what is working capital cover

What is Working Capital? Definition, Importance & More.

What is Working Capital? Definition, Importance & More.

Hello Readers. One of the most important factors to check while analyzing a company before making an investment decision is its working capital.

In simple words, working capital can be defined as the funds available to a firm to finance its regular operations like day to day business activities. Nonetheless, the noteworthiness of working capital is way more than what most people think. 

In today’s article, we will be focusing on the importance of working capital management and how it could be studied to get a deeper insight into the companies we are researching for potential investments. 

Here are the topics that we’ll cover in this post.

  1. What is working capital?
  2. Why is working capital important?
  3. What factors affect the working capital of a company?
  4. When Negative net working capital is actually positive.
  5. Conclusions

Overall, it’s going to a very educational post. Therefore, please read this article till the very end. Let’s get started.

1. What is working capital?

To define the term in the simplest words, working capital is essentially the funds that have been allocated for day to day operations of the firm for the current financial year. These funds need not entirely be held in cash but could also include any asset or liability from which a cash transaction could be expected. This could include account tradables, cash in hand, account payables and short-term borrowing and loans.

The most commonly used formula for working capital is given by the following,

Net Working Capital = Current Assets – Current Liabilities

When an investor wants to look only at the operating level of a company he may prefer to use the following formula for working capital.

Operating Working Capital = Cash + Inventory + Accounts Receivables – Accounts Payables

Please note that the operating working capital excludes the short-term interest and loan payments a company may have to incur in a financial year.

2. Why is working capital important?

Conventionally, the working capital is used as a measure of a company’s liquidity. Since it is calculated on the basis of accounts receivable/payable, cash, borrowing and payments, the working capital of a company could tell us a ton about the management’s approach and commitment to inventory management, debt management, revenue collection, and payments to suppliers.

A positive working capital would imply that a company has got a good control over its transactions and is able to collect and make payments with a large degree of freedom.

A negative working capital, on the other hand, would normally imply the opposite.

3. What factors affect the working capital of a company?

Although working capital is studied to get an understanding of the management and the general thumb rule that positive working capital is always better than negative working capital works most of the times in investing. We, at Trade Brains, believe that investors could get access to more opportunities if they were to take a more holistic approach to study working capital.

Since a company is always involved in a particular business, it is, therefore, logical to assume that all the short/long term factors affecting the industry will determine how managers conduct their operations and hence the working capital. In some industries, managers can offset the risk in operations by choosing a favorable business model. Depending on the kind of model they choose to operate could also determine the working capital of the company.

On a broad level, the list of factors that can affect the working capital of a company are as below (note that this is not exhaustive but may be used as a guide)

  • Nature and type of business
  • Type of Industry
  • Factors of production and their availability
  • Competition
  • Price levels and inflation
  • Production Cycle Time
  • Credit Policy and agreements with suppliers and customers
  • Growth and Expansion strategies
  • Working capital cycle

A more quantitative approach to analyzing working capital would be through a basic ratio analysis. Below are the most useful metrics used by fundamental investors.

4. When Negative net working capital is not so negative!

Imagine a newspaper printing and distribution company with around 2,000 customers in a city. When a customer signs up for a subscription for 1 year, he/she may have to pay the amount up front for the period for which the service is provided. Assume that the subscription cost for one year is ₹1,000, this implies that the company will receive ₹20,00,000 in advance payment. This amount is recorded under accounts payables portion of the balance sheet. Assume that the company holds another ₹8,00,000 in cash and an inventory worth ₹2,00,000.  The net working capital of the company can then be computed to be -₹10,00,000.

In the above example, it can be noticed that even though the working capital happens to be negative the business model of the company allows the company to receive its cash well in advance. This cash could then be ploughed back into the business as investments into new equipment or into marketing to expand its client base.

In general, companies that have high inventory turns and perform a lot of business on a cash basis, such as grocery stores or discount retailers, require very little working capital. These types of businesses raise money every time they open their doors. Because of their advantages, these company can also enter into contracts with vendors and suppliers to lend their products for free for a specified period of time. These partnerships allow the retailers/discounters to keep their cash in hand and employ them elsewhere which trying to sell the products they got through credit. If they are unable to sell them they could just return it back to the vendors before the end of their negotiated period without any cost.

The following sectors are normally observed to operate with a negative working capital.

  • Retail: Due to supplier agreements and high inventory turnover
  • FMCG: Able to leverage their wide brand appeal and customer demand to get retailers to book their products in advance
  • Automobiles: Companies employ “just in time” manufacturing policies to keep efficiency high and inventory at low levels. Also, they normally charge a decent sum as an advance from customers as booking charges.
  • Media: Services are provided only after an upfront subscription fee

5. Conclusions

Although analyzing the working capital and its various components form an essential part of investment research. An investor should always keep in mind to view the company as a business and try to understand the root causes within the business model or the industry which drive the numbers.

Sticking to an individual’s circle of competence may help greatly in this regard which investing in stock markets. Happy Investing!

May 29, 2019 Investment Basics 1 comment
Why Nobody Talks About VALUE TRAP

What is a VALUE TRAP? The Bargain Hunter Dilemma!

Have you ever bought a cheap stock, which later got cheaper and cheaper? If yes, then you might already have met with- Value traps.

Value traps are those stocks which may seem like a value stock because of their cheap valuation. However, in actual, they are garbage stocks. Unlike value stocks, these value traps do not have true potential to give good returns to their investors and that’s why their price keeps on declining for a continued period of time.

Why do investors fall in value trap?

There are some stocks which may appear cheap because they are trading at a low valuation metrics such as PE, price to book value ratio, cash flow ratio etc.

The bargain hunters keep an eagle eye on these stocks as they appear cheaper compared to their historical valuation or relative to the market.

These investors buy these stocks at a low price considering them as a value stock. However, the problem arises when the price keeps on dropping for an extended duration of time.

Here, instead of purchasing a value stock, the investor has fallen for a value trap.

Also read: #9 Things I Wish I had Avoided During my Initial Days in Stock Market.

VALUE TRAP 4

What actually is a ‘value trap’?

The value traps are those stocks which are ‘not’ cheap because the market has not realized their true potential or because of some temporary setbacks. These stocks are trading at a cheap valuation because the company has either lost its fire or else its fire is fading away.

A value trap is that stock which is not able to generate any significant profit growth or revenue. A few of the general reasons for the underperformance may be rising production/operational cost, declining market share, lack of new product/services, change in competitive dynamics or inefficient management.

The investors who buy such stocks just by evaluating its low valuation (without giving any regard to the reason why the valuation is low) falls in the value trap.

Also read: Why Warren Buffet Suggests- ‘Price Is What You Pay, Value Is What You Get’?

Real value stock vs value traps

The real value stocks are those stocks which are trading below their intrinsic value. The reason for their cheap valuation may be either temporary factors or because the market has not yet realized their true potential.

Few common characteristics of value stocks are consistency, strategic advantage, strong business plan, growing cash flow and high-quality financials. Further, these stocks can be considered value stocks only if they are bought at a significant margin of safety by the value investors.

On the other hand, value traps are those stocks that are trading at a low valuation because of long-term or permanent setbacks (factors).

These stocks are not actually trading below their intrinsic factor. They are just trading at a low valuation compared to their historical valuation or relative to the market (which might be even above its true intrinsic value).

Value trap stocks lack catalysts or momentum to retrace its original growth track.

Also read: SWOT Analysis for Stocks: A Simple Yet Effective Study Tool.

Common traits of value traps:

Although these value trap stocks might be trading at a low valuation compared to its past valuation or market, however, the chances of these stocks bouncing back to their historical valuation are quite low.

Most of the value trap stocks suffer from lack of innovation, degrading competitive advantages, high debt, low-interest coverage potential, poor management, declining profitability and no future growth prospects. Proper research is required while investing in these cheap stocks to understand the reason behind their low valuation.

For example- if the average PE of an industry is 18x and stock is trading at 5x, then considering the PE valuation, it might look like a value stock. However, whether its actually a value stock or a value trap can only be found after proper investigation.

Similarly, if a banking company is trading at a price to book value of 4x compared to the industry average of 9x, then again the bargain hunters first need to investigate the reason behind the low valuation of that stock before concluding it as a value stock.

Also read: Why You Should Invest Inside Your- Circle of Competence?

VALUE TRAP 3

Here are a few common signs that the cheap stock is actually a ‘Value Trap’:

1. Declining earnings:

If the earnings and cash flow of a company are consistently declining for past few couples of years, then the stock might be a value trap. The low valuations of these stocks are because of their dull future prospects. The market works on future expectations and if investors cannot see any future growth potential in the company, then the stock might even degrade further, no matter how low is the valuation.

2. Business plan:

A company with outdated technology or a non-profitable business cannot be a value stock. Take the examples of the 2G/3G technology based telecommunication companies. Most of such companies ran out of business just because of outdated technology.

3. Poor Management:

A poor and inefficient management of a company is a sure sign of a value trap. If the management lacks the driving force and their strategic vision is cloudy, then the investors of that company might suffer from value traps.

4. High Debt:

Huge debt and leverages are never favorable for a business. A big debt is an actual trigger for the most deadly value traps.

5. No change in management compensation structures:

If the earnings have declined and still the management keeps on giving huge bonuses to their top management structures, then definitely they have not adapted to address the problem. During declined earnings or troubled times, a company needs to change their fundamental behavior in order to get back in the race.

6. Poor financials and accounting principles:

The financial accounts should be clear and transparent enough to give the true snap regarding the company. If the accounting of a company is not credible, they might be hiding some financial difficulty or even solvency.

7. No change in capital allocation method:

With the shift in the scenarios, the company needs to change its capital allocation method like how much capital they want to allocate in their growth, dividends, capital expenditure or to get rid of a big debt.

8. Strategic disadvantages:

Declining market share, declining competitive advantage, and company not being able to contain its costs are again a few big signs of a value trap.

9. No growth catalysts:

When the company starts moving in the wrong direction, it might need some kind of catalysts to move back to the growth track. These catalysts can be new innovations, products/services or even earning growth. If the company is lacking any sign of growth catalyst, then again that cheap stock might be a value trap.

Also read: 11 Must-Know Catalysts That Can Move The Share Price.

Although, there can be a number of other signs that a company is a value trap, however, these nine are the top signs.

Quick Note: New to stocks? Want to learn how to select good stocks for long-term investment? Check out this amazing online course: HOW TO PICK WINNING PICKS? Enroll now and start your investing journey today.

Summary:

The actual goal of a value investor is to avoid value traps. Therefore, my first suggestion to every value investor would be to research the stock properly before investing.

However, even seasoned investors sometimes fall into the value trap and buy garbage stocks considering them undervalued.

In such a situation, the best you can do is to understand the problem and cut off the stock as soon as possible. Do not purchase more stocks in order to average down or hold the stock long enough with an expectation to break even. The faster you can get rid of that stock, the better it is for you.

In the end, let me tell you the law of holes: “If you find yourself in a hole, stop digging”.

May 26, 2019 Investment Basics No comments yet

Cyclical and Non-cyclical stocks: How do they differ?

The best offense is a good defense. Just like in military combat or football, investors also need a good offense and defense strategy. In other words, you need to use more than one strategy in order to succeed. As a serious investor, there are many different ways you can do this. You can invest in a variety of stocks, cash, and other securities, you can also diversify your portfolio by investing in securities across various sectors and markets or you can invest in stocks that are at different growth and value levels.

Implementing the right strategy requires a good knowledge of the global economy and how the markets work- if you don’t have a good understanding of this, making decisions become incredibly difficult. As we all know, the economy goes through different business cycles and while we can’t predict the outcome of the cycles we can alter our decisions to keep up with the ever-changing landscape. This changing environment also provides a great way for investors to mix up their portfolio, namely with investing in cyclical and non-cyclical industries.

What are cyclical stocks?

As the name suggests, cyclical stocks are those that move in the direction of the market. That is when the economy is doing well, the stocks go up and when there is a downturn in the economy, the value of the stock goes down too. These stocks are more closely aligned with the broader economy and are more prone to economic activity.

For many investors, the movement of stock in cyclical industries provides a great opportunity to earn revenue on the stock by buying when there is a downturn and selling when there is an upward trend. For a novice investor, this may seem like a fool-proof strategy but be cautious, as it is almost impossible to tell when there will be a downturn in the market.

Cyclical industries usually may include durable goods (that last for a long time into the future), non-durable goods (that have a short shelf life) and services like automobile, construction, and travel.

When the economy is doing good and the people are earning well, they may spend a lot of money on buying a new car, constructing their new house or even plan fancy off-shore travels. However, when there is a downturn in the economy, people may prefer to hold these expenses for another year or two.

