Boston Consulting Group Analysis - BCG Matrix Explained cover

What is a BCG Matrix? Explanation with Example!

Hey fellow readers! Today’s topic of concentration is how do analysts perform the Boston Consulting Group – BCG Matrix Analysis on companies! Initially, it might seem like a big deal but the truth is, with a little knowledge and awareness, any layman can execute the BCG analysis to get an apparent outlook about the company. Applying this Analysis on a company can also help an individual to gain an edge if they are particularly looking to invest in the company! Well, without much adieu, let’s dive in!

Boston Consulting Group Analysis

The Boston Consulting Group is a management consulting firm that was founded in 1963. It helps organizations to improve their performance by working on the key areas like the right implementation of technology, development of strategies and improvement in operational services.

As a result of their exposure and relationships with top-notch organizations, they are supremely aware of the industry’s best practices. In Fortune Magazine‘s 2007 Survey of “100 Best US Companies to Work For”, Boston Consulting Group (BCG) has received the 8^th rank amongst all for their immense contribution.

In the year 1970, BCG shaped up a Product Portfolio Matrix to assess long term growth opportunities in the business by analyzing the product lines and thereafter untap their real capabilities. Even after 49 years of its establishment, the BCG matrix still remains a priceless apparatus for assisting companies in reaping the visions.

The tool is employed in reference to the distribution of resources in appropriate segments and utilizes them in the marketing of brands, product administration, strategic management, and portfolio perceptivity. However, the method is also referred to as the Growth-Share Matrix.

BCG Matrix Dimensions

Let us now understand the Boston Consulting Group (BCG) matrix in a subjective way.

Growth-Share Matrix is a graphical planning tool for corporate and businesses where the company’s products and services are plotted on axes and conclude major business verdicts.

Two prominent dimensions like Competitive Position (Relative Market Share) and Industry Attractiveness (Growth Rate Of That Industry) are taken help to estimate the true capacity of a business brand portfolio and advice further investment programs. These two dimensions determine the likely profitability of the business portfolio in terms of required cash to back the unit and cash generated by it. The conventional agenda of the inquiry is to understand the areas of investment, divestment, and development.

It is one of the most accepted methods of Portfolio Analysis and segregates a firm’s product and services into a 2/2 Matrix or, into four quadrants. Each quadrant is labeled as low or, high according to their performance which is again further based on the Relative Market Share and Growth Rate Of The Market.

The Horizontal Axis i.e. x-axis indicates the extent of the market share of a product and its consecutive firmness in the particular market. It also helps to quantify a company’s competitiveness.
On the other hand, the vertical axis ie. y-axis indicates the growth rate of a product and its ability to grow in a particular market.

1. Relative Market Share

A higher market share generally means higher cash return and the logic behind the allotment of this dimension is dependent on its relationship with the experience curve.
The usual notion is that when the company generates more number of products, it enjoys the advantage of low input costs and leads to increased profits.
The market share of a company is always taken into consideration in relation to the marker share its major peer.
It reveals the brand’s position amongst its competitors and is a subtle indication of its future prospects.

2. Market Growth Rate

A high growth rate in the market is an indication of higher earnings and higher profits.
It also refers to a higher level of investment in the product lines. This is a positive sign of consistent growth and an expectation to get a handsome return on investment.
The market growth rate gives us significant data about the position of the brand other than the cash flow.
It is also a reliable parameter of the stability of the market and attractiveness of the industry.

In addition, the four quadrants in the Growth-Share Matrix are as follows: Stars, Question marks, Cash cows, Dogs

The postulation of the Growth-Share Matrix is that an increment in the relative market share will lead to higher cash flow.

Firms acquire an upper hand from using economies of scale and yields a cost advantage in relation to its competitors. The growth rate of the market differs from industry to industry where growth rates more than 10% are seen as high while growth rates less than 10% are seen as low.

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

BCG Matrix Breakdown

1. The BCG Matrix: Stars

Stars are business entities that have a mammoth market share in a fast-pacing industry. These product lines have a crystal clear niche and need sound investment to maintain their market position, push growth, and carry out a competitive advantage. Stars absorb a considerable amount of cash and also spawn huge cash flows.

Investments in the Stars can be a wise decision since they are the primary units and are awaited to become Cash Cows. Generation of positive cash flow takes place as the market reaches its mature stage and the products successfully retain their dominant position. Stars are the prized possession of a company and are placed in the top categories in a firm’s product portfolio.

Anyways, not all Stars end up as Cash Flows because random new products can soon be outjumped by innovative technological advancements in the course of rapidly dynamic industries. The strategic choices which can be incorporated are Vertical integration, market penetration, horizontal integration, product development, and market development.

2. The BCG Matrix: Question Marks

Question Marks are those business entities that have low market shares in a fast pacing market. Question marks are the most managerially radical products and need pervasive investment and resources to escalate their market share. They also need extensive monitoring because investments in question marks are broadly funded by cash flows.

Question marks do not always see the lights of success and even after the colossal amounts of investments they toil hard to gain market share and gradually transform into dogs. The natural or, typical cycle for most products in that they flag off their journey as Question Marks and eventually become stars with the clarification in their position.

When there is a slowdown in market growth, they metamorphose into Cash Cows and finally, the Cash Cow turns into Dogs. The strategic choices which can be incorporated are Market Development, Market Penetration, Product Development, and divestiture.

3. The BCG Matrix: Cash Cows

The product lines under the Cash Cows Quadrant has an enormous share of the market in a sluggish -growing industry. In this case, the generation of the revenue outpasses the initial investments which are necessary to preserve their business. Products in the cash cows quadrant are looked up to as products that are the leadmen in the market. These products already have an important chunk of investments and do not demand more investments to withhold their position.

Cash cows are termed as the most prosperous brands and should be “milked” to generate consistent cash flow as much as possible. These Cash flows are generally utilized to finance Stars and Question Marks to nurture their future growth. It is advised by different Financial Analysts that corporates should invest less in Cash Cows and reap the generated profits from the existing products.

