “Getting lucky through an inheritance or winning the lottery.” tied with “live frugally and save money.”

Earning millions of bucks wouldn’t matter if you wouldn’t know how you can actually put them to use. Let’s statistically give you a harsh reality check; more than 65% of your salary goes into your housing and food expenses. While these two things are certainly the most important things in life, you can save a lot more here. Swear to yourself to not spend more than 25% on your housing and 15% on your food. I know it is more of a rosy picture but you certainly can do it.

Adding to the list never be in one of those never-ending credit card debt loans. No matter how tempting it feels at first, it is going to get your financial account crooked for the longer term. Out of all your expenses, primarily shift your focus to your emergency fund. You can always buy that extra piece of cloth or that extra piece of footwears later.

Also read: The Best Ever Solution to Save Money for Salaried Employees

BONUS: 50-30-20 Rule

Till now we just covered the theory. However, this rule gives you a practical formula for spending to avoid poverty. Here is the straightforward 50-30-20 rule.

  • Spend 50% of your income on your needs: For example- Housing, food, utility, necessities etc.
  • Limit your wants to 30%: For example- dining out, vacations, entertainment etc.
  • Save remaining 20%: Final twenty percent should go towards financial goals like an emergency fund, retirement fund, debt repayment, investing etc

50-30-20 rule

This rule of 50-30-20 can be very beneficial if you are just starting out to budgeting. Breaking down the basics categories (percentage-wise) can help you create a balance between your obligations, goals, and extravagance.

Bottomline:

Being rich is a goal of the majority of the population. However, most people never get there. Many of us are just one paycheck away from becoming poor.

The hacks discussed in this post are solid and proven methods for overcoming poverty and becoming rich. Nevertheless, there’s a reason why these strategies are called personal finance. Well, personal finance is ‘personal’ and totally depends on how you deal with it. Good luck.

July 17, 2018 Earn More, Personal Finance 1 comment
Should you Quit Your Job to Trade Stocks

Should you Quit Your Job to Trade Stocks?

Should you Quit Your Job to Trade Stocks?

One of the most frequently asked questions that I receive in the emails is – ‘Can I make a living trading stock?”.

It’s a fascinating idea, right? Quitting your job and working from home trading stocks. No boss, no employee, no logistics, nothing. Just a laptop and an internet connection. 

So, can you make living trading stocks?

The straight answer to this question is- YES, it is possible to make living trading stocks.

I know a dozen of people who are making tons of money in their 20s by living in the well-fashioned flat in Mumbai and trading stocks.

There is no entry barrier in this field. Anyone can enter and make living trading stocks. Even you don’t need any tremendous amount to start trading. You can leverage money from your brokers which means that you can control a significant amount of capital with a small investment. To make living trading stocks- all you need is a passion, desire to earn and energy.

Also read: What is the difference between trading and investing here.

But wait… This can’t be so simple, Can it?

No!! There’s no shortcut in this world, my friend. Especially, not for an average person.

Every year thousands of people quit their job to become a full-time trader. Few become successful and start living their dream life. But the majority of people ‘FAIL’.

In reality, making living trading stocks in tough.

It’s just like learning any other skill. A large number of people learn guitar or a few other musical instruments. Even many of them play pretty well. But making a successful living out of it or becoming a rock star is RARE. Only a minority of the people can do it.

You need a specific skill set to become successful in any field- which requires thousands of hours of hard work in the back end. Similarly, to become a star trader- you will need to achieve a same level of excellence.

Here, I’m not discouraging you, but just highlighting the reality. Anyways, if you are ready to put thousands of hours of efforts from your side- then you also become a successful full-time trader.

Questions to ask before You Quit Your Job to Trade Stocks:

Before you quit your job to trade stocks, here are few points that you should consider asking yourself–

1. Do you have enough education?

By education, I don’t mean a degree or qualification. What matters here is whether you have enough knowledge and experience of trading or not? If not, then first you might need to take some time reading books, enrolling in courses, attending webinars, or browsing the internet.

2. Do you have a sound trading methodology?

Just because you did well in paper trading (virtual stock trading) doesn’t mean that you’ll do similar in the real-time scenario. You need a proven trading methodology (which should be tested over time). Without a sound trading strategy and risk management skills, it’s difficult to consistently make earnings from trading. Before you quit your job to trade stocks, master a trading methodology.

full time trader

3. Do you have an emergency fund?

Before quitting your job, make sure that you have an emergency fund of at least one year. Stock market trading involves market risks and if you are ready to dive-in completely, then having a backup fund can ease your life and reduce your stress in the difficult days.