Around 75 percent of the stocks listed in the stock exchange are cyclical and follow the market trends. A few examples include Ferrari NV (RACE), Alibaba Group Holding Ltd. (BABA) and Royal Caribbean Cruises Ltd. (RCL).

What are non-cyclical stocks?

While cyclical industries may seem like a good investment, every good offense needs a defense, hence, it is important to balance out your portfolio with non-cyclical or defensive stocks. During a boom, people splurge on goods and services such as travel and cars. But during a slump, people stop spending on purchases that they don’t consider a basic necessity, instead they focus their spending money on food, water, and shelter.

non cyclical industry

During an economic recession or depression, the revenue and cash-flows and share price of non-cyclical companies continue to do well because they are industries that produce the basic needs of life that people will continue to consume.

In addition to basic needs, non-cyclical stocks also include those goods that are addictive such as tobacco or alcohol which can put ethical investors in a tricky situation as these industries do well even during a slump and reduces the number of industries that they can invest in.

Defensive stocks include goods and services in industries that are not affected by market fluctuations such as utilities, food, and medicines. It is basically any good or service that people will buy whether or not the economy is doing well. A few examples of defensive stock companies include Kraft Heinz Company (KHC), Johnson and Johnson (JNJ) and Sysco Corporation (SYY).

Bonus: The top-down strategy

There are two main investing strategies in the market, the top-down approach, and the bottom-up approach. The top-down approach involves looking at the economy as a whole and picking stocks that do well during certain economic conditions. This strategy requires the investor to have a good understanding of the macroeconomy along with its various sectors and industries to know what industry will perform well during the different business cycles. They also need to assess the inflexion points in the economy, that is when a certain stock price is expected to go up or down. For cyclical and non-cyclical stocks, top-down is the most commonly used strategy.

The bottom-up approach, on the other hand, involves looking at the stock individually and making investment decisions based on independent parameters.

When using the top-down approach, there are many indicators that investors can use to study the market. The first and most obvious metric is the GDP (Gross Domestic Product). This is the total value of all the goods and services produced in the economy and gives us a good understanding of the overall economic health.

Another great indicator is the ‘Purchasing Manager’s Index (PMI). This is a survey conducted among the purchasing managers in different sectors and industries in the economy. The PMI provides the investor with information on how the businesses are currently performing and which direction the economy is headed.

A third metric is the Consumer Price Index (CPI). This will give an investor insight into the changing price levels of goods and services in the economy and is a reflection of the state of the economy.

The top-down strategy is considered successful when the cyclical and defensive stocks are in perfect correlation with each other. A 100% correlation would mean that the stocks move in synch with each other while a -100% correlation means that the stocks are still in sync but move in the opposite direction.

During the 2008 recession, luxury goods such as Ford cars faced a huge decline in the value of their stock as people stopped spending on expensive items when the economy was down but at the same time, the stock for beverages such as Coco-Cola continued to do well as people spent money on this regardless of the business cycle.

Also read:

Conclusion

It is important for every investor to have a balanced and diversified portfolio with both cyclical and non-cyclical stocks.

Cyclical stocks include more luxury goods and hence a provide a higher return than non-cyclical stocks. However, the investor needs to study the market carefully and have a good tolerance for risk. Defensive stocks are safer investments but provide lower returns but are better for investors looking for safe investments Remember low risk, low return.

May 22, 2019 Economics, Stocks No comments yet
10 Best Youtube Channels to Learn Indian Stock Market cover

10 Best Youtube Channels to Learn Indian Stock Market

With the boom of the internet, self-education has never been easier. Now, you can learn any skill that you crave by sitting on your couch and watching youtube videos. And that too for FREE. There are tons of information and resources available on youtube to learn whatever you want. And if you want to acquire financial literacy without spending a dime, Youtube is definitely one of the best places where you should be.

Anyways, if you are a newbie to investing world, you might not know the best youtube channels to learn Indian stock market. After all, there are thousands of youtube channels which discuss stocks. But which ones give the best information? We’ll answer this question today. In this post, we are going to discuss ten Best Youtube Channels to learn Indian stock market.

Quick Note: There may be a few more good channels that we might miss in this post. This may be because we never watched their videos or the channel is launched recently. If we miss any of your favorite youtube channel feel free to mention in the comment box. We’ll be glad to add it our list of best youtube channel for Indian Stock Market. 

Nonetheless, you might not synergize with all the channels as they may cover different core areas like fundamentals, technicals or future/options trading strategies. Only subscribe to the channels that suit you the best and whose ideology you would like to follow. So, let’s get started with our list of 10 Best Youtube Channels to Learn Indian Stock Market. Here it goes.

10 Best Youtube Channels to Learn Indian Stock Market

— FinnovationZ

This channel uploads animated financial education videos on stock market tutorials, mutual fund basics, book summaries, case-studies, etc. FinnovationZ has uploaded over 320 videos on their channel and had got +41 million views on their videos with +670k subscribers. The videos on this channel are mostly in Hindi language and very simple to understand. If you are a complete newbie to the stock market, this is a definite channel to subscribe.

— Pranjal Kamra

Also known as Finology, Pranjal Kamra runs this channel and teaches the philosophy of value investing. On his channel, you can find over 130 videos on investing, stock analysis, mutual funds, and behavioral finance. Along with educational videos, Finology also offers courses, workshops, Excel tools, Advisory & research services etc on their website.

— Trade Brains

This channel is hosted by Kritesh Abhishek and is focused to teach stock market investing and personal finance to the do-it-yourself (DIY) Investors. On Trade brains youtube channel, you can find simplified investing videos on stock market basics, valuations, mutual funds, investing strategies and much more. You can subscribe to the channel using this link.

— Sunil Miglani

Sunil Minglani is an expert on behavioral aspects of Stock Market and has rich experience in analyzing stock chart patterns which he has co-related with human psychological patterns at a deeper level. He has uploaded over 250 videos on his channel and got over +410k subscriber. On Sunil Miglani’s channel, you can find videos on stock market basics, human psychology, Q&A with Sunil Miglani, etc.

— Nitin Bhatia

Nitin Bhatia is a Youtuber and founder of the blog nitinbhatia.in. On his youtube channel with over +549k subscribers, Nitin Bhatia uploads videos about stock trading & investing, Real Estate and Personal Finance to provide ‘Smart Ideas for Your Money’. He’s very consistent in making videos and has uploaded over 690 videos on his channel.

— Yadnya Investment Academy

This channel uploads simple investing videos in Hindi & English on the stock market, mutual funds, taxes and other investment options in India. The videos are extremely simple to understand. They have uploaded over +720 videos on their youtube channel and received over +190k subscribers. Invest Yadnya also offers different services like financial planning on their website.

— Ghanshyam Tech

This channel is run by Ghanshyam Yadav, a trader and trainer in stock market from Mumbai. This channel focuses on stock market trading and technical analysis. Ghanshyam has uploaded over 1,400 videos on his channel and here you can find videos on Nifty Trading, Technical analysis, Candlestick patterns, charting software and more.

— ProCapital.MohdFaiz

This channel is run by Mohd Faiz and the objective of this channel is to help the subscribers create wealth. Mr. Faiz has uploaded over +4,700 videos on this channel which has received over +95 million views. This channel upload videos on current news, technical analysis, stock charts, patterns and more.

— Market Gurukul

The marketGurukul channel is managed by Mr. Edward and is one of the best technical analysis youtube channels in Hindi. He uploads videos on Indian Stocks, Commodity or Forex Trading including Trading Psychology, Money Management along with hardcore Technical Analysis. You can find over +170 videos on this channel teaching technical analysis, Strategies, and Indicators to know the markets better, demo trading platform and more.

— Varun Malhotra

The host of this channel, Varun Malhotra, Director EIFS, started investing at an age of 17. He dropped out of his Campus placements at IIM-A to continue his journey in the investment world. Since 2010, Varun Malhotra has trained over 500,000 Investors including the entire 250,000 strong force of Border Security Force. On his youtube channel, he uploads videos on stock market investments & mutual funds. Varun Malhotra has uploaded over +45 videos on youtube and earned+225k subscribers.

Also read: 7 Must know websites for Indian stock investors

Closing Thoughts:

If you are not from a finance, commerce, business background or from a family of stock market enthusiasts, the chances are that you do not know the stock market lingo or even the frequently used terms like dividends, market cap, etc. Moreover, if you are in the learning stage, it’s a little difficult to master everything by yourself. Enters Youtube.

With the help of youtube channels, you can find online mentors who can help you to make your investing journey a lot easier. Further, interacting with Youtubers is also not very difficult. You can simply leave a comment on the videos and if the Youtuber is active, most likely, you’ll get the reply.

Final advice, watch the videos but do not copy their entire investment strategy or stock picks of the Youtubers. Ideally, Copycat investing doesn’t work. Be original and create your own investment style.

That’s all for this post. I hope it was useful for you. Have a great day and comment below which is your favorite YouTube channel to learn Indian stock market.

May 22, 2019 Essential Reading, Investment Basics 4 comments
How To Make Money From Dividends -The Right Way

How To Make Money From Dividends -The Right Way?

Everyone who enters the stock market wants to make money from their investments. And in order to do that, first, they need to understand how people really make money from stocks. Basically, there are two ways to make money from the stock market – Capital appreciation and making money from dividends. 

When it comes to capital appreciation, most of the people know this method to make money from stocks. Buy low and sell high. Purchase a good stock at a low valuation and wait until the price goes up. The difference in the purchase and selling price is the profit (capital appreciation).

This is the core principle of value investing. Find an amazing stock at a cheap valuation and hold it for a long time until the market realizes its true/real value.

However, there is also a second method to make money from the stock market which is (generally) ignored by most newbie investors. It is called dividends. In this post, we are going to discuss how to make money from dividends -the right way.

Important terms to learn regarding dividends:

buy low and sell high

Before we dig deeper, first you need to learn few important terms regarding dividends-

Dividends: Dividends are the profits that a company shares with its shareholders as decided by the board of directors.

Dividend yield: Dividend yield is the ratio of annual dividend per share divided by the price per share. The formula for dividend yield is given below:

             Dividend yield = (Dividend per share/ price per share)

For example, if a company gives an annual dividend of Rs 10 and its current market price is Rs 200, the dividend yield of the company will be 10/200 = 5%.

Also read: Dividend Dates Explained – Must Know Dates for Investors

Here are the annual dividends of a few famous companies in India (2017).

  • Hdfc bank – Rs 11 per share
  • Coal India – rs 19.90 per share
  • Hindustan Unilever – Rs 17.00 per share
  • Reliance Industries- Rs 11 Per share
  • Ongc- Rs 6.05 per share

dividends

Now, if you calculate the dividend yield given by the above companies, you may find it very small.

If a company gives a dividend yield of 2% per year, it’s really difficult to build a livelihood using this income, right? For example, if you want an annual income of Rs 2 lakhs in dividends, then you have to invest Rs 1 Crore in that stock. This is not feasible for most of the average Indian investors.

However, there’s an important lesson that you need to learn here—

Dividends increase over time…

This means that a good fundamentally strong company will increase its dividends with time.

For example, if a healthy company gives a dividend of Rs 10 this year and makes more profit in upcoming years, then it will increase its dividends in future.

Another important lesson to learn here is that– your dividends are going to increase. But your purchase price is going to remain constant throughout your holding time frame.

Therefore, if you look at the dividend yield, the numerator (dividends) is going to increase with time. But the denominator (purchase price of the stock) is going to remain constant for you. In short, the dividend yield for that stock is going to increase in future.

Also read: How to Earn Rs 13,08,672 From Just One Stock?

Let us understand this better with the help of an example.

How To Make Money From Dividends?

Suppose you purchased 100 stocks of a company at Rs 200. The annual dividend for that year was Rs 10. So, for the first year, the dividend yield will be 5%. This yield is small here compared to the returns from most of the debt investments. 

Nevertheless, let us assume that the company is fundamentally healthy and going to give a consistent (increasing) dividends in the upcoming years. Here is a table describing the annual dividends in the upcoming years.

Dividend Purchase Price Dividend Yield Total Annual Dividends
YEAR1 Rs 10 Rs 200 5% Rs 1,000
YEAR2 Rs 12 Rs 200 6% Rs 1,200
YEAR3 Rs 15 Rs 200 7.5% Rs 1,500
YEAR4 Rs 18 Rs 200 9% Rs 1,800
YEAR5 Rs 21 Rs 200 10.5% Rs 2,100

Moreover, along with the dividends, your capital will also appreciate in value as you are holding the stock for a long time. In the next 5 years, maybe the purchase price of Rs 200 has now appreciated to Rs 400, 500 or whatever high price.