However, this point always doesn’t hold true as Cash Cows are usually big corporations that are proficient in creating new products that might become Stars in the long run. The strategic choices which can be incorporated are product development, diversification, divestiture, retrenchment.

3. The BCG Matrix: Dogs

Dogs are those business entities that have a scanty market share in a ripened and slow-growing market. Products falling under the dogs quadrant are somehow able to protract themselves by initiating cash flows and sustain the market share.

Usually, this unit is mainly valueless to the company in terms of earning capability. However, it might give rise to other small scale benefits such as the production of jobs and mutualism that help other business units. Firms sell off products belonging to the Dogs Quadrant unless the products are complementary to existing products or are used to act as a shield to oppose the moves of the competitors.

According to financial analysts, corporate should avoid investing in such product lines because they lead to negative cash returns. Dogs can massively affect the investors’ sentiments and their personal views about the management of a company. The strategic choices which can be incorporated are retrenchment, Divestiture, and Liquidation.

According to the Boston Consulting Group, a branched out company with an equitable portfolio is in the standardized gallery to utilize its strengths to capitalize on the opportunities of expansion and multiplication. However, an equitable portfolio is one which has

Stars to embolden future success.
Question marks that have a probability to turn into Stars with some consideration, management, and investment.
Cash cows to generate funds for future growth.

BCG Matrix Analysis

Now that we have gained an insight into the basics of BCG Matrix, let us now learn the steps for its application.

1. Choose the unit:

Strategic Business Units(SBU), Independent Brands, Product Lines or the Firm as a unit can be researched using the BCG matrix. The selected unit steers the whole analysis and crucial definitions. As the market, industry, competitors, and position will all be driven based on the chosen unit, it is extremely important to define the unit demarcated for analysis.

2. Define the market

The most momentous stage for the entire matrix is the key definition of the market. An erroneously defined market will make way for an erroneous classification of the unit. Suppose, if we would do the analysis for the Gucci dresses in the regular clothing market it would end up as a Dog but it would be a Cash Cow in the luxury clothing sector. Therefore, It is a major task to transparently explain the market in order to get a solid grip on a firm’s portfolio position.

3. Calculation of Relative Market Share

Relative Market Share can be enumerated in terms of revenues or, market share. It is calculated by dividing the brand’s market share by the market share of the market leader/supreme competitor in an industry.

For example, if the competitor’s market share in the automobile industry is 37% and a firm’s brand market share is 13% in a year, the relative market share would amount to 0.35.

4. Calculation of Market Growth Rate

The growth rate of an industry can be found from the industry reports released every year and are put up on official websites. It can also be calculated by considering the average revenue growth of the leading industrial enterprises. However, it is to be kept in mind that the growth rate of a Market is expressed in terms of percentage.

5. Draw the circles on a matrix

After calculating all the parameters, one can easily plot the brands on the matrix. The plotter should draw a circle for each brand within a unit, or for all the brands in a company. The size of the circle should be in proportion to the generated revenue of the brand.

Let’s apply these steps to analyze an India Company!

For ease of understanding the concept, we are taking ‘Amul’ a well-known company in India as our example.

Amul brand is a prominent and popular name in the dairy industry in India. It produces milk, butter, and other dairy-related products and successfully caters to the Indian population.

The exercise of BCG Matrix on the brand can furnish critical information about the products and the product lines that are a pivotal source of revenue for the organization. The BCG matrix for Amul is as follows:

1. Stars

The products which are considered as Stars of Amul are Amul Ice cream and Amul Ghee. These two products have a high market share and have adequate possibilities to grow in the near future. Amul Ghee has also been a Star for the company as the brand has been able to acquire a 30% hike in its sales while the market share clinged by the product is around 18% along with a yearly turnover of more than Rs 1,700 Crores.

2. Question Mark

Amul Lassi is diagnosed as a Question Mark as their capability as a major derivation of profitability remains quite bleak. Amul lassi has been brought about in the market with the agenda to magnify the market share and give a tough competition with the other beverages available in the market. The healthy milk from Amul possesses a huge potential to swell in the future considering the expansion of interest and demand for healthy products, refreshments, and beverages.

3. Cash Cows

There are three products under the umbrella of Amul that come under the Cash Cow category and they are Amul Milk, Amul Butter, and Amul Cheese. The market share of these products is not likely to undergo colossal gains but their current spot makes them a high revenue contributor.

4. Dogs

Amul has two products that have not been able to generate sales and revenues as per the estimation. One of the noteworthy examples in this regard is Amul Chocolates and Amul Pizza. The competitors make it tough to amplify the market shares to a notable degree which can turn this product to become an outstanding source of sustainable revenues. However, if the sales figures do not proceed towards betterment, a probable measure would be to take the path of divestment of the above-mentioned brands.

Benefits of BCG Matrix Analysis

Every theory and model exiting in the books have their pros and cons. Similarly, Boston Consulting Group( BCG) has its own set. Here are a few of the benefits of BCG Matrix:

The BCG Matrix is beneficent for managers to assure a balance in the companies’ current portfolio consisting of Stars, Cash Cows, Question Marks, and Dogs.
BCG-Matrix is befitting to large-cap companies that usually look for volume and experience effects.
The model is coherent and easy to apply and also provides a base for management to take decisions and jack up for future activities.

Limitations of BCG Matrix Analysis

Here are a few of the common limitations of using BCG matrix for analyzing companies:

Growth-share analysis has been highly disapproved of for its simple calculations and absence of a fruitful application.
Market share and Industry Growth are not the sole factors of profitability. Besides, high market share always does not mean high profits.
This matrix does not take into consideration any other factors that may have an effect on both competitive advantage & industry attractiveness.
It denies the correlation between different existing units. In reality, products under Dogs may be assisting another unit to gain a competitive advantage.
The definition of a market is taken from a broader perspective and often neglects smaller aspects.

Summary

Let us quickly summarise what we discussed in this article. The Boston Consulting Group (BCG) is a management consulting firm that helps organizations to make informed decisions from the business point of view.