4. Are you emotionally prepared?

You know that you can’t win every trade, right? But are you ready for it emotionally? After quitting your job, you won’t receive a monthly paycheck. Your income will be based on the profits or losses on your trades. Before deciding to leave your day job to trade stocks, first- you should get emotionally ready.

5. Have you chosen the right option for you?

There are multiple options available in the trading. For example- you can be an independent trader (day trading from home) or become a proprietary trader. Further, you can also trade in forex, currency market or commodities. The critical question here is- have you chosen a right option for you?

Bonus: Here’s an interesting video that I found on youtube regarding how to become a full-time stock trader by Nitin Bhatia- which might be useful to you-

Bottomline

Making a full-time living trading stocks requires a lot of hard work and efforts. However, this is not a rocket-science, and thousands of people are doing it. Therefore, it’s possible for you to quit your job to trade stocks. 

However, before making your decision to quit your job to trade stocks, you should find the answers to the questions discussed in this post.

Anyways, once you have mastered the art of trading, you can build a lot of wealth and financial freedom. A successful full-time trader is his own boss and can work from anywhere. 

New to stocks? Confused where to begin?  Here’s an amazing online course for beginners: ‘HOW TO PICK WINNING STOCKS?‘ This course is currently available at a discount. 

July 12, 2018 Investment Basics 5 comments
30 DAYS 30 POSTS CHALLENGE

30 days, 30 Posts Challenge -Let the learning begin.

Hi, 

This is Kritesh. I hope you are doing well.

I’m writing this short post to announce that I’ll be doing a ’30 days, 30 posts’ challenge which starts today. This means that I’ll write one interesting investing article every day for the next 30 days. The blog posts will be published between 10 AM to 11 AM (IST) daily.

I’ve made a small list of topics that I’ll cover in this challenge. Nevertheless, I would love to hear your suggestions, and I will do my best to include as many of the topics you propose in a blog post or maybe even a short video.  I may not be able to get to all of them, but I’ll do my best.

You can send your suggestions by simply commenting on this blog post. Else, if you’re using our mobile app, you can directly send a topic request from the app. 

(Quick note: You can stay updated with the Trade Brains’ upcoming articles by downloading our learning app where you’ll receive daily notification of every new post. Here’s the link to download Trade Brains’ android app.)

I’m excited about this challenge and firmly believe that it will be beneficial to all our blog readers. Thanks again for your support, and I hope to hear from you soon.

Let the learning begin.

Thanks and regards,
Kritesh Abhishek
Founder, Trade Brains.

P.S. I know that many of you might be thinking that shouldn’t a 30-days challenge start on the first day of a month or at least Monday… Well, sometimes you got to do what you got to do. Anyways, new year or new month resolution don’t work, do they? Awaiting your reply. Cheers!!

July 10, 2018 Uncategorized 6 comments
Family vs Professional Management businesses in India

A Random Study: Family vs Professionally Managed businesses in India.

A Random Study: Family vs Professionally Managed businesses in India–

“I look for integrity, energy, and intelligence in management.” – Warren Buffett

One of the most critical factor to look before investing in a company is its management. A lot of wealth of the shareholders has been destroyed just because they overlooked the management’s capabilities. For example – Punjab National Bank- What was the mistake of the loyal shareholders who invested in this Indian public sector bank –other than the fact that they failed to read the bank management’s efficiency?

A good and efficient management can grow a weak company. On the other hand, a poor & inefficient management can destroy even the bluest of the blue chips.

Indian stock market is filled with the examples of effective leaders and managers who have strongly headed their company to create consistent wealth for their shareholders. Few of the best examples are Mukesh Ambani of Reliance, Azim Premji of Wipro, Sunil Mittal of Bharti Airtel, Laxmi Narayan of Cognizant, Narayan Murthy of Infosys, Deepak Parekh of HDFC etc.

Few of these leaders were the founders/founding family of their company. On the other hand, the rest were the hired professionals. But which ones are more efficient? Are professionally hired management equally coherent as the family management? 

In this post, we are going to discuss family vs professionally managed businesses in India to find out which one is more capable of driving the growth of their company.

Family vs Professionally Managed businesses in India

1. Family Management:

(Pic- Rajiv Bajaj (Son of Rahul Bajaj) – Managing Director of Bajaj Auto)

The family managed businesses are those companies who are managed/controlled by their owners. Generally, the chairman or the CEO is the member of the controlling family. Further, the board of the directors are either members of that family or their associates.