For the investors, who buy that stock directly in the fifth year (at an appreciated price- let’s say Rs 500), the dividend yield for them might be low. However, as you have purchased that stock long ago at a decent price, the dividend yield will be quite high (even higher than the fixed deposits). From the above table, you can notice the increase in the dividend yield as the dividend increases.

In short, here dividends are allowing you to receive a healthy income without selling your original assets.

Also read: 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. 

A few points of concerns regarding dividends:

The biggest point of concern regarding dividend stocks is that dividends are not obligations. This means that the company may reduce or discontinue the dividends in future.

For example, if a company suffers a heavy loss in a year or if the company is planning to invest its profit in some new project/plant, then it might reduce the dividends or do not give any dividends to its shareholders.

Therefore, if you are investing in any dividend stock, then first make sure to look at the dividend history of that company. A consistently increasing dividend for the last 10-12 years can be considered a healthy sign.

Also read:  10 Best Dividend Stocks in India That Will Make Your Portfolio Rich.

Conclusion:

Buy low and sell high is not the only way to make money from the stocks. There are many long-term investors who are generating big wealth through their annual dividends. If you want a good consistent return on your stocks without selling it, then investing in a healthy dividend stock can be a good strategy.

That’s for this post on how to make money from dividends. I hope it was helpful to you. Have a great day and happy investing.

May 21, 2019 Essential Reading, Investment Basics 4 comments
3 Uncommon Alternative Investments Option in 2019 cover

3 Uncommon Alternative Investment Options in 2019

It is no secret that diversifying is the key to success for investing and as humans we love our options! Many investors assume diversifying means investing in different types of securities like bonds, stocks, and options. However, the top investors take the term in their most exclusive form and invest in truly diversified assets. This brings us to alternative investments.

What are alternative investments?

Outside stocks and bonds, there is a world of investments that we can choose from. Alternative investments are those investments that vary from the traditional forms of investing in terms of liquidity, how they are regulated and the way they are managed. Having a mixed basket of investments is very beneficial for an investor especially during a downturn. People who have experienced a recession or inflation will tell you that investing in only one type of asset will result in great losses.

A few examples of alternative investments include venture capital, real estate investments and even gold efts. These assets are usually more illiquid than traditional investments and have little to no correlation with stocks and bonds. However, alternative investments are less regulated than traditional stocks which are under the control of organizations such as FINRA, SEC in the U.S or SEBI in India. On the flip side, although they are not controlled investments, the performance of alternative investments is difficult to measure. This is because, unlike stocks, there is limited information available on alternative investments, making them difficult to assess.

Types of alternative investments

Alternative investments is a mindset approach to investing rather than a specific investment. There are various alternative investments out there and investors can choose the ones that best suit their management style. A few investments include:

1. Private equity

Investing in the stock market is great but not all companies are listed on the exchange. There are more private companies than public companies and the companies often take on an investor to help fund their growth. Private equity is the broad term to describe the spectrum of investors in the private market. The funds raised by the private equity firms will be invested in private companies, many of which include promising startups. The capital raised is used for organic and inorganic growth of the company. The amount invested is then returned back to the investors during an exit event such as the private firm issuing an IPO to go public or an acquisition or merger.

To assess the performance of this alternative investment, many investors use the internal rate of return (IRR) however this does not take into consideration the interim or negative cash flows. In recent years, this formula evolved to the Modified IRR which is a more holistic approach to analyze the performance of a private equity investment.

2. Collectibles

paintings

Collectibles is the broad term used to describe items such as cars, antiques, paintings and various vintage items. In other words, they are items that have a low intrinsic value. Many people place a high value on these items, but unlike stock and bonds that can generate profits and income, the value of the collectibles is based on the speculations of buyers and sellers. An investment into collectibles can help diversify your portfolio but you need to have a good understanding of the items you are collecting to reduce risks.

One of the best ways to invest in collectibles is to have a personal interest in what you are collecting. This will help you develop an interest in the market and gain expertise on the items you are investing in. Items collected this way will give the collector personal satisfaction of the items they own whether or not they receive the expected return.

It is important for investors to remember that collectible items have a long holding period. While stocks and shares can be sold at a whim, depending on market conditions, collectibles, on the other hand, need to be ‘held’ by the owner for an extended period of time. This is because collectibles tend to gain value over time and selling them too quickly can only result in high transaction costs.

While collectibles can help diversify your portfolio, an investor requires extensive knowledge in the market to make the right decisions. But collectible investing is great because not only is it an alternative investment but it is also a hobby for many!

3. Hedge funds

A hedge fund isn’t a single investment but rather a pooled investment that is managed by an investment advisor. A hedge fund raises money from investors and uses the money to buy up entire businesses, either through a takeover or by investing in the business to improve operations. There are also hedge funds that specialize in real estate or other assets such as patents and trademarks.

Investing in hedge funds can help an investor diversify their portfolios because hedge fund managers used a variety of strategies when investing. This includes arbitrage, distressed assets, and macro-trends. They also take a Leveraged approach to investment which is using borrowed money for investment.

Hedge Funds vary from private equity investments because they invest in public companies, thereby providing more liquidity and making it easier for investors to take out their money if required. A report by the World Economic Forum states that in the U.S investments in hedge funds represent 40% of total alternative investments.

Also read: What is a Hedge Fund? And How do they operate?

Closing Thoughts

Diversification is the mantra when it comes to earning high returns on your investments. While the stock market allows investors to assess the performance of their stocks and provides liquidity, it is not always the safest investment as the markets are constantly volatile. This has led to an increase in the popularity of alternative investments in the last couple of years.

Historically, however, alternative investments are more popular among high net-worth individuals as they require a large initial investment and cannot be converted to cash quickly. Nevertheless, alternative investments have numerous advantages such as portfolio diversity and active management of funds.

Alternative investments are now an option for all classes of investors and not just the wealthy ones. But these investments requires a lot of research and study and investing in them without a thorough assessment can be incredibly risky.

May 18, 2019 Invest Intelligently, Personal Finance No comments yet
Open-Ended Vs Closed-Ended Funds Which One to Prefer cover

Open-Ended Vs Closed-Ended Funds: Which One to Prefer?

A few days ago, I was having a discussion on Mutual Funds with a friend of mine. During the conversation, he asked me to state the key parameters which one needs to consider for investing in a Mutual Fund scheme. Another time, a person in my connection lists on LinkedIn texted me and asked when he should invest in an Equity Mutual Fund. He further wanted to know whether he should invest a lump sum or opt for investing through SIPs. Again yesterday, an old friend of mine called me up in the evening and asked in which fund he should be investing given his risk-return profile.

Well, being a Mutual Fund enthusiast and having an experience in Mutual Fund investing of over two years, I frequently come across many such queries on Mutual Funds from my acquaintances. But, there is one thing which has really surprised me is that till date, no one has ever asked me anything regarding Open-ended and Close-ended Mutual Funds.

I think this is something one needs to know if he/she is a fresher in Mutual Fund Investing. Therefore today, I have decided to talk about Open-ended vs Close-ended funds.

Open-ended vs closed-ended funds

On the basis of the structure, a Mutual Fund can be either termed as an Open-ended Mutual Fund or a Close-ended Mutual Fund. Let us first discuss Open-ended funds.

— Open-ended Funds

Open-ended funds can issue any number of units from the market. These work in a similar manner like some collective investment scheme where you can purchase units directly from the Mutual Fund Company instead of an existing unitholder.

Unlike a Close-ended fund, the units in an Open-ended scheme can be purchased or sold even after the NFO (New Fund Offering) period ends. These funds offer units to you on an everyday basis. Further, you can also redeem your units to the Mutual Fund Company any day.

The units of an Open-ended fund are issued at a price which is termed as the Net Asset Value (NAV). The NAV of a scheme is nothing but the market valuation of the assets minus liabilities of the scheme. If the scheme performs well, its NAV goes up and vice versa. So, having a constant look at the NAV of a fund helps an investor to evaluate its performance.

— Closed-Ended Funds

In a Close-ended fund, a fixed number of units are issued at the NAV to the investors in its New Fund Offering (NFO). After that, no fresh units are offered to investors. Therefore, you cannot invest in the units of a Closed-ended fund after its NFO period ends. Furthermore, you cannot redeem your units to the Mutual Fund Company after the NFO period lapses.

In order to provide liquidity to the existing investors, the existing units of a Close-ended scheme are listed on a recognized stock exchange subsequent to the NFO. Any further transactions with respect to those units are taken place in the stock market.

The transactions of the units of a Close-ended fund in the stock exchange are taken place at a price determined by the interaction between demand and supply in the market. Therefore, in a stock exchange, you would get a unit of a close-ended scheme at a price which could be at a premium over or a discount below its NAV.

Difference between open-ended vs closed-ended funds

So far we have understood the basics of Open-ended and Close-ended funds. Let us have a look at the major differences between them.

1. Open Ended schemes are more liquid in nature. You can redeem your units of an Open-ended fund anytime. Closed Ended schemes come with a fixed lock-in period. If you want to redeem your portfolio to the Mutual Fund Company at the NAV, you have to do it within a specified period of time. Otherwise, you have to dispose of it through the stock exchange at the market determined price.

2. Unlike a Close-ended scheme, an Open-ended fund is not traded on any recognized stock exchange: The price of a unit in an Open-ended scheme is majorly influenced by the prices of its underlying securities. On the other hand, the price of a unit in a Closed-ended scheme is more impacted by the market forces as compared to its benchmarks. So, it is easier to evaluate the performance of an Open-ended scheme as compared to a Close-ended fund.

3. Closed-ended funds offer trade opportunity at real-time market prices: As the units in a Closed-ended fund are traded on a stock exchange like shares, this gives you an opportunity trade on them based on real-time market prices. You can apply share trading strategies like limit orders, margin trading, etc.

4. Less-pressure for Closed-ended fund Managers: The Fund Managers in an Open-ended scheme is having no option but to strictly follow the objective of the scheme. Further, they have to face the redemption pressure of the unitholders off and on. The AUM (Assets under Management) for the Fund Managers to handle in a Close-ended scheme stays majorly fixed from the beginning. Therefore, they can manage the same at their own discretion and are not required to face any external pressure or adhere to stringent compliances.

5. The track records of a Closed-ended fund are not available, unlike an Open-ended fund: It is not possible for you to see the performance of a Close-ended fund over different economic cycles. But, in case of an Open-ended fund, you can always take an informed investment decision.

6. In a Close-ended fund, you have to invest a lump sum in a scheme during the time of their NFO issue: It is of no doubt in saying that it is a risky approach in making investments. Whereas, an Open-ended fund allows you to set up a Systematic Investment Plan (SIP) in a scheme of your choice.

Also read:

Closing thoughts

 In an Open-ended fund, many investors look to redeem their portfolio to book quick profits when the NAV goes up by 5 to 10% in the short run. This hurts the long-term investors significantly who stay invested with an aim to achieve higher returns in the long run. In this regard, a Closed-ended fund seems to be a better option. This is because its lock-in period prevents early redemption by the investors and if they redeem in the stock market, the AUM of the scheme still remains unaffected.

Again, if you have a little or no knowledge of the market and looking to earn a return of 15 to 20% annually, an Open-ended fund is ideal for you. In these funds, the NAVs are updated daily and they offer a higher scope of liquidating as compared to the Close-ended ones.

Moreover, Close-ended funds don’t offer any SIP mode for investing. You can only invest in a lump sum mode either in the NFO or in the secondary market. So, you can choose to invest in a Close-ended fund if you want to trade in a Mutual Fund scheme like any share in the stock market. But, if you are a regular income earner who likes to invest on a regular basis, an Open-ended Mutual Fund is always better for you.

It is not so easy to conclude whether opting for an Open-ended fund is better than investing in a Closed-ended scheme. The performance of any Mutual Fund scheme, whether it is Open-ended or Closed-ended, depends on the fund category it belongs and the effectiveness with which the Fund Managers handle its assets. In addition to that, what matters more is the purpose for which you want to invest in a Mutual Fund.

May 16, 2019 Mutual Funds 1 comment
Do You Need a Finance Degree For a Career in Stock Market cover

Do You Need a Finance Degree For a Career in Stock Market?

The finance industry in India has been growing at a very fast pace since last two decades. And along with the growth in the industry, there’s also a boom in job opportunities and enthusiasts willing to work in this field.

Although there are many job opportunities available in the stock market, however, one of the most frequently asked questions is- “Can a student from non-finance degree get a job on Dalal street?” How much relevant is having a finance, commerce or business degree to land a job in the world on the stock market.