They introduced the Growth-Share Matrix which is a designing and a planning tool that prepares graphical representations on the basis of a company’s products and services. The Growth-Share Matrix categorizes a firm’s products into four divisions namely Dogs, Cash Cows, Stars, and Question Marks. The four divisions are based on the Relative Market Share and Growth Rate Of The Market. This Matrix immensely helps the company to make decisions regarding investment, divestment, liquidity, and retrenchments.

January 30, 2020 Oindrila Chowdhury Investment Basics 2 comments

Measurement Scales Balance Swinging Swing Equality

Is Stock Market Investing a Zero-Sum Game?

One of the most debated questions regarding stock market is that- Is stock market investing a zero-sum game? If someone makes money in the stock market, does it means that someone else must be losing money?

In this post, we are going to demystify this question and try to answer whether stock investing is a zero-sum game or not.

What is a Zero-Sum Game?

A Zero-sum game is a situation where one person’s profit is equivalent to the another’s a loss so that the net change in wealth is Zero.

A few popular examples of zero-sum game is Poker and gambling. In poker, the amount won by one player is equal to the combined losses of the other participants. Please note that there can be two or multiple participants in such games.

Moreover, Zero-sum games are contrary to win-win situations.

Is stock market investing a Zero-sum game?

When it comes to the stock market, the majority assumes that the market is a zero-sum game. After all, the money made by someone should come from a source and most believe that it costs from the other losing participant.

However, this is not true. Investing in stock can be mutually beneficial.

In the share market, trades are based on future expectations and because of the different risk tolerances of the participants.

Just because someone is selling their stock, doesn’t mean he is losing. He might have made substantial profits and willing to book profits. And similarly, if one sells, there’s no reason to think that the next investor can’t profit too. Here, both the parties can be winners.

Overall, a zero-sum game isn’t the right description of investing. As the company expands and becomes more valuable, the stock market can increase the wealth of both the participants & economy over time.

Dividends…

An important factor which is invariably ignored while studying the stock market as a zero-sum game is the dividends. As corporations generate profits from the sales, they share a portion of this profits with their shareholders as the dividends.

(There are even cases where the investors get back more money than the original invested amount just as dividends over time.)

If the market was a closed system with just buyers and sellers, somewhere it could be possibly considered as a zero-sum game. However, it is not a closed system as money is consistently pumped into it as dividends by the companies.

Quick Note: The exception to these scenarios are the companies that do not pay dividends.

Closing Thoughts

Investing is not a zero-sum game and both the parties can be winners.

Here, the profit for the participants doesn’t come from the stake of losses by other participants, but from the value created by the company. If one sells a stock, there’s no reason to think that the next investor can’t profit too. As long as the business is performing well, the stock will keep on increasing value without anyone losing the money.

Overall, there doesn’t need to be one winner and other losers. Stock market provides an opportunity for a win-win situation for all.

Kritesh Abhishek

Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting

www.linkedin.com/in/kriteshrules/

January 28, 2020 Kritesh Abhishek Investment Basics 5 comments

market capitalization in Indian stock market COVER

Market Capitalization Basics: Large cap, Mid cap & Small cap companies

A complete guide on Market capitalization of Indian stocks (to understand large, mid, and small-cap companies): Hello investors. In this post, we are going to discuss the basics of Market Capitalization (A.k.a market cap) in the Indian Stock Market to understand large-cap, mid-cap, and small-cap companies in India. We’ll look into how companies are classified, their features, risk and return potential of all these types of companies.

However, before we start this post, let me ask you a very general question. The stock prices of two famous Indian companies are given below. What do you think? Which company is bigger?

MRF= Rs 69,780
HDFC Bank= Rs 1,650

If you think that MRF is a bigger company as its share price is too big compared to HDFC bank, then you need to read this post completely. This is because you’re completely wrong. You cannot judge the size of the company just by looking at its share price.

To understand the answer to the question about which company is bigger, you need to understand the concept of market capitalization. So, be with me for the next 8-10 minutes to learn everything about market capitalization in Indian stock market.

Market Capitalization in Indian Stock Market

Classification of companies in Indian stock market:

Any company in Indian stock market can be classified in one of the following categories:

Large Cap
Mid Cap
Small Cap

Here cap means capitalization. Although there are few other categories also like Mega-cap, Microcap etc, however, they aren’t used much in classifying the stocks.

These companies are classified based on their market capitalization, which we are going to discuss next.

What is Market Capitalization?

Basically, market capitalization shows the size of the company and its aggregate value. Let us define market capitalization now:

Market capitalization or Market Cap refers to the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s outstanding shares with the current market price of one share.

Market Capitalization = (Total no of outstanding share) * (Price of one share)

Note: Here, Outstanding Shares refers to all shares currently owned by stockholders, company officials, and investors in the public domain.

For example, let us assume for a company ABC,

Total number of outstanding shares= 1,00,000
Current price of 1 share= Rs 1,500
Market capitalization = 1,00,000* 1,500 = Rs 15,00,00,000

Therefore, the market capitalization of company ABC is Rs 15 Crores.

Now, let us move back to our original question. Which company is bigger? HDFC Bank or MRF?

We need to find the market capitalization of both these companies to figure out which one is bigger.

Company Name	MRF
Total Number of outstanding shares	42,41,143
Current market price of one share	Rs 69,780
Market Capitalization	Rs 29,635 Crores
Company Name	HDFC Bank
Total Number of outstanding shares	2,70,95,42,308
Current market price of one share	Rs 1,650
Market Capitalization	Rs 4,30,532 Crores

From the above table, we can notice that the market capitalization of HDFC bank is around 15 times that of MRF. Hence, HDFC bank is a much bigger company than MRF.

The skyrocketing share price of MRF is insignificant when we compare the total number of outstanding shares of MRF with HDFC bank.

In short, the share price cannot decide the size of a company. It’s the market capitalization that is used to classify the companies based on size.

How are companies classified using Market Capitalization in Indian stock market?

There is no hard and fast way rule (criteria) to define the classification of the companies based on the market capitalization. If you refer to different financial websites, the range of market cap will vary for different capitalization. However, in general, here is the commonly accepted classification of companies based on the market capitalization in Indian stock market.