The family led businesses are been major contributors to the growth of Indian economy. A bigger portion of the companies in India are under the control of family personnel like Reliance, Tata group, Infosys, Bharti Airtel and Bajaj, who stands as some of the well-known examples.

Here are few major characteristics of the family managed businesses:

  • All the major policies of the company are determined by the controlling family (which may or may not be in the favor of shareholders).
  • They are loyal towards their own company. You’ll rarely find any case where the CEO of a family managed business moved to take a job as CEO of another company just because they were offering a higher salary.

Also read: Shareholding Pattern- Things that you need to know.

2. Professional Management:

Tata Motors MD - Guenter Butschek

(Pic – Tata Motors Managing director – Guenter Butschek)

Professionally managed companies are run by the professionals who are also an employee of the company (not the owner). These professionals may or may not have any significant stake in the company.

Here are few of the major characteristics of the professionally managed businesses:

  • The professionals are in their position of chairman/CEO only as long as they are able to complete their responsibilities. 
  • These professional managers can easily be fired by the board of the directors if they do not meet the required company target. (One of the popular examples is the Tata Son’s board of directors firing Cyrus Mistry as its Chairman because of his issue with Mr. Ratan Tata.)
  • These professionals focus on performance and consistency.
  • The biggest disadvantage of professional management is that they can readily leave the company for a better pay or perquisites offered by another company.

Few best examples of professionally managed companies in India are ITC, HDFC, HUL, L&T etc.

So, which one is better?

It’s hard to decide which management style is better- family vs professionally managed businesses. Both have their pros and cons. 

Family led business have their footholds in trust and values. Trust they share with their stakeholders and the values they follow to uphold their family pride typically gives the business the animal spirits needed to pass through all economic phases. The charisma and commitment of the leaders which is important for the long-term working of firm generally lacks with the professional management.

Family personnel always have their interests strongly aligned with the firm and follows long-term strategies to achieve the goals of the firm, unlike the professional CEO’s who strive to make short-term profit figures that decides their compensation and commissions.

Besides, family firms have their advantage over their ownership of the firm which gives them the power to take risky calls that provides the opportunities for improved profits and expands the assets into new diversified areas. But the professional managements perceive this risky actions with conservative stand due to the fear of failure which can show an adverse effect on their profile. 

Many a time, family organization structure suffers from the issues which include overconfidence, inexperience, and non-expertise of the family person who manages the business. But the dynamics of this organizations are shifting bases to include professional team which can help them to effectively manage their business.

Lastly, one of the biggest drawbacks of the family management is the sibling’s rivalry in the next generation – Who gets the throne? Many big companies are torn apart just because the siblings work as rivals and disagree on the business roles. Nevertheless, the sibling’ rivalry is not always bad for the business…

Also read: #5 Things Warren Buffett looks for before investing.

Learnings from Ambani Family Management Dispute:

family vs professional management ambani family

Sons of Dhirubhai Ambani leads us to the better examples of pros and cons of family led business, the disruptions in the reliance due to the conflicts between the brothers and the overconfidence of Anil Ambani that led him to invest debtors money in risky projects without having a proper expertise stands out as an example of some of the cons of family led business.

On the other hand, the charisma of Mukesh Ambani that led Reliance industries into greater heights and the ability to utilize the opportunities to start the projects like JIO tells us about the pros of this type of businesses.

We can also point the recent issue of the ICICI Bank with their CEO Chanda Kochhar which helps us to understand the importance of having a promoter as the management head.

Bottomline:

Both family vs professionally managed businesses has been successful in India and it would be unfair to select one as a better alternative. For the Indian originated company, family management still seems little impressive to the public. However, this trend is shifting slowly towards the professionally managed businesses.

The family led management might need to look for professional help these days because of the changing dynamics of the economy with the advent of technology. Technology brings in challenges to some family led business with older generations that feel uneasy to adapt to technology and some with newer generations without proper competences to understand the dynamics.

Nevertheless, while evaluating a company to invest- management’s efficiency still remains a critical factor to check before making your decision. If the captain of your ship is not capable, it might be little difficult to sleep ‘fearlessly’ in the tidal days.

Also read: How To Select A Stock To Invest In Indian Stock Market For Consistent Returns?

(Additional credits: Abhishek Aedla)

July 3, 2018 Investment Basics 2 comments
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