Well, the short answer to this question is that you do not need a finance or business degree to get all the jobs in the stock market. A lot of financial companies hire employees from Engineering, mathematics, science, computing or economics background. In the era of internet technology, most of the financial giants are looking more for the skills and the aptitude of the candidates rather than just the degree.

Anyways, there are still a few careers in the market like Investment Banking, Equity Research, Risk Management, Investment Management, etc where a special skill set and expert knowledge of finance is required and having a degree can give an advantage to the candidates.

Nonetheless, having or not having a finance/commerce/business degree is just the starting point. There are a lot more things that you need to know if you want to build a career in the stock market industry which we are going to discuss in this post.

It’s always beneficial to have a background in Finance

When you have a background in finance, business, accounting or commerce, you already have got a minor exposure to the investing world. You might already know the lingo and familiar with the frequently used terms in the stock market like dividends, assets, liabilities, etc.

On the other hand, most of the non-finance guys are not even familiar with the most common terms of the market. Moreover, they find reading and understanding financial statements is quite challenging compared to people with a finance background.

Getting a job at Dalal Street Market

In a scenario where you are appearing in a job interview for a financial position, knowing these financial terms can help you impress the interviewer or at least not feeling like a dumb one. Besides, as stated, in a few financial positions, the interviewers create a barrier by shortlisting only candidates with a graduate degree in finance, commerce, business or accounting. And in all these cases, having a degree can be advantageous for you.

Moreover, if you want to become a SEBI registered investment advisor or research analyst, you will require an educational qualification of graduate or post-graduate degree in finance/accounting/commerce, etc. If you don’t meet the educational qualification, you cannot become a SEBI registered advisors/analyst and hence can’t have a career in the advisory field.

Overall, if you’re planning to become an investment advisor/research analysis, you’ll require a degree in these fields. Nonetheless, you can always enroll in post-graduate degrees of one or two years to get the degree and meet the educational qualifications.

Also read: What are the Different Career Options in Indian Stock Market?

Managing your own portfolio

When it comes to trading & investing or managing your own portfolio, you don’t require any degree.

Anyone can open their trading accounts and start trading in stocks. Many engineers, math/science major, arts graduate or even people who don’t have any degree have been investing successfully and made a huge fortune from the market. A lot of successful stock market traders/investors do not have any background in finance or never did any course in this field. One of the best examples is Charlie Munger, a successful stock investor and vice-chairman of Berkshire Hathaway.

In short, if you are not interested in a 9-to-5 job or career in the Dalal street and just want to trade in stocks on your own, you won’t require any degree or certification. Here you can make money by using your knowledge and skill sets.

What to do when you don’t have a degree in Finance/Commerce?

It’s often said that Self-Education is the best form of learning. Even though if you do not have a degree in finance, you can learn the skills and impress the interviewer with your enthusiasm to master the market.

Start by learning the lingo. It’s really important to know financial terms if you want to break the initial barrier of entering the stock market world. Know the most frequently used investing terms and how to read the financial statements.

Further, if possible, take a few online courses to learn the trading/investing concept. Attend local investing workshops, seminars, etc. It would be best if you can find a mentor. Expand your knowledge base and try simulating platforms to trade in stocks without risking your money. And finally, try to land an internship in the finance company so that you can have a real experience of how things work in this industry.

Closing Thoughts

Most people believe that a career in stock market is only for the people with finance or business background. But this is not true. Do not stop yourself from entering the exciting world of the stock market just because you do not have a finance degree. Here, having a skill set is more important compared to a degree. Moreover, even if you do not have a graduation degree in Finance/Commerce, you can go for reputed financial certifications like CFA, FRM, PRM etc that will put you on the same position as those with degrees.

My final advise will be to focus on enhancing your skills and acquiring specialized knowledge. This will help you more in building your dream life than chasing over degrees.

May 15, 2019 Beginner's guide 2 comments
Howard Marks' Investing Strategies & Lessons cover

Howard Marks’ Investing Strategies & Lessons

Howard Marks, born during the 1940s, is a renowned investor and writer in the United States of America. In 2017, he was ranked the #374 richest person in the United States, with a net worth of $1.91 billion by Forbes.

During the early part of his career, Howard Marks worked with Citibank in senior positions. In the year 1985, he joined TCW where he created high yield, convertible securities, and distressed debt groups and led them all by himself.

After working in TCW for a decade, Howard resigned and eventually founded Oaktree Capital Management in Los Angeles with five partners. Interestingly, the partners of Howard in Oaktree are all ex-employees of TCW like him. The Asset Management Firm of Marks started growing in size and operations at a rapid pace with the passage of time. Oaktree focused on distressed debt, high-yield bonds, and private equity. Mr. Howard is currently the Co-chairman of the organization.

He is also a very popular personality among finance enthusiasts in the US and the world. His detailed discussion on investment strategies and insights into the US economy is known as “Oaktree memos”. It contributed highly towards his popularity among the investing community across the world. He has also authored several books on investing which are quite famous around the globe like Mastering The Market Cycle: Getting the odds on your side & The Most Important Thing: Uncommon Sense for The Thoughtful Investor.

Investing strategies of Howard Marks

Let us have a look at some pointers which would help you understand the investing philosophy of this famous billionaire investor. 

1. Be a contrarian investor: Howard Marks stated that your behavior as an investor towards the financial market should be different from the other retail investors. When people buy some stock, you have to sell the same and vice versa. You need to observe what others are doing and try to comprehend where they are going wrong.

As per Marks, the market is driven by greed and fear of investors. You should not follow the herd. What others are doing, not necessarily it has to be correct. You can’t afford to get carried away by the actions of the herd. Controlling your emotions is extremely important to achieve success in financial investing.

2. You might face punishing times in your investing career: You can’t expect any industry to perform well every time. It is also not possible for an asset class to provide high returns on all occasions. It might happen that the investing approach of yours fails to generate your target returns on every occasion.

Your portfolio might stay reddened for a substantial period of time. It is pretty okay to incur losses while investing. Losing your corpus in the financial market is a part and parcel of investing.

3. Patience is highly needed to succeed in the financial market: If an asset is underpriced, it doesn’t mean its price is going up tomorrow. Similarly, an overpriced asset doesn’t indicate it will start going bearish soon.

You might come across a plethora of opportunities in the stock market to book quick profits at low risk. But, it is always recommended to stay firm with your investing strategies. Have faith in your investing philosophy to yield returns for you in the long run.

4. Don’t look for “exact bottoms” in the market: Marks said that he looks to buy a stock at a cheap price. He enters into the market when the price is low, not necessarily it has to be the price. It is not always possible that you get to buy all quantities of a share at its rock bottom price.

After an initial investment, when the same stock gets cheaper, Marks again buys more of it. It is not necessary to buy all your shares at the market low to make huge money.

5. Refrain from buying quality stocks at any price: It is not true that you will earn huge profits by investing in high-quality securities. You should look to buy a stock which is trading at a price lower than its intrinsic value.

Investing in stocks at a low purchase price not only generates the scope for future gain, but it also puts a limit on the downside risk. The more is the discount from the fair value (intrinsic value), the greater is the “margin of safety” a stock could provide you with.

6. Psychology is more important than market predictions: You don’t have a crystal ball to predict the future. You can’t forecast how the market will perform tomorrow. You can only mentally prepare yourself from probable situations in the market. For making money in the stock market you require having a deep insight into companies, asset classes, and sectors.

You can’t let your emotions get better of your investment strategies. What matters most is your psychology. You have to be either aggressive or defensive in your approach. It doesn’t matter whether you are investing in stocks or bonds.

It hardly matters whether you pour your money in domestic or international markets. Your returns remain unaffected irrespective of the fact whether you invest in a developed economy or an emerging market. 

Famous quotes by Howard Marks

You can find a plethora of quotes from Marks on the internet. Here are a few quotes which I found worth sharing from his book, ‘The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor’.  

— “The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst.”

— “There are old investors, and there are bold investors, but there are no old bold investors.”

— “There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time. That’s one of the most important things you can know about investment risk.”

Here are two more of my favorite quotes of Howard from his book, ‘Mastering the Market Cycle: Getting the Odds on Your Side’.

— “There are three ingredients for success—aggressiveness, timing, and skill—and if you have enough aggressiveness at the right time, you don’t need that much skill.”

— “What do value investors do? They strive to take advantage of discrepancies between “price” and “value.” In order to do that successfully, they have to (a) quantify an asset’s intrinsic value and how it’s likely to change over time and (b) assess how the current market price compares with the asset’s intrinsic value, past prices for the asset, the prices of other assets, and “theoretically fair” prices for assets in general.”

Also read:

Closing thoughts

Investing requires a person to have patience, dedication, and studying the market thoroughly. In case you want to earn quick profits in the short term, it is possible through trading but not by investing. But, if you are looking to grow your wealth and willing to stay invested for a long time, investing can make it a reality.

Howard Mark has not made huge money in one day. It took him years of experience to reach where he is now. To grow as a fundamental analyst, it is very important to learn from the eminent personalities who have achieved grand success as investors. The investing approach of Marks is immensely informative for any fresher willing to pursue a career in the financial market.

May 14, 2019 AceInvestors No comments yet
the butterfly effect cover

The Butterfly Effect: This Theory Can Change Your Life

It has been said that something as small as the flutter of a butterfly’s wing can cause a typhoon halfway around the world.

One of the greatest surprises in the scientific world is the chaos theory or butterfly effect which are events in our lives that are both non-linear and unpredictable. While science traditionally deals with outcomes that can be predicted and calculated to a certain extent like chemical reactions or the force of gravity, there are often many instances that are nearly impossible to predict like natural disasters, stock prices or the weather.

The first step to overcoming this unpredictability is to understand the chaotic nature of the world we live in. Identifying the elements that cause changes in stock price or the weather can help us steer our thinking in a certain direction. Finally, we need to remember that our eco, social and economic systems are all interconnected and taking negative actions on any of these systems can result in detrimental consequences.

The Butterfly Effect

The butterfly effect describes the phenomenon that a small event can have very large consequences.

This chain reaction is perfectly described in the movie ‘Pay it forward’ where a small boy, Trevor, creates a plan of kindness for a school project.  A recipient of a kind favor carries forward this favor to three other people. As the movie goes on we see this circle of people who do favors become bigger and bigger and ultimately affects the lives of many people in the community. One random act kindness started by a small boy resulted in a very large impact, changing everyone’s lives for the better.

While the movie represents a glass half full situation, the butterfly effect can be negative as well. For example, as much as meteorologists try to predict natural disasters, there have been tsunamis and typhoons that are inexplicable.

It is important to remember that the butterfly effect is not a small event that can have a large impact which can eventually be driven to the desired end but it is in fact a small event in a complex universe that can either have a very large impact or no impact at all. It is virtually impossible for us to identify or predict which one will occur.

The invention of the butterfly effect

In popular culture, the butterfly effect is used to describe the explain the inexplicable. How one small event can have a magnanimous effect on a completely unrelated event. This theory was first discovered by an MIT meteorology professor, Edward Lorenz who came across the phenomenon while conducting some weather-related research.

In 1963, Lorenz was conducting research on weather patterns and entered numbers into a program that was based on 12 variables such as wind, speed, and temperature. These values would be depicted on a graph that would rise and fall depending on the weather pattern. Lorenz ran a stimulation similar to the one he ran previously and the results he saw surprised him.

The variables were drastically different from what he saw previously when he ran the same stimuli. This would forever change the way his program produced weather patterns. He said “the numbers I had typed into the computer were not exactly the original ones. They were rounded versions I had first given to the printer. The initial errors caused by rounding out the values were the cause: they constantly grew until they controlled the solution. Nowadays, we would call this chaos.”

This unexpected change in the value of the variables based on the same stimuli led Lorenz to the powerful insight that the smallest of changes could have large unpredictable effects. He later termed this the butterfly effect saying that a butterfly could flap its wings in one part of the world and it could cause a typhoon in a completely different place. This led him to the conclusion that even with knowledge of primary conditions, the future was virtually impossible to predict.

Lorenz presented his findings in a paper titled ‘Deterministic Nonperiodic Flow’ which is considered one of the greatest achievements of twentieth-century physics. He said that there are small variables that can have profound impacts on the same body or system in the future. The strength of the impact is however unpredictable. Weather is a variable that is often hard to predict.

How the butterfly effect has impacted reality?

There are many references in real life (also represented in popular culture) where a small event has resulted in a large consequence- the butterfly effect. Here are a few ways the butterfly effect has shaped modern history.