Market Capitalization	Classification
Less than 8,500 Cr	Small cap
Between 8,500 Cr to 28,000 Cr	Mid Cap
Greater than 28,000 Cr	Large cap

Quick Note: The above table is based on the latest circular by SEBI. Here’s the link to the list of Average Market Capitalization of listed companies during the six months ended 31 December 2019 available on AMFIIndia Website.

Why there is no fixed market capitalization range for classifying companies?

Bombay stock exchange (BSE) uses the 80-15-5 rule to classify the companies in large cap, mid cap or small cap. Now, let me explain this 80-15-5 rule. The rule classifies the different companies listed on the exchange based on the decreasing order of their market capitalization in Indian stock market.

The largest market capitalization which covers up to 80% of the total market cap of all the listed company on the BSE is categorized as large cap company.
The next set which covers the 80-95% of the total market capitalization of all the listed company on the BSE is categorized as mid cap company.
Lastly, the set which covers 95-100% of all the listed company on the BSE is categorized as small cap company.

% of Total Market Capitalization	Classification
80%	Large cap
15%	Mid Cap
5%	Small cap

Since the share price and market caps are dynamic; hence, there is no fixed market cap segment limit for classifying companies.

A few years ago, companies with a market capitalization around 10,000 crores- were considered to be large cap company. Now, they are mid cap company for this market cap. Most small cap companies are start-ups or in developing phase. They have a high growth opportunity. However, due to high failure rates of small caps, they also have a high risk.

Also read: S&P BSE Mid Cap and BSE Small Cap Index

What are large, mid and small cap companies?

“Every large cap company was a mid cap/ small cap once. However, every small cap company is not certain to become a mid/large cap.”

Large Cap companies

They are the big and well-established companies. Most of the large-cap companies are leaders in their sector and have a huge market presence. Many of the large-cap companies are listed in Sensex 30 and Nifty 50. These companies have a very large capitalization to survive in adverse economic conditions. Here is the example of a few large-cap companies:

Company Name	Industry	Last Price (Rs)	Market Cap (Rs Cr)
Hindustan Unilever	Fast-moving consumer goods (fmcg)	2032.1	477435.39
Coal India	Mining and production	129.6	79868.96
Nestle India	Food and consumer goods (FMCG)	16443.8	158544.08
HDFC AMC	Asset Management Company	2527.8	53792.42
TCS	Information technology (IT)	1892.9	710288.9
Britannia Inds.	Food and consumer goods (FMCG)	3125.65	75161.97
Marico	Food and consumer goods (FMCG)	316.5	40861.59
GlaxoSmith CHL	Manufacturing and healthcare consumer	10732.6	45141.32
Hero Motocorp	Automobile Manufacturing	2193.55	43813.83
Asian Paints	Manufacturing, distribution of paints, Dicor	1552.95	148958.62
Pidilite Inds.	Adhesives & Sealants	1373.25	69778.1
ITC	Conglomerate, Consumer Products (FMCG)	164.65	202391.59
Infosys	Information technology (IT)	652.3	277814.09
HCL Technologies	information technology (IT)	511.25	138736.13
Bajaj Auto	Automobile Manufacturing	2663.6	77075.8
HDFC Life Insur.	Insurance Provider	487.3	98376.05
Dabur India	Food and consumer goods (FMCG)	443.9	78439.97
Divi's Lab.	Pharmacuetical	2335.2	61992.22
Hind.Zinc	Metal and mining	192.65	81400.77
Berger Paints	Manufacturing, distribution of paints, Dicor	450.85	43787.44
Tech Mahindra	information technology (IT)	510.55	49312.22

Mid Cap companies

These represent mid-sized companies that are relatively riskier than large-cap as investment options, yet they are not considered as risky as small-cap companies. These companies have the potential to become a large cap in a few years and have enough finance to survive harsh economic conditions.

Here are a few examples of mid-cap companies:

Company Name	Industry	Last Price (Rs)	Mkt Cap (Rs Cr)
Adani Power	Power, Generation & Distribution	52.3	20,171.79
Aditya Birla F	Retail	226.75	17,499.84
Ajanta Pharma	Pharmaceuticals	1,043.05	9,181.24
Amara Raja Batt	Auto Ancillaries	746.85	12,757.13
Apollo Tyres	Tyres	226.8	12,974.09
Bank of India	Banks, Public Sector	92.45	24,931.34
Bata India	Leather Products	1,368.25	17,585.78
Castrol	Lubricants	167.1	16,528.24
Future Consumer	Food Processing	49.6	9,521.53
Future Retail	Retail	445.4	22,385.73
Glenmark	Pharmaceuticals	635.25	17,924.73
HEG	Electrodes & Graphite	2,219.50	8,868.93
Jubilant Food	Miscellaneous	1,349.90	17,814.50
Muthoot Finance	Finance, Investments	592.75	23,747.25
NALCO	Aluminium	54.5	10,167.62
PNB Housing Fin	Finance Housing	891	14,921.18
Tata Global Bev	Plantations, Tea & Coffee	204.9	12,931.85
Tata Power	Power, Generation & Distribution	73.35	19,839.51
TVS Motor	Auto 2 & 3 Wheelers	497	23,611.83

You can find the list of more mid-cap companies here.

Small Cap companies

These companies have small market capitalization and usually includes the start-ups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector. However, the risk level is high while investing in small-cap companies.

Here are a few examples of small-cap companies:

Company Name	Industry	Last Price (Rs)	Mkt Cap (Rs Cr)
Bombay Dyeing	Textiles Processing	83.2	1,718.37
Career Point	Computers Software Training	100.75	182.69
D-Link India	Computers Hardware	99.95	354.87
Eros Intl	Media & Entertainment	224.6	2,121.35
Everest Ind	Cement Products & Building Materials	362.4	558.93
Fineotex Chem	Chemicals	31.45	350.04
Gati	Couriers	128.85	1,267.50
Godawari Power	Steel/ Sponge Iron	93.35	318.42
Indraprastha	Hospitals & Medical Services	52.95	485.41
Jayshree Tea	Plantations, Tea & Coffee	100.35	289.79

You can find the list of small-cap companies here.