The bombing of Hiroshima and Nagasaki

The nuclear bombs dropped on Hiroshima and Nagasaki is remembered as one of the most significant events in the war that changed the course of history and won Korea their independence. A little research into the war will tell you that the U.S intended to bomb the Japanese city of Kuroko.

However, on the fateful day, bad weather conditions prevented the U.S from doing this. The fighter planes flew over the city three times and eventually gave up due to the lack of visibility. The military personnel then made the split second decision to bomb Nagasaki instead. This bombing, as has been documented in history, had a magnanimous effect on the war and changed the course of history. If the weather conditions in Kuroko had been better, it might have resulted in a completely different outcome.

The Chernobyl accident

In Soviet Ukraine, 1986, a catastrophic accident occurred at a Chernobyl nuclear plant. The disaster was a result of design flaws in the reactor and the arrangement of the nuclear core that was not in accordance with the manual. This nuclear accident is said to have released more radiation that the bombings of Hiroshima and Nagasaki. Numerous people were evacuated and it also resulted in deaths and birth defects.

However, the accident could have been much worse, after the initial release of radiation three workers volunteered to go turn off the underground valve which is said to have eventually killed them. This was a brave and heroic act because had they not turned off the valve when they did, more than half of Europe would have been destroyed and inhabitable (the butterfly effect). The Chernobyl accident has had numerous long-term effects and many believe it is the cause of global warming. Countries today are slow to adopt nuclear power as an energy source.

Closing Thoughts

While the human race thrives on control and predictability, the butterfly effect shows us that we, in fact, cannot predict the future. The complex universe around us is chaotic and vulnerable to even the smallest of changes. As humans, we can only identify catalysts that react to these conditions. However, if we try to control or predict outcomes, more often than not, it will result in failure.

Finally, always remember what the butterfly effect actually teaches us- “Everything that you do matters”. 

May 13, 2019 Investing Psychology 1 comment
What is National Pension Scheme (NPS)? Advantages, Tax Benefits & More cover

What is National Pension Scheme (NPS)? Advantages, Tax Benefits & More

NPS or National Pension Scheme is a pension plan which was initiated by the Indian Government in January 2004. It was primarily introduced for those Government employees those who joined employments in 2004 and onwards.

Subsequently, the Government of India wanted to develop the habit of savings among the salaried Indians, specifically for retirement. Therefore, from the month of May in 2009, NPS was made available for all employed Indians. PFRDA (Pension Fund Regulatory and Development Authority) is the regulator of NPS in India.

How can you start NPS?

If you are a salaried Indian resident, aged between 18 to 60 years, you are eligible to invest in NPS. You can open your NPS account with any entity called the Point of Presence (POP). POPs mostly include banks and other financial institutions. The authorized branches of a POP are called Point of Presence Service Providers (POP-SPs). POP-SP acts as the collector of its POP.

In order to enroll in an NPS account, at first you have to make an application in a prescribed form. Next, you have to furnish the documents required for complying KYC norms. Once your application is processed, the Central Record-keeping Agency (CRA) will send you your PRAN. After that, you have to pay the minimum account opening fee along with the management fee to activate your NPS account.

Various types of Accounts in NPS

There are two types of accounts in NPS, which are Tier I account and Tier II account.

Tier I account is mandatory for all subscribers of NPS. If you are a Government employee, you are required to contribute 10% of your Basic Salary plus D.A. in NPS. The Government of India also contributes an equal amount in the same account. A minimum of Rs 500 per month is required to be contributed in your NPS account, i.e. Rs 6000 in a year.

In case you are a private employee, you get the option of choosing between NPS and EPF. If you choose NPS, you have to contribute an amount equal to 10% of the sum of your Basic Salary and DA. Your employer will also contribute an equal amount in your account. You can find your employer’s contributions towards your NPS account in Form 16.

Tier II account of NPS is a savings account and you can withdraw money from it anytime. Neither your employer contributes any amount in this account nor do you get any tax exemption on such contribution made. You have to pay Rs 1,000 to open this account. In your subsequent contributions, you have to pay a minimum of Rs 250 on each occasion. Further, every year end, your balance in this account should be at least Rs 2,000 to keep your account operation.

How does NPS work?

An NPS invests in Equities, Corporate Debts, and Government Securities. You can choose any from the Active, Auto or Default plan. In Active plan, maximum 50% of your investments can be allocated to Equities.

In the Auto plan, until you reach 35 years of age, maximum investments that can be made in Equities and Corporate Debts would be 50 and 30%, respectively. After that, in the next 20 years, the investments in Equities and Corporate Debts go down every year by 2 and 1%, respectively.

In the Default plan, maximum 55% in Government Securities, 40% in Corporate Debts, 15% in Equities, and 5% in Money markets can be invested out of the contributions made. If you are a Government employee, please note that you can only opt for the Default option.

The financial assets of your NPS account are managed by an established Fund Management Company. You can choose your fund manager from any of the following:

  1. ICICI Prudential Pension Fund.
  2. LIC Pension Fund.
  3. Kotak Mahindra Pension Fund.
  4. Reliance Capital Pension Fund.
  5. SBI Pension Fund.
  6. UTI Retirement Solutions Pension Fund.
  7. HDFC Pension Management Company.
  8. DSP BlackRock Pension Fund.

How your NPS account provides you with pensions?

When you subscribe to an NPS scheme, you are provided with a Permanent Retirement Account Number (PRAN). While you work, NPS accumulates your savings in your Permanent Retirement Account (PRA).

When you retire, your savings in the PRA will be used for providing you with pensions throughout your retired life. When you retire from your job after reaching a certain age, NPS allows you in withdrawing up to 40% of the corpus in your PRA. The balance corpus continues generating pension amounts for you annually.

You should also keep this in mind that you can only withdraw from your NPS account after three years from your subscription date have been completed. You can withdraw funds only to the maximum of 25% of the amount contributed by you. Furthermore, you are allowed to withdraw to the maximum of three times during your subscription tenure.

Also read:

Benefits of investing in NPS

When it comes to investment management, NPS provides you with a certain amount of flexibility. Your savings in NPS is operated and managed by a private investment entity. If you are dissatisfied with your chosen fund manager, you can shift to another Fund Management Company.

Apart from that, NPS is a safe investment as it is regulated by PFRDA, a statutory body of the Indian Government. NPS has been in India for around 15 years and it has consistently yielded between 8 to 10% returns every year.

One of the greatest perks of investing in NPS is that it provides huge tax benefits to its subscribers. Whatever you contribute to your NPS account is eligible for tax benefit up to Rs 1.5 lakh u/s 80C of Income Tax Act, 1961 for every Financial Year.

Further, a tax benefit of extra Rs 50k out of your employer’s contributions is allowed u/s 80CCD1B for every Financial Year. NPS has an EET status like PPF. This means the investments, returns, and redemptions are all eligible for tax benefits. You can read more on taxation of NPS in this blog.

Closing Thoughts

You must have heard that one should not put all the eggs in a single basket. Diversification is the key to success in the financial market. Diversifying your corpus is difficult if you directly invest in the market. This is because you would require a huge amount of money to create a well-diversified portfolio.

Investing in Mutual Funds can sort this problem to a huge extent. But, it is not going to be of much help to you if you lack the knowledge of picking the right Mutual Fund scheme for your financial needs.

NPS overcomes this shortcoming of Mutual Fund. Here, you don’t need to analyze a plethora of schemes by yourself. You just require picking your desired fund manager who would handle all your investments as per your chosen NPS plan. The beauty of investing in NPS is that you don’t need to possess any practical knowledge of the stock market.

May 12, 2019 Personal Finance 1 comment
How to Develop a Stock Investor Mindset cover

How to Develop a Stock Investor Mindset?

If you want to make a significant amount of money from the stock market, it is crucial to develop a healthy stock investor mindset. However, the problem is that most people never learn this skill set as neither it is taught in schools nor colleges. Even the best degrees in finance or MBA do not honestly explain how to invest in stocks and make money from it smartly.

Only a minority population is fortunate enough is born in the family of the investors or whose close ones have been investing efficiently in stocks or mutual funds. For the rest, they always have to start from the ground zero level, without any proper guidance or mentorship.

Therefore, when it comes to developing a successful stock investor mindset, it is the responsibility of the individual to learn this skill-set themselves. If you are one of those who has never invested in the stock market and struggling to build an investor mindset, this post can be useful to you.

In this article, we are going to discuss how a beginner can develop a successful stock investor mindset.

Stock market gives us all an amazing opportunity…

There are thousands of companies publicly listed in stock exchanges. And hence, the stock market allows everyday investors like us to buy the shares of those company and get a piece of ownership.

From big Indian companies like Tata, Reliance, Wipro, ITC, etc. to Global giants like Apple, Google, Facebook, Samsung, etc. You can invest in any public company that you like through a stock exchange. All these companies are professionally managed and give employment to hundreds of people. And by investing in these companies through the market, you can become a part-owner and shareholder.

The first step of building a successful stock investor mindset is by appreciating the fact that we are given a fantastic opportunity as an investor. And if you are not investing in stocks, you are missing an excellent opportunity to become one of the owners of the best of best companies and also be a part of the growing economy.

The majority of the investing population never appreciate this fact, and hence they end up just trading stocks entire day and never owning the stock of an amazing company that they believe in.

How to develop a stock investor mindset?

My first advice for you to develop a stock investor mindset would be to read books.

However, this is a bit of obvious advice, right? And you are not reading this post for getting an obvious answer. Therefore, I won’t write an article of 1,000 words on the best investing books to read today. Anyways, if you are interested in reading a few good investing books, you can check out this list of 10 must-read books for stock investors.

My second advice would start watching investing videos on Youtube. This is again a piece of obvious advice. However, a great benefit of watching videos on Youtube (which people forget) is that they’re FREE. And therefore, I thought to mention this point in this post.

A few great Youtube Channels to follow to learn stock investing in Indian are FinnovationZ, Pranjal Kamra, Nitin Bhatia, Varun Malhotra, Sunil Minglani and of course Trade Brains’ Youtube Channel.

Now that we have discussed the apparent answers, let’s move forward to a few fun and easy tips to help you build an investor mindset.

Here are a few essential tips to help you build a stock investor mindset:

1. Keep investing apps on your phone:

Now and then during your day, you get some time off your work. Maybe during lunch, coffee break or while traveling to and fro from your work through metro or cab. You can use this time to develop your investor mindset.

Keep a few good investing and news app in your phone to remain updated with the investing world. A few useful apps that I recommend to stay updated with the market for beginners will be Moneycontrol or Economic times market. A quick tip- do not fill your phone will dozens of stock market app as it will burn you out to check them all. Instead, have one or two good apps which you can get comfortable with.

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

2. Join online forums/Whatsapp/Telegram Group

Joining active online forums will keep you in the loop regarding what’s happening in the market and what other’s are saying. Needless to mention that you should never invest based on a post in these forums/groups without researching. However, there are a lot of genuine contributors to these forums who are willing to share their knowledge and findings with the group members.

Find a few good forums/groups that suits you and join them. A few active online forums for the Indian stock market is ValuePkr, TradingQ&A, Rakesh Jhunjhunwala forum, Traderji & Trade Brains’ forum.

3. Enroll in courses

A lot of people envy online courses and want to learn to invest for free. But if you can spend lakhs of rupees in college tuition fee, thousands of rupees in buying books, then why not also spend some money for enrolling in investing courses that can help you get financial literacy.

How is spending money for enrolling in courses different from spending money on buying books? Both give you the knowledge, right? One of the vital step to enhance your stock investor mindset is by enrolling in a few right courses to learn the investing skills.

4. Mastermind

Although joining forums/WhatsApp groups etc. will help you in masterminding. However, it is equally important to surround yourself with people interested in similar activities as of you. This will encourage and help you keep motivated towards your goal. Find a few people with whom you can hang out and discuss your investment queries.

5. Attend local investing workshops/Conferences

If you are living in a big city, the chances are that you can easily find a few good investing workshops/conferences happening in your locality. Just by doing a simple google search, you can find a list of such events. On the other hand, if you live in a tier-2 or 3 cities, then you might have to plan a visit to your nearest big city to attend such conferences.

Attending investing workshops and conferences is another fantastic way to learn new skills, keep yourself surrounded by like-minded people and ask your most troubling questions with the experts. And if you can regularly attend a few investing workshops/conferences in a year, it will help you build a winning investor mindset.

Closing Thoughts:

No matter how common a skill might look like cooking, driving or swimming, it takes time and practice to become an expert in that skill. Just think about how many swimming lessons you took before diving in the 8-ft deep water.

Similarly, you cannot develop an excellent investor mindset in a day or week. You need to put time and efforts. Moreover, consistency is key here. Always remember, he who wants the most wins. If you’re going to become a successful investor, be consistent and keep learning.

That’s all for this post. I hope it is useful for you. Cheers!

May 11, 2019 Investment Basics No comments yet
Renting vs buying a home- Which one is better 3

Renting vs buying a home- Which one is better?

Renting vs buying a home has always been a big topic of discussion. Whenever we look for any long-term accommodation, we analyze deeply whether to buy a house property or take it on rent.

Some people say that staying in a rented home is better as we don’t have to spend a huge amount of money upfront. Moreover, when we opt for buying a residence, we mostly prefer raising a home loan which can again be a big commitment. On the other hand, those who advocate acquiring a residential property, state that it feels completely different to live in one’s own house and the house is their biggest asset.

We shall take an example to analyze the question of renting vs buying a home.

Renting vs buying a home

Let us consider two guys, Rohit and Sumit, who have got jobs as freshers in the IT sector in Kolkata. The former has decided to stay in rented accommodation while the latter has chosen to buy a flat on loan.

Let us see how the financial picture of Rohit looks like.

Renting a home

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Rohit has decided to stay in a 3-BHK apartment on rent. Let us assume Rohit’s rent to be Rs 20k per month with an average annual appreciation of 5% per annum. This is to be noted that if you take accommodation on rent, your landlord may increase your rent with time so as to adjust inflation.

Coming back to our example, the expected rent of the apartment after 20 years can be assumed to be Rs 40k per month. The monthly rent after 20 further years (a total of 40 years from now) is expected to become Rs 80k per month. If we calculate, we will find that after 40 years, Rohit would have paid Rs 2.9 crores towards the rental of his home.

Pros and cons of staying in rented accommodation:

As Rohit has opted to stay in a rented apartment, he needs to consider a few key things. First, he can’t treat his house as his own home as the legal owner is his landlord. Next, Rohit is always exposed to the risk of losing his shelter as his landlord may ask him to leave anytime (by giving a notice period as per the rent agreement).

Generally, the landlords in the majority of the states in India impose restrictions on the number of years a tenant can stay in his house. This happens as the landlords are not adequately protected by the applicable Indian laws. There are certain restrictions that Rohit will have to face with regard to the renovation of his apartment and keeping pets. Moreover, he has no scope of enjoying complete privacy in rented accommodation.

There are a few advantages too that Rohit can enjoy while staying in his rented residence. He is not required to pay any house taxes. Next, Salaried individuals, who live in rented houses, can claim the House Rent Allowance (HRA) to lower their taxes – partially or wholly. Apart from paying a refundable security deposit and sometimes the maintenance charge, he is not required to pay any further lumpsum amount upfront.

If Rohit changes his job to another location or he is transferred to another location in his existing job, it won’t bother him financially. His contract with the existing landlord will be canceled and he will enter into a fresh contract with a new landlord.

Also read: HRA – House Rent Allowance – Exemption Rules & Tax Deductions

So, far we have discussed only regarding Rohit. Let us now analyze the situation of Sumit.

Buying a home

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It was stated earlier that Sumit has decided to buy a similar accommodation like Rohit by borrowing from a Bank. Let us assume the amount of his home loan is Rs 40 lakhs which he has to repay in 2 decades time. The applicable interest rate is 8.3% p.a and Sumit requires paying EMIs of Rs 34,200 for 20 years loan duration. So, if we calculate, the total amount that Sumit has to pay after 20 years, it will amount to Rs 82 lakhs.

After the loan is repaid, Sumit is not required to pay anything at all to the Banker. So, for staying in rented accommodation for 4 decades, Rohit has to pay Rs 2.08 crores more than Sumit. Although Sumit is required to pay Municipal Tax every year, it is a nominal amount and can be ignored in our analysis.

Sumit would get dual income tax benefits every year as long as he is repaying the loan on house property. On one side, his gross total income will get reduced by the Interest on Loans paid by him u/s 24(b) of the Income Tax Act, 1961. On the other side, he would get deduction u/s 80C of the said for the principal amount of loan paid by him. The maximum deduction allowed u/s 24(b) and 80C are Rs 2 lakhs and Rs 1.5 lakhs, respectively.

So, from the above discussion, Sumit’s decision of purchasing a house property seems to be financially more viable than that of Rohit’s choice of rental accommodation.

Pros and cons of staying in buying a home:

Let us discuss some major benefits that Sumit can enjoy by opting for buying an apartment.

It is needless to say that having one’s own house is a sign of pride, sense of achievement and source of privacy. If Sumit is transferred to a new location or takes up a job in another location, he can sublet his property to someone. Even if he doesn’t stay in his house, it doesn’t mean that he has to incur a loss if he has bought the apartment on loan.

Many people say that rentals are always cheaper than EMIs. But, the fact is that, as time passes, the rentals tend to get higher and higher while the amount of existing EMIs doesn’t.

As an owner of the house property, Sumit can obtain any personal loan keeping his apartment on collateral. Today, real estate is a growing industry where the price of properties is going up every single day. Therefore, as Sumit has chosen to buy a house property, he will be investing in a physical asset having huge potential to generate large returns in the days to come.

There are a few shortcomings of buying a house too. Although Sumit will get the house in his own name, he can only enjoy the ownership in a true sense after he has repaid the loan in full. Generally, a Bank charges a down payment while granting the home loan. This upfront payment could be as high as one-fifth of the price of the apartment bought. So, in the short term, Sumit has to incur a heavy payout to buy a house property on loan.

Also read: Are REITS in India a worthy investment option?

Closing Thoughts

The decision of buying vs renting a home is not going to be the same for every individual. Whether you want to buy a house property or take it on rental, it totally depends on your financial situation. If buying accommodation suits my financial situation, it may not suit yours.

Moreover, both the options are having their own perks and shortcomings. In this article, we have evaluated both the options where buying accommodation sounds financially fitter than staying in a rented home.

May 10, 2019 Invest Intelligently, Personal Finance No comments yet
21 Do's and Don'ts of Stock Market Investing for beginners cover

21 Do’s and Don’ts of Stock Market Investing for Beginners

Making money from stocks is simple if you strictly follow the do’s and don’ts of stock market investing. However, because of the lack of financial education, the majority of the investing population do what they are not supposed to ‘do’ in the market and vice-versa.

For example, the first and foremost rule to invest intelligently in stocks is to ‘not speculate’, but invest only after proper research. However, most people speculate in stocks and bet that the share price will go high in the upcoming days without any significant analysis.

In this post, we are going to discuss the do’s and don’t of stock market investing for beginners. Let’s get started.

21 Do’s and Don’ts of Stock Market Investing for beginners.

Do’s of Stock Market Investing

Here are a few of the do’s of stock market investing that every investor should follow:

1. Get an education

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This is probably the most relevant do’s of stock market investing. If you really want to become a successful stock investor, start learning the market.

It doesn’t mean that you should enroll in a college program/degree. Self-education is the best way to learn. There are tons of free information available on the internet which you access to learn the market. Moreover, if you want to get a head-start, you can also enroll in a few good online stock market investing courses. Let the learning begin.

2. Start small

If you are just starting to learn how to swim, you won’t jump in 8 ft deep water, right? Similarly, when beginning to start investing in the stock market, start small. Invest the lowest possible amount and gradually increase your investments as you get more knowledge and confidence.

3. Get started early

I cannot emphasize enough on the importance of getting started soon with your finances. Time is in your favor when you start investing early. Moreover, here you get enough time to recover even if you make some losses during the early time of your investment journey.

Also read: Bunty and Babli: A financial story of how Bunty lost Rs 1,29,94,044!

4. Research before investing

One of the key reason why people do not make money from stocks is that they do not put the initial efforts before investing in the share. Every investor needs to research the company before investing. Here you need to learn the company’s fundamentals, financial statements, ratios, management and more. If you do not want to regret later, research the company first before investing.

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

5. Only invest what is surplus:

Stock market gives an immense opportunity to invest in your favorite companies and make money. However, there are always a few risks involved in the market, and no returns are guaranteed. Moreover, many times a bad (or bear market) may even last for years. Therefore, you should only invest the surplus money which does not affect your lifestyle even if you can’t get it out.

6. Have an investment goal

It’s easier to plan your investments (and to monitor your progress) if you have an investment goal/plan. Your goal may be to build a corpus of Rs 10 Crores in the next ten years or to build a retirement fund. Having a goal will keep you motivated and on track.

7. Build a stock portfolio

For making good consistent money from the stock market, just having two or three stocks is not enough. You need to build a winning stock portfolio of 8–12 stocks which can give you reliable returns.

Although it’s very less likely that you can find all the fantastic stocks to invest at once. However, year-after-year you can keep adding/removing stocks to build a strong portfolio which can help you reach your goals.

8. Average out:

It’s challenging to time the market and almost impossible to buy the stock at the exact bottom and sell them at the highest point. If you’ve done it, you might be lucky. A better approach here is to Buy/Sell in ‘steps’ (unless you find an amazing opportunity which the market offer sometimes).

9. Diversify

“Do not put all your eggs in one basket!”. The risk involved while investing in just one stock is way higher compared to a portfolio of ten stocks. Even if one or two of your stock starts performing poorly in later scenario, it may not affect the entire portfolio too much. Your stock portfolio should be sufficiently diversified.

10. Invest for the long-term

It’s a common fact that all the veterans of the stock market who made an incredible fortune from stocks are long term investors. But why do long-term investing helps to build wealth? Because of the power of compounding, the eighth wonder of the world. If you want to build massive wealth from the market, invest for the long-term.

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11. Hold the winners, cut the losers

Cut you losing stocks if they underperform for a long time and hold your winning stocks longer to allow them to offer even better returns. This is the golden mantra of investing that you should strictly follow. Moreover, keeping your winners and cutting losers will also help in building your dream portfolio.

Also read: The Biggest Investing Mistake that 90% Beginners Make!

12. Invest consistently

Most people get excited and enter the stock market when the market is doing well, and the indexes are touching new highs. However, if you only invest in a bull market and exit when the market is down i.e. when stocks are selling at discount, you will never find fantastic opportunities to pick cheap stocks.

Do not invest in the market just for a year. If you want to make good money from stocks, invest consistently and periodically increase your investment amount.

13. Have Patience

Most stocks take at least 1–2 years to give good returns to the investors. Moreover, the performances get better when you give more time. Have patience while investing in the share market and do not sell your stocks too soon for short term gratification.

Don’ts of Stock Market Investing:

14. Don’t take investing as gambling

Let me repeat this in simple words- “INVESTING IS NOT GAMBLING!”. Do not buy any random stock and expect it to give you two times return in a month.

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Also read: 5 Signs That You are Gambling in Stocks.

15. Don’t invest blindly on free tips/recommendations

The moment you open your trading account, you’ll start getting free messages on your phone with BUY/SELL calls. But remember, there is no FREE lunch in this world. Why would anyone send a stranger free tips for multi-bagger stocks? Never invest blindly on free tips or recommendation that you receive, no matter how appealing they may sound.

16. Don’t have unrealistic expectations:

Yes, many lucky guys in the market have made 400–500% return on their single investment. However, the truth is that these kinds of news get quickly circulated (and inflated).

Have a realistic expectation while investing in stocks. A return between 12–18% in a year is considered good in the market. Moreover, when you compound this return over multiple years, you will get way higher returns compared to 3.5% interest on your saving account.

Further, do not assume that you can get the same profits as others, who might be investing in stocks from many past years and may have acquired an amazing skill set. You can also get similar returns, but only after enough knowledge and practice.

17. Don’t over trade

When you are trading frequently, you are repeatedly paying for the brokerage and other charges. Don’t buy/sell the stocks too often. Take confident decisions and make transactions only when necessary.

18. Don’t follow the herd

Your colleague purchased a stock and made 67% returns from it within a year. Now, he’s boasting about it, and many of your office-mates are buying that stock. What would you do next? Should you buy the stock? Wrong!

No investor can get significant success from the market by following the herd. Do your own research, rather than following the crowd.

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19. Avoid psychological biases/traps

There are a lot of physiological biases while investing that can adversely affect your investment decisions and your ability to make effective choices. For example- Confirmation Bias, Anchoring bias, Buyer’s Remorse, Superiority trap, etc.

Most of these biases are pre-programmed in human nature, and hence it might be a little difficult to notice them by the individuals. Anyways, knowing these biases can help you to avoid them causing any serious damage. Moreover, a good thing regarding these biases is that — like any habit, you can change or get over them by practice and efforts.