Here is a summary of the large-cap, mid-cap, and small-cap companies.

Criteria	Small Cap	Mid Cap	Large Cap
Risk	Very high	High	Low
Return	Very high	High	Low
Liquidity	Low	High	Very high

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

How to track different sectors’ performance?

You can track the performance of the companies of different classification of the various financial websites like Money control, BSE India, NSE website etc.

It would be best if you use the BSE India website for tracking. Here is a link, which you can use: http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

S&P BSE Sensex is used to show the performance of the large-cap companies.

S&P BSE Midcap shows the performance of mid-cap companies. http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

S&P BSE Smallcap shows the performance of small-cap companies.
http://www.bseindia.com/sensexview/indexview_new.aspx?index_Code=82&iname=BSE30#

What are Blue Chips stocks?

Blue chips are the nationally recognized, well established and financially sound companies.

These are the stocks of those reputed companies who are in the market for a very long time, financially strong and have a good track record of consistent growth and returns in the past many years.

Blue chip companies have huge market capitalization and are generally leaders in their market.

For example- HDFC bank (leader in the banking sector), Larsen and turbo (leader in the construction sector), TCS (leader in the software company) etc. A few other examples of blue-chip stocks are Reliance Industries, Sun Pharma, State bank of India etc.

These companies have stable performance and are very less volatile. That’s why blue-chip stocks are considered safe to invest compared to other companies.

Why are they called ‘Blue chip’ stocks? — The term ‘Blue chip’ has been derived from ‘Poker’ game. In the game of poker, blue chips are considered to be most valuable. Mr Oliver Gingold, who used to work in Dow Jones, is credited to bring this name in the stock market. He used this name first time in 1923 referring it with few most valuable companies of that time. Later, the term ‘blue chips’ became popular to cite the reputed companies of the stock market.

Blue-chip stocks are known to give good consistent dividends to their shareholders. These companies have a huge liquidity, which means that there are a large number of buyers and sellers in these stocks. So, they can be easily bought or sold anytime.

Besides all these pros of the Blue chip stocks, there are few cons too.

It’s not necessary that these companies will always perform. There are a number of examples of companies that were a blue chip in the past but are not anymore. Although most of them survive harsh economic conditions, nevertheless few blue chips stocks are financially hit hard by recessions and extreme adverse conditions.

In addition, as these companies have already achieved great success, therefore a large growth possibility is very less for such stocks. So, it will be very less likely to make quick returns or sharp profit in these stocks.

However, the chances of a sharp downfall are also very less in blue-chip stocks. Therefore, they are considered very less risky.

A few of the good properties of these stocks are- stability, consistent returns, good financial backup, less volatility and high liquidity.

Overall, Blue chip stocks are a good option for a safe long-term investment.

Top 10 Blue Chips stocks in Indian stock market.

Here is the list of top 10 blue chips stocks in Indian stock market.

S. No	Company	Sector
1	Reliance Industries	Refineries, Oil & Gas
2	TCS	Software company
3	HDFC Bank	Non-public sector banking
4	ITC	Cigarette, Hotels, Consumer products
5	ONGC	Oil drilling & Exploration sector
6	Infosys	IT Software
7	SBI	Public sector bank
8	HDFC	Financial company
9	HUL	Consumer products
10	Asian Paints	Paint company and manufacturer

Also read: Best Blue Chip Companies in India that You Should Know

Conclusion

The various companies can be classified based on the market capitalization in Indian stock market as large, mid and small-cap companies. A thumb rule for classifying them is shown below:

Market Capitalization	Classification
Less than 8,500 Cr	Small cap
Between 8,500 Cr to 28,000 Cr	Mid Cap
Greater than 28,000 Cr	Large cap

The selection of a company to invest depends totally on your preference. If you looking for a steady long-term investment, select large-cap companies to invest. On the other hand, if you are looking for high profits and quick returns, then you should invest in small or mid-cap companies.

Quick Note: Ready to start your journey to become a succesful stock market investor? If yes, then here’s an amazing course for newbie investors: HOW TO PICK WINNING STOCKS?

I hope this post ‘Basics of Market Capitalization in Indian Stock Market’ is useful to the readers. Do comment below if you have any doubts or suggestions.

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 25, 2020 Kritesh Abhishek Investment Basics 45 comments

Catching a falling knife stock - Is it worth it?

The stock market is filled with all kind of people. Some prefer investing in fast-growing companies while there are others who prefer investing in high dividend-paying stocks. There are also value investor who favors investing in discounted companies. And then comes the daredevil bargain hunters who are eager to invest in falling knife stocks.

In this post, we are going to discuss what exactly are falling knife stocks and why it is dangerous to invest in these type of stocks. We’ll also look into a few strategies that investors can use while trying to catch a falling knife stock.

What are falling knife stocks?

The falling knife is that category of stocks which has undergone a rapid decline in share price in a short amount of time. Here, the term ‘falling knife’ is used as a metaphor for the rapidly declining share price of the company.

Now, by definition, there is so specific ‘magnitude of drop’ or ‘duration’ to define these falling knife stock category. The stock which may fall +50% in a month or +80% in six months, both can be considered in the category of falling knife stocks.

In the investing world, it is always suggested that “Do not try to catch a falling knife!”, especially if you’re a beginner. Anyways, the investors should proceed with great caution if they are interested to invest in these kinds of stocks. In general, these stocks are extremely dangerous and may result in a severe loss if the investor enters at the wrong time.

Note: Even in real-world, trying to catch a falling knife is extremely dangerous and can easily hurt your hand. A thumb rule here is to wait for the knife to fall on the ground and then pick it up. Similarly, if you are planning to invest in a falling knife stock, wait until the prices drop at a significantly lower price with a huge margin of safety.

A few recent examples of falling knife stocks in the Indian market

— Yes Bank: The stocks of Yes Bank has declined over 85% in the time duration between August 2018 to September 2019.