Also read: 5 Psychology Traps that Investors Need to Avoid!

20. Don’t take unnecessary risks

Investing all your money in a hot stock/industry to get a little higher return is never a wise move. Safeguarding your money is equally important than getting high returns. You should never take unnecessary risks while investing in stocks and your ‘risk-reward’ should always be balanced.

21. Don’t make emotional decisions

The human mind is very complex, and there are many factors both internal and external that can affect the choices we make. While investing in the stock market, do not take emotional decisions. No matter how much you like a company, if it is not profitable and doesn’t have a bright future potential, it may not be the right investment decision. Do not get emotional while making your investment decisions.

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Bottom line:

In this post, I tried to cover the do’s and don’ts of stock market investing for beginners. However, this is just a guide and not a manual. You will learn more do’s and don’t through your personal experiences when you start investing on your own.

I hope this article is useful to you. Have a great day and happy investing!

May 9, 2019 Invest Intelligently, Investment Basics 3 comments
Minimalist lifestyle Is it worth being a minimalist cover

Minimalist lifestyle: Is it worth being a minimalist?

Being a minimalist is all about living with less and in recent years it’s become somewhat of a trend with shows such as Tidying up with Marie Condo and the Minimalism documentary (both on Netflix) taking the internet by storm. They say that minimalist lifestyle can change your life for the better and living with less equals more time to focus on the important things in life such as growing your personal relationships. But who is a minimalist and is it really worth being one?

Minimalist lifestyle: Is this for you?

While the word minimalism, these days, is synonymous with the clutter-free way people live their lives, it was traditionally a word used to describe art and design (such as the decorating your home with a minimalist concept). However, this word has become so much more today as we use it to define a certain lifestyle- less is more.

The idea behind this concept is that in today’s digital age we are often overwhelmed with materialistic things such as our iPhones and laptops. We forget to spend time with our loved ones and enjoy the simple things in life like cooking or creating art. Minimalism serves as an answer to these problems.

Minimalism is intentional living and involves getting rid of anything that takes up unnecessary space in your life like unwanted clothing, household items, bills, and fees. While living a clutter-free life sounds like a good idea, it may not be for everyone. Here are a few pros and cons to help you decide if the minimalist life is for you.

The PROS

Minimalism lets you focus on what matters the most and take out what you don’t need. Here are a few reasons why you should consider this lifestyle.

It helps you find the things you really need

Let’s be honest, you could honestly survive without a lot of things currently sitting in your house. The first step to being a minimalist is picking an area or room in your house and clean it out. You will find a bunch of things you no longer use or didn’t even know you owned.

Take this opportunity to either donate or sell these things. Not only does this leave you with the things that are important to you but you can also make a quick buck on the side. The rule of thumb is to take an item and see if you’ve used it in the last 90 days if the answer is no, will you use it in the next the 90 days? If the answer is still no, you no longer need it.

Having fewer things makes it easier to budget

When you know exactly what you have, it is easier to budget and make decisions. One of the main reasons many people find it hard to forecast expenses and prepare financially for the future is because they have too many unnecessary expenses to think about. This includes bills to apps like Hulu or Netflix or unwanted subscriptions. While these may not seem like too much money at first they can add up over time.

A few ways to overcome these unnecessary minor expenses is by having just one card to pay all your bills. You can even get a card with a good rewards program to rack up those points. This way you have all your major expenses on one statement which makes it easier to budget for the upcoming year.

Another option is to have a single checking account and a single emergency fund. This way you can maintain the minimal balance for the account and have a better idea of your daily expenses. An emergency fund is particularly useful during a period of a cash crunch. Getting your finances in order is a crucial element in living a stress-free and clutter-free life.

Also read: How Much Should You Save  - 50/20/30 Rule!

You create room for the important things in life

Having too many things can create a sense of claustrophobia which often leads down a road of anxiety and unhappiness. So when we clear out unwanted items, it leaves more room for what truly brings happiness to our lives. Physical things tend to tie us down like an anchor and living a minimalist life can take that weight off your shoulders- freedom from greed and debt.

Happiness is subjective and can mean different things to each one of us. For some, it could mean spending time with your family, your puppy or even doing something you are passionate about. Many people find that living a minimalist life will get them closer to this goal.

The CONS

While living a minimalist life looks interesting, it is often easier said than done. Minimalism isn’t a personal project and tends to affect those around you as well. Here are a few cons of living a minimalist life.

The minimalist lifestyle is difficult to adopt

Living clutter-free sounds like paradise but many people find it incredibly challenging to trade in their material possessions for a more minimalist life. In today’s digital age, with new trends popping up on the internet every day, there is a lot of peer pressure to keep up with the latest styles. Living without material possessions (shoes, clothes and electronics) can seem unthinkable for many.

The process of de-cluttering your life is stressful and overwhelming and going through all your things can bring up a lot of memories (some good, some not so good). Moreover, minimalism has a different meaning for everyone so it can be hard to decide how much minimalism is right for you.

(Video Credits: Matt D’Avella)

Minimalism is not a one-stop solution to all your problems

Greed and debt are two evils that people want liberation from and many people see leading a minimalist lifestyle as the answer to all their problems. But this is not the case because if you wake up one day and decide to go cold-turkey and lead a completely minimalist life, you are more than likely to relapse and go right back to your old habits.

It is important to see minimalism as a gradual process rather than a quick fix to all your problems.

Also read: 7 Fun And Easy Tips to Save More Money

So, should you become a minimalist?

Well, that’s a question only you can answer. Leading a clutter-free life is a great feeling but it is not for everybody. Some people often find happiness amongst their chaos.

Choosing to live a minimal life depends on your mindset and what you hope to get out of it. If you do decide to become a minimalist, remember to take it one day at a time.

May 7, 2019 Personal Finance, Save money No comments yet
10 Reasons Why You Should Start a SIP cover

10 Reasons Why You Should Start a SIP

Last Friday, I met my old college friend- Priyanshu. While discussing various stuff, he told me that he has decided not to invest in ‘Fixed Deposits’ anymore. Well, there is no doubt in saying that he has made a good decision. We all know that FD is no longer a strong investment option for creating our desired wealth for the future.

During our conversation, Priyanshu suddenly got eager to know more about investing in Mutual Funds. I told him that Mutual Funds have of late become the talk of the town. I explained to him the benefits of investing in the same. Anyways, he also asked me whether he should invest in Recurring Deposits instead of Mutual Funds. As we went further in our discussion, I realized that he used to think one can invest in Mutual Funds only in a lump sum mode like FDs. But, the fact is that you can even invest in a Mutual Fund through SIPs.

Later, I told him that as he is doing a day job and earning a regular income, he should start investing in the Mutual Funds via SIP mode. Investing through SIPs works in a similar manner like Recurring Deposits (RDs). One key difference between the two is that you get units while investing in Mutual Funds. Another major difference is that through SIP investing you can earn relatively higher returns than RDs. Further, the rate of returns in SIP Mutual Funds is not fixed as in the case of RDs.

In the SIP or Systematic Investment Plan, a fixed sum of money is automatically invested in your chosen Mutual Fund on a specified date of each month. When you set up SIPs, your Bank Account is debited and your desired sum gets invested in your chosen Mutual Fund scheme.

Why You Should Start a SIP?

If you are a beginner in Mutual Fund investing, you might have this doubt why you should opt for investing through the SIP mode. Here are the ten best reasons why you should start a SIP.

1. Automate your investments: You can set up SIPs to activate investments in the Mutual Fund from your Bank Account on a particular date. This results in developing a habit of investing in the Stock Market and helps you create a large corpus in the long run.

2. Developing an investment habit towards your goal: SIP investing builds a regular investing habit for an individual. So, if you have any financial goal, your well planned SIPs can make it more feasible to achieve.

3. Variety of investment plans: SIPs help you invest in Mutual Funds with your desired amount for a chosen term. Moreover, you have a variety of schemes to choose from according to your financial needs like Equity based mutual funds, debt mutual funds, balanced funds, etc.

4. Flexibility in investments: Using a Step-up SIP, you can gradually increase your SIP amount with the increase in your earnings. In Mutual Fund investing, you can choose to stick to your regular SIP amount. But, if you wish, you can also choose to increase or decrease (up to the minimum investment amount) your SIP amount with the help of a Flexi-SIP.

5. Affordable investments: When you invest in the Mutual Funds through SIPs, you can create a huge capital over a long period of time. SIP investing doesn’t require you to invest a large sum of money in every installment. So, your household expenses are not at all hampered due to SIP investing. You can start investing in SIP with an amount as low as Rs 500 per month.

6. Rupee cost averaging: Investing in the Mutual Funds through SIPs fetch you more units when the market moves down and fewer units when it goes up. Therefore, this averages out the overall costs of your investments over time.

7. You do not need to time the market: You don’t need to know whether the Stock Market has hit rock bottom or it has reached its peak. You can invest in the Mutual Funds any time through SIP as its rupee cost averaging feature nullifies the market volatility.

8. Long-term investment: Mutual Funds are typically meant for creating wealth in the long run. Investing through SIP let you invest in the market with small amounts over a long period of time. The higher is the investment horizon, the greater is the scope to earn larger returns.

9. Power of compounding: The returns on your SIP investments are also reinvested in the market. Therefore, you not only earn returns on what you invest but also on your reinvested returns. The longer you stay invested in the market, the greater is your scope of enjoying the power of compounding.

10. Diversification: You get the opportunity to enjoy the benefit of diversification while investing in SIPs. You can easily allocate your investment across diverse asset classes and industries. Diversifying your investment results in reducing your security-specific risks and increases your chances of earning larger returns.

Quick Note: Long term capital gains on an Equity Mutual Fund are tax-free if such gains don’t exceed Rs 1 lakh in a Financial Year. This goes to show that Equity Fund investing via SIPs is a wonderful way to accumulate a huge investment in the long run. Further, Investing in ELSS up to Rs 1.5 lakh in a Financial Year is allowed as a deduction against Gross Total Income for the same period. Setting up SIPs in an ELSS can help you gain tax benefits with ease.

Also read:

Conclusion

Mutual Funds have become extremely popular in recent years among the middle-class Indians because of AMFI’s “Mutual Funds Sahi Hai” campaign. SIP investing is a great way to invest in Mutual Funds for building huge wealth in the future.

People who don’t invest in Mutual Funds are either lacking in knowledge or simply scared to invest in the same. However, the Mutual Fund industry in India is highly regulated by SEBI, which reduces the chances of occurring malpractices to nil.

In this article, we have tried to highlight the major advantages of investing in Mutual Funds via SIP route. Again, you can start investing with as low as Rs 500 per month in a SIP. Mutual Funds can help you fulfill all your financial needs if you invest in it in a systematic manner.

May 5, 2019 Mutual Funds 1 comment
7 Incredible Side Hustle Ideas to Make an Extra Income

7 Incredible Side Hustle Ideas to Make an Extra Income

Thanks to the world wide web, earning a few extra bucks with a side-hustle is now easier than ever. But although there many different ways one can make money, you need to pick the side hustle ideas that matches your skills and needs.

Fortunately, there are many unique ways you can earn an income without an investment or a highly-specialized skill-set. While not all side-hustles may be the best fit for you, you need to pick the one that derives the most value- because at the end of the day, your job satisfaction is what mattes the most.

What are side hustles important?

Side hustles provide an outlet for you to pursue your passions outside your 9-5 job while giving you the opportunity to make an extra income. It is all about personal growth, discipline and can help you develop an entrepreneurial streak.

When choosing your side hustle, you may want to consider what you would want to supplement your current job with. This could be anything from blogging to selling your artwork online. Whatever your side hustle may be, it’s all about following your passions and seeing them through. Additionally, you can make some extra bucks and treat yourself.

Side hustle ideas

The idea of a side hustle can seem alluring but you are not sure what kind of job you want to do. Thanks to the developments in technology we have the world at our fingertips and a myriad of side hustles to choose from. A few of them include:

1. Sell your crafts online

If you have an artistic streak, you can use your talent to start a side hustle and earn some extra cash. They are many websites out there such as Etsy where you can list your crafts and other home-made items for others to buy.

Apps such as Instagram and Facebook are also great places to showcase your work. Many artists post pictures of their work on their Instagram or Facebook pages along with a link to their websites where customers can purchase the products. The rise in businesses born this way has led to a decrease in the number of brick and mortar stores worldwide.

2. Sell your stuff on e-bay or Amazon

A sure-fire way to make money online and have a lucrative side-business is to sell your items on websites such as e-bay, Amazon, or Olx. These items could include anything from household goods to furniture, books and even stamps. This is a great way to make use of things that you don’t really use or need. If you find that you have a knack for selling stuff online, you can do this professionally and earn a commission on every sale.