— Manpasan Beverages: The stocks of Manpasand Beverages has declined over 95% in the time duration between May 2018 to September 2019.

— DHFL: The stocks of Deewan Housing Finance Corporate Limited has fallen over 90% in the time duration between September 2018 to September 2019.

If you have already tried catching these falling knives stocks during their downward journey, your portfolio would have been severely hurt by now. However, can these stock rebound and give massive returns to the investor who are planning to enter at this price? The answer to this question requires a lot more comprehensive study than just looking at their share price.

How falling knife stocks work?

The journey of falling knife category stocks is pretty straightforward. Initially, the negative news regarding a company can result in the decline of the share price. However, when the situation continues to degrade, it results in a market panic and subsequent fall in the prices. During such cases, there are two possible outcomes:

In a few cases, the share prices may rebound if there is positive news or the company is able to control the damage in the near future. Such scenarios can be extremely profitable for the investors who bought the stock at the discounted price before they bounced back.
However, in most cases, the investors may face severe loss even if they bought the stock at a discounted price if the company’s performance continued to weaken. In the worst-case scenario, if the company goes for bankruptcy, the investors may have to lose most of their investments.

Overall, picking such stocks at the near bottom can result in a massive gain. However, entering these companies at the wrong time may lead to a disaster. There are cases when these stocks never rebounded to the original price for decades since they started falling.

Reasons for the Company’s Price to fall:

There can multiple reasons for the company’s share price to decline. Here are a few of the top reasons:

A significant decline in revenue and profits for a continued time period.
Negative reports and the company continuously missing the market estimates/targets.
Deterioration of the company’s fundamentals
Discovery of malpractice by the company, fraud charges by SEBI or lawsuits
Changes in the management like the resignation of top managers, promoters, etc

Here, if the decline in the price is due to temporary reasons, the long term investor should continue to hold the stock or even buy more. However, if the reason is because of the change in the company’s fundamentals, it’s time to exit, even if you have to book a loss.

Also read: Why is a VALUE TRAP? The Bargain Hunter Dilemma!

Why investors are so much interested in catching falling knife stocks?

Many people find investing in falling knife stocks fascinating because of the following reasons:

As the share price of these companies has fallen significantly, they appear to be undervalued. Most investors consider these stocks as an excellent opportunity to purchase the stock before it rebounds to make handsome capital appreciation.
People anchor the current price of the company with its original price before it started falling and hence believe them as cheap. However, while anchoring the price, they do not give enough importance to recent events which resulted in the decline of prices.

Anyways, an investor should only buy these stocks if they have fundamental reasons backing the company, not just because the price has fallen significantly.

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

A few points to consider which catching a falling knife stock:

If you are planning to invest in a falling knife stock category, here are a few points that may help you to analyze the situation better and avoid loss:

— Start with analyzing your own behavior: Are you planning to enter that stock because you’re anchoring its current price with its past prices, based on some predictions, or just to gamble.

— Say ‘no’ more often: In most of the falling knife cases, the stock is not profitable to the investors for sustained longer period of time. Although such stocks may seem like a great opportunity, try to say ‘no’ to the stock as much as possible. The more frequently you say ‘no’, the more time you’ll get to study the company and evaluate it better.

— Understand the situation: Read about the recent and past happenings and analyze whether the problem is temporary or structural.

— Do not buy stock on the first decline: There’s a famous Cockroach theory which says that if you find one cockroach in your kitchen, there are more cockroaches likely to be discovered. Similarly, if there’s a piece of bad news related to the company, more is yet to be revealed. Usually, after the first decline, there are more troubles ahead for the company. Therefore, as a thumb rule, do not jump into the stock on the first decline.

— Know the worst-case: Knowing the worst-case scenario can make you prepare for it. Before entering the stock, know how much risk can you handle. Will you be comfortable if your investment value in that stock falls below 70%? What is the risk vs reward for your investment?

— Be pessimistic: While calculating the intrinsic value of the stock, always be pessimistic and take conservative values while estimating the growth rate and estimating the future cash-flows.

— Always have a margin of safety: As these stocks have a higher risk, always have a bigger margin of safety while investing in these companies. For example, if the fair calculated intrinsic value turns out Rs 100, then give yourself a margin of safety of 40% and invest only when the price goes below Rs 60. The higher the margin of safety, the lower will be the risk.

— Diversify — Yes, you want to make big returns and the falling knife stocks seem to have the potential to give higher capital appreciation. However, if because of any reason, let’s say that your study is wrong or the stock didn’t perform the way you supposed it is going to, then you will face critical damage. Therefore, do not put all your money in a single stock, but diversify.

Also read: 5 Psychology Traps that Investors Need to Avoid

Closing Thoughts:

A falling knife stock category may represent a high opportunity, but they also have a higher potential to hurt the investor’s portfolio.

For newbie’s, it’s difficult to judge whether the stock is a value stock or value trap. If you are a beginner and not experienced in judging companies, I would suggest to simply ignore these stocks and try to find fundamentally strong companies.

For experienced investors, if you are planning to purchase them, then know what you’re getting into. Analyze the reward that you may receive by investing in these stocks, but also have the heart to see your investments going down and not making any gains for a long time. You should not expect the stock to bounce bank the very next day or even a month or so when you enter.

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 20, 2020 Kritesh Abhishek Investment Basics, Stocks 1 comment

Revisiting 2008-09 Economic Crisis – Causes & Aftermath!

The Financial Crisis which occurred between the time period of 2008–2009 was a mammoth economic crisis encompassing worldwide. It was an enormous setback to the global financial system and had a series of aftermath. The crisis is contemplated as the grimmest financial crisis since the Great Depression of the 1930 s by many eminent economists around the world.

The fracture of the economic system-induced monetary damage on millions of Americans and gradually escalated to other economies. The reasons and causes behind the catastrophe are not solely driven by one factor, but it is a conflux of several prominent factors. Let’s look at it step by step what caused the financial crisis of 2008!

What caused the 2008-09 Economic Crisis?

— Sub Prime Mortage

Subprime Mortgage commenced in the year 2007 with a crunch in the Subprime Mortgage Market in the United States. Subprime Mortgages and the Subprime Meltdown are usually termed as the felons for the onslaught of The Great Recession.

A subprime mortgage is generally remitted to borrowers with low credit ratings because the lender perceives the borrower with high-risk appetite regarding defaulting on the loan. Lending organizations often put a burden of high-interest rates on subprime mortgages compared to prime mortgages due to the exposure to steep risk. Such mortgages didn’t require any down payment or, any proof of income.

Later, when the housing market took a crashing downturn, the borrowers found themselves in a precarious situation with their home values lesser than the value of their mortgage. Many of the borrowers lapsed because the associated interest rates were variable in nature according to the clause. Initially, the lending institutions provided loans with low-interest rates but they swelled over time and as a result, the borrowers were underwater. Due to ballooning up of interest rates upon the principle, it was difficult for the borrowers to pay down the principal amount. Many lending institutions were flexible in the provision of these loans due to high capital liquidity and a golden opportunity to make a lump sum profit.

Immense greed also led them to pool in the mortgages and sell off to the investors. The heightened increase of population who could all of a sudden purchase mortgages resulted in a situation of a housing shortage which led to a rise in housing prices. The soaring demand for the housing market made way for easy sanction of loans. When a large chunk of people started defaulting on their mortgages, the loan sharks lost all their lent money and so did many financial institutions that had invested extensively in the pack of mortgages. The subprime mortgage deadlock continued to exist and eventually transformed into a global recessionary situation as its repercussions beamed thoroughly in the financial markets and economies around the globe.

— Lehman Brothers

The highly talked about Financial crash of 2008 had elongated lineage but it wasn’t palpable until September 2008 when its flak became quite noticeable to the world. The news of the bankruptcy of Lehman Brothers is heavily claimed to be the torchbearer of the great economic crisis.

The filing of the bankruptcy was one of the grand incidents in the pages of history. Lehman was the fourth-largest. an investment bank in the USA with $639 billion in assets, $619 billion in debt and consisted of 25,000 employees all over the world. The investment bank is considered to be the largest victim of the Subprime Mortgage generated Financial Crisis that mopped away all the financial markets in the year 2008. The deflation of Lehman’s was an extremely crucial event that tremendously added fuel to the fire and eroded an approximate amount of $10 trillion in market capitalization from global markets.

However, in spite of its stamina to emerge victorious from previous disasters, the downfall of the U.S. Housing Market completely brought Lehman to a rock bottom. Lehman’s hovering amount of leverage and its extensive portfolio full of mortgage securities pushed it to extreme vulnerability under declining market conditions. Finally, on 15^th September 2008 Lehman Brothers, filed for bankruptcy. The further announcement of “No Bailouts” intensified the panic-stricken scenarios. Lehman’s paralysis agitated global financial markets for days, weeks, months and years.

Also read: The Collapse of Lehman Brothers: A Case Study

— Politics and Other Factors

Since the era of the 1980s, bankers and politicians have constructed a peevish partnership. Politicians had dramatically bribed banks into generating absurd loans to un-creditworthy borrowers on the pretext of the confirmation of bank mergers according to the Community Reinvestment Act. Politicians effectively advertised the expansion of the American idea of homeownership without calculating the possible risks and negative consequences.

Bankers were paid ludicrous amounts of money to securitize pernicious subprime mortgages. On the other hand, Rating Agencies swept in profits by labeling virulent securities as worthy of investment ie. “A” grade. The firms that followed the herd and gave into the riskiest hazardous types of subprime mortgages, securities, and derivatives were the first to backslide when the house of cards stumbled one after the other. CITIGROUP is the most prominent example of falling under this category!

AFTERMATH: 2008-09 Economic Crisis

— Crisis on Banking Sector

The financial crisis viciously slaughtered the banking sector where a large number of banks had to be bailed out by governments while others were mandated into unions with stronger heads. Institutions like Merrill Lynch, American International Group, Halifax Bank of Scotland, Royal Bank of Scotland, Fortis, Bradford & Bingley, Hypo Real Estate, and Alliance & Leicester were apprehended to pursue the road to bankruptcy but the announcement of a US Federal Bailout worth $85 Billion rescued them from absolute collapse. In spite of the “Bailouts” by the US Federal government, it became much more harrowing to take loans from the bank.

— Effect on the Equity Market

The 2008 crisis was a worldwide anomaly as it severely disturbed almost all the economies with a heightened degree of invasion. When the gigantic investment banks and eminent insurance companies were under immense pressure, they started selling equities to get some liquid cash for debt payments. The selling pressure induced a relentless crash in the equity markets around the globe. Since almost all Capital markets consist of foreign institutional investors, the impact was noticeable everywhere. The Asian markets in China, Hong Kong, Japan, and India were promptly affected and became parched after the U.S. Sub-Prime Crisis. Whenever there is a crucial correction in the markets in the USA it triggers all other markets as well because the rate of return in stocks is extremely correlated globally.

Also read: How Does The Stock Market Affect The Economy?

— Investor’s Catastrophe

The Bank Stocks went through a bloodbath where their respective dividends were ripped off and consequently led to the loss of wealth amongst investors. The majority of the population had much of their money parked in bank stocks because they were generating such high dividends.

— Declination in Consumer Wealth

The financial crisis caroused a critical role in the downfall of grass-root businesses and declination in consumer wealth. It also completely contributed to the European Sovereign-Debt Crisis which later manifested into a full-swing international issue and cornered the world’s banking system towards a deflation. Economies paced down during this phase as there was a decrease in international trade and the tightening of credits.

— Fall in Income & Opportunities

The Great Recession immediately fueled cutbacks in many reputed and non-reputed companies and there was a considerable fall in income. Great Recession restricted the opportunities for career enhancement and income raises. Financial flexibility was tremendously tampered by the Great Recession to a vast extent.

— Calamity in Economic Policies

The engineering of economic policies also altered thoroughly. Central Banks & Governments took on additional functions in regulating the financial system to managing monetary policy and also deployed new apparatuses like “Quantitative Easing” and ‘Austerity’. Quantitative Easing synthetically escalated the values of many fiscal assets, benefitting the existing wealthy section of the society. On the contrary, “Austerity Programmes” declined the aids and support available for the people belonging to the lowest rung of the income distribution. Austerity Programmes also led to the creation of high unemployment and curtailed public services.

Amidst the financial crisis, due to unfair structural reform, “Rich became richer” and “Poor became poorer.”

January 17, 2020 Oindrila Chowdhury Economics No comments yet

10 Common Mistakes While Investing in Mutual Funds

Mutual Fund investment is the talk of the town. These days, many people who earlier used to invest in the traditional saving schemes like PPF and FD are showing more interest in investing in Mutual Fund.

Ideally, if you don’t have a good knowledge of analyzing the security market, instead of directly investing in stocks, buying through Mutual Funds is a lot safer and more convenient. For the middle-class Indians, Mutual Fund investing is a wonderful way of fulfilling their desired goals. You can even start investing with as low as Rs 500 per month.

Irrespective of these advantages, there are many people- especially novice investors, who make a plethora of mistakes investing in Mutual Funds. In this post, we are going to discuss ten of the most common mistakes while investing in mutual funds.

10 Common mistakes while investing in mutual funds

Here are some of the general mistakes which you should avoid while investing in Mutual Funds:

1. Not defining any goal

You should clearly define your financial goals before you jump into Mutual Funds. One requires specifying his/her short and long term goals before deciding over the investment portfolio. If you are planning to go for a tour abroad after a year from now, investing in a Debt Fund seems more appropriate. On the other hand, if you wish to retire after 30 years from today, you should set up your SIPs in an Equity Fund to have a large corpus in hand during your retirement.

2. Not researching the fund properly before investing

Investing in the financial market makes no sense if you haven’t done proper research. Before investing in a Mutual Fund scheme, you need to know its fund type, exit load, historical returns, asset size, expense ratio, etc. You need to have a clear idea about your own risk-return profile before you invest your savings in some scheme. This article can provide you with the necessary guidance regarding making the selection of the right Mutual Fund.

3. Reacting to short term market fluctuations

There are many investors who get scared when the market witnesses a bearish trend. You need to understand that Mutual Fund investing is basically meant for generating long term wealth. So, you should not react to any sharp correction in the market or short term volatility. Moreover, you should refrain from blindly following the stock market analysts and business channels on television. If you don’t keep yourself away from the noise, your chances of making larger returns from Mutual Funds will decrease.

4. Not having a long-term mindset

People generally invest in the Equity Funds to make huge money. Equity Funds can only generate long term wealth if you stay invested for a substantially long period of time. Many people sell their funds losing their enthusiasm and patience after suffering from short term losses. This doesn’t make any sense if you are aiming for quick money from an Equity Fund scheme.

5. Waiting for the perfect time to start investing

I have recently talked to some friends, to whom I had explained about Mutual Fund investing a year back. I was taken aback knowing that he is yet to start investing. He still couldn’t commence investing because he has been looking for the perfect time to invest. I must tell you that when it comes to investing, you should never think of timing the market. Timing the market is important only when you look to trade, and not invest. The market goes through several ups and down in order to reach to point B from point A over a significant period of time.

6. Not having an emergency fund

Many investors invest their entire savings in the Mutual Funds at one go. Therefore, it goes without saying that they don’t have sufficient money for meeting emergencies like medical expenses. So, for paying such expenses, they have no option but redeeming their units and end up paying exit load. Exit load is one type of charge which is levied by a Mutual Fund company if you redeem any units within a specific period of time from the date of investment.

7. Inadequate investment amount

In the case of Mutual Fund investing, you should increase your SIPs in accordance with the growth in your income. Many investors don’t understand the importance of this. Therefore, their SIPs remain the same over time and fail to generate their desired wealth in the long run. Moreover, the inflation rate goes up with time. So, this is also a reason that one should step up his/her SIPs with time to achieve the desired corpus.

8. The dilemma of dividend funds

You will find many people opting for Dividend based Mutual Funds. This is to be noted that the dividends from a Mutual Fund are paid to the investors out of that fund’s AUM. This results in decreasing the NAV of the units of such Mutual Fund. Mutual Funds work best only if you stay invested for a significant term and let the power of compounding play its role. So, if you invest in a growth plan instead of a dividend plan, the amount which you are not going to receive as the dividend is reinvested in the market. This results in creating more wealth in the future as compared to the earlier plan.

9. Not diversifying your mutual fund portfolio enough

When an investor invests in too many schemes of a particular type, he/she thinks that diversification is achieved. You should understand that each Mutual Fund scheme is a portfolio of diversified securities in itself. Therefore, investing in multiple schemes of a specific nature results in nothing but portfolio overlapping at a higher expense ratio. Instead of opting for it, investing in 2 or 3 schemes to the maximum helps in achieving the benefit of diversification.

10. Not monitoring your fund’s performances periodically

Among the investors who invest in the market regularly, only a few them track their investments periodically. If you review the performance of your portfolio timely, it would keep you aligned with your financial goals. Lack of periodic evaluation of funds results in keeping your portfolio filled with junk investments which keep pulling your mean portfolio returns down.

Closing thoughts

AMFI came out with the campaign “Mutual Funds Sahi Hai” two years back. This four words campaign means that Mutual Funds are good in all respects. The main objective of this campaign was to create awareness among the Indians regarding Mutual Funds and bring more investors in the stock market.

However, it doesn’t mean that you can invest in any Mutual Fund scheme blindly. You must have heard this famous dialogue, “Mutual fund investments are subject to market risks. Please read all scheme related documents carefully before investing.” Mutual Fund investments don’t guarantee a fixed return. You need to go through all relevant documents and analyze the key aspects of a scheme, before investing in the same.

In this post, we tried to cover some major mistakes that plenty of investors make while investing in Mutual Funds. If you prevent