3. Drive for Uber or Ola

One of the best and most versatile ways to make money is to drive for Uber or Ola. Companies such as these have transformed the way we view transport in today’s sharing economy.

What makes these ride-share companies so great is that you get to decide when you want to work with just the click of a button. In metropolis cities such as Bangalore or Chennai, this is an easy and convenient way to make a side-income.

4. Start a blog

Starting a blog is not a quick money maker but it is a great way to create a platform for something you are passionate about while developing your skills.

What’s more? you can do it anywhere and from any part of the world. A blog is something you can create in your spare time and consistently working on it and posting great content can result in a high income eventually. You can even monetize your platform through sponsored posts, affiliate links or a shopping link to buy your products. Many people have created very lucrative businesses through their blogs.

5. Get a part-time job

If you want to trade in your time for money, you can get a part-time job. They are many options you can choose from to match your interests and skill-sets. A few ideas include babysitting, an administrative assistant or a barista.

If you are big on Instagram or Facebook, you can even take on a social media gig. The only downside to part-time jobs is that they often don’t pay as well as online businesses but they are still a great way to earn money while doing something you love.

6. Teaching

If you have the ability to teach other people skills, this opens up numerous side hustle possibilities. For example, if you are skilled in a particular academic field such as math or science, you could tutor students or even teach an online class. If your interests lie in other areas such as fitness or calligraphy, you can use your skills to teach a class in your free time. The great thing about teaching as a side hustle is that you get to do what you love while sharing your passion with others.

7. Freelance writing and editing

For those who possess the skill of putting words on paper, they are many side hustles that allow you to share your stories with others. Freelance writing and editing allows for flexibility and is quite enjoyable. You could write articles for magazines or journals on various genres (travel, fashion) and even edit student essays or websites online. You can develop your skills while expressing your creativity.

Also read: 11 Best Passive Ways to Make Money While You Sleep

Closing Thoughts

Tony Robbins famously said that’ if you do what you’ve always done, you’ll get what you’ve always gotten’ and this holds true for a lot of things in life.

Even if you love what you do for a full-time job, it is important to have an outlet where you can develop your passions and express free -thinking- this is where side-hustles play an important role in our lives.

While side-hustles can help you earn a supplemental income, they are important for many other reasons as it taches you to step out of your comfort zone and develop life-skills. While getting another job may be hard there are many ways you can earn an additional income as listed above.

So get a side-hustle and develop those skills!

May 4, 2019 Earn More, Personal Finance No comments yet
Over Diversification cover

Why Over-Diversification can be Dangerous for your Stock Portfolio?

“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett on Diversification

If you read any investing book or listen to a popular investment advisor, the first tip that most of them will give you is to diversify your portfolio. “Do not put all your eggs in one basket!!”

At first glance, this tip sounds logical. After all, risks involved while investing in just one stock is way higher compared to if you diversify your investments in ten stocks. However, the problem occurs when people over diversify their portfolio.

Over-diversification is a common mistake among the investing population. In this post, we are going to discuss what exactly is over-diversification and how over-diversification can be dangerous for your stock portfolio. Let’s get started.

What is diversification?

A diversified portfolio is investing in different stocks from dissimilar industries/sectors in order to reduce overall investment risk and to avoid any damage to the portfolio by the poor performance of a single stock.

Ideally, a retail investor should hold stocks between 3 to 20 from different industries and sectors. However, personally, I believe 8–12 stocks are sufficient for a diversified portfolio. It’s crucial that your portfolio is sufficiently balanced as ‘over’ and ‘under’ diversification are both dangerous for the investors:

  • Under diversified portfolio has more risk as the poor performance of a single stock can have an adverse effect on the entire portfolio.
  • On the other hand, over-diversified portfolio gives low returns and even the good performance of a few stocks will lead to a minimum positive impact on the portfolio.

Ironically, Peter Lynch described it as ‘diworsification’ highlighting inefficient diversification, in his best-selling book ‘One up on the Wall Street’.

Why do people over diversify?

Over diversifying simply means owning an excessive number of stocks in your portfolio. If you are a retail investor and holding 30–40 stocks or more, you are over-diversifying your portfolio. Now, the next question is why do people over diversify their portfolio.

The most common answer can be that a lot of investors do not even know that they are over-diversifying. They just keep buying stocks following the famous traditional tip written in popular books i.e. diversify to reduce risk. They believe that having more stocks is good for their portfolio.

A similar thing happened to me during my rookie days. At one time, I had 27 stocks in my portfolio. Out of them, I had invested almost equally in among 18 stocks and the rest 9 were trailing stocks which contributed only a minor portion of my portfolio.

Although the returns from many of my holding stocks were high, however, the overall return on my portfolio was not that big during that period. Anyways, after a few months, when I analyzed my portfolio to understand why this was happening, I found the answer. I over-diversified my portfolio. In the upcoming months, I slowly reduced the number of my holding stocks from 27 to 14, keeping only the best ones which I was confident about.

Quick Note: An amazing book that helped me to understand that the concept of over-diversification is flawed was reading ‘The Dhandho Investor’ by Mohnish Pabrai.

The principle that I liked the most in this book was ‘Few bets, big bets, and infrequent bets’. Here, Mohnish Pabrai suggests that you do not need to make frequent bets. Every once in a while, you’ll encounter overwhelming odds in your favor. In such times, act decisively and place a large bet. If you haven’t read ‘The Dhandho Investor’ yet, I would highly recommend you to read this book.

Security

Another big reason why people over-diversify their portfolio is to have ‘security’. Buying a large number of stocks helps in spreading investment risks over many instruments.

If you diversify your portfolio with multiple stocks, you’re less likely to experience major drops. This is because the possibility of all the stocks underperforming at a particular time is quite less. When some of your stocks are having tough times, others may be out-performing. Hence, efficient diversification helps is maintaining consistent overall portfolio performance.

For defensive investors, security may be a reason for over-diversifying. It definitely reduces the risk, but it also decreases the expected returns. High returns on your best stocks will be always balanced out with the majority of average/losing stocks.

Why over-diversification can hurt your stock portfolio?

By now, you might have vaguely understood the concept of over-diversification, let’s discuss why over-diversification can hurt your stock portfolio.

  • Low expected Returns

Over diversifying or adding too many stocks to your portfolio reduces the risk, but it also reduces the expected returns. Let’s understand it better with the help of two extreme situations.

When you own 2 stocks, your portfolio is associated with high risk and high expected gains. On the other hand, when you own 100 stocks, your portfolio risk is low, but your expected gain is also lower.

Over-diversification is a point where the loss of expected return is higher than the benefit of reduced risks. For a well-diversified portfolio, you need to find the sweet spot where you neither own too many stocks nor too few.

  • Tracking them all is difficult

In order to efficiently monitor your invested stocks, you need to evaluate their quarterly reports, annual reports, corporate announcements, latest news related to the companies, etc. If you are holding 30 stocks in your portfolio, monitoring them all can be really difficult, especially for the retail investors who have a full-time day job.

On the other hand, if you are holding just 10 stocks in your portfolio, monitoring them doesn’t take too much time or efforts. However, when the number of holding stocks increases, the chances of missing important news/announcement related to your invested stocks gets higher.

  • Duplication or inefficient diversification

Diversification means owning different companies from different industries or sectors. For example, one stock from automobile sector, two stock from technology industry, one stock from pharmaceutical, two from banking, two from energy sector, etc.

However, if you’ve bought 5 banking stocks out of 10 stocks in your portfolio, you haven’t diversified your portfolio effectively. Over-diversification often leads to owning similar companies in your portfolio.

Closing Thoughts

The majority of the investing population are given flawed tip to immensely diversify their stock portfolio. However, following this strategy is quite dangerous for retail investors. Your portfolio should be sufficiently diversified, not ‘over’ or ‘under’ diversified.

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

May 3, 2019 Investment Basics 1 comment
what are bonds cover

What are Bonds? And How to Invest in them in India?

A bond is a financial product which represents some debt. It is a debt security issued by an authorized issuer which can be a company, financial institution, or Government. The issuers offer returns on bonds to the lenders in the form of fixed payment of interest for the money borrowed from them.

A bond is having a fixed maturity period of its own. It is an obligation of the authorized issuer in paying interest and/or repaying the principal at a future date upon maturity. However, such payouts are dependent on the terms and conditions associated with the bonds issued by the said issuer.

Are bonds and stocks the same?

It was stated earlier that bonds are as good as debts. So, if you are a bondholder, it means that you are a lender of funds to the issuer entity. On the other hand, if you own a stock, it indicates that you have a share in the ownership of such issuer organization.

Bonds are having predefined maturity periods while stocks don’t. Anyways, if you invest in stocks, you can sell them off any day. But, if you are a holder of bonds, you have to wait for its maturity period to end to get back your investments. 

What are the different types of bonds available for investing?

  1. Zero-coupon bonds: These bonds are available for investing at a discount on the face values. After the expiry of their maturity period, they are redeemed at par.
  2. G-Sec bonds: These bonds are considered as one of the safest bonds as they are issued by the Government of India.
  3. Corporate bonds: These bonds are issued by corporate The companies borrow funds from the people and pay them regular interests.
  4. Inflation-linked bonds: The principal amounts and interest payments of these bonds are indexed to inflation.
  5. Convertible bonds: A bondholder is having the option of converting these bonds into equities as per predetermined terms.
  6. Sovereign gold bonds: These bonds are issued by the Indian Government and offer the safest way of investing in digital Gold.

Why would you invest in bonds?

Here are a few best reasons why one should invest in bonds:

  1. Bonds are less riskier than equities. Therefore, investing in bonds will ensure that your corpus is protected.
  2. It is highly likely that the returns on equities are higher than bonds. But, this is also to be considered that investment in equities carries a higher risk than bonds. The payment of interests on bonds is ideally assured while equities don’t make any such promise of paying regular dividends.
  3. If you don’t want to pay tax at all then you can invest in tax-free investment bonds. So, if you fall in the higher tax bracket, not only you keep on growing your wealth but also enjoy full tax advantage on the returns on such bonds.

TOP TAX SAVING BONDS IN INDIA-min

(Source & Image credits: Karvy)

How to Invest in Bonds in India? 

If you want to invest in Bonds in India, either you would be investing in corporate bonds or Government bonds. Let’s first talk about investing in corporate bonds.

You can buy Corporate bonds from the primary markets when the issuing company issues new bonds. In order to invest in them, you are required to file an application form and submit the same to any branch of the issuer along with prescribed documents and application fee. In case you are having Demat Account, your bonds will be credited to the same. However, if you don’t have one, then you would receive them in their physical format. You can also buy corporate bonds from the secondary markets subject to their availability.

Government bonds are not traded like shares on the stock exchange or secondary market. They are sold through their official distributors. These bonds are also made available by the designated branches of post offices and banks. For investing in these bonds, you can submit your application form, necessary documents, and required fees in any of the said places. Once your application is processed, you would receive bonds in your name.

Instead of buying bonds directly from the companies and Government, you can also invest in them through the bond brokers in India. Investing in bonds through brokers is more convenient. You can invest in bonds through their online platforms like websites and mobile applications. Brokers like ICICI direct, HDFC Securities etc offer their clients to invest in bonds along with equities. Here, to comply with KYC requirements, you are not required to pay any visit to their physical offices. They are the investment service providers and act as middlemen between you and the issuer organizations.

icici direct bonds

The bond brokers are the market makers of bonds in India. Over 90% of the bonds which are traded in India are privately placed instruments. Therefore, they are not advertised at all. The bond brokers are playing an important role in creating a deep and wide bond market in our country.

Also read:

Conclusion

In India, the majority of the people are interested in investing their money in their Bank Fixed Deposit Accounts. The next preferred investment options are the tax saving instruments like NSC and PPF. Financial literacy is not at all strong in our country. Therefore, most people are unaware of the fact that diverse investment options are available. A good number of Indians simply feel afraid to invest because of the lack of proper financial education.

The bond market in India is not as deep as what exists in western countries. Therefore, the number of individual investors in the Indian bond market is pretty low. Due to AMFI, Mutual Funds have started gaining substantial popularity in the last few years in India. So, the retail investors have started investing in bonds not directly but through debt mutual funds.

The investors in the Indian bond market majorly consist of Banks and Financial Institutions. Advertising is not permitted in India with regard to investing in bonds. If any authority takes the initiative to encourage bond investing, then India can witness a more liquid bond market someday.

May 3, 2019 Investment Basics 1 comment
how to start investing in share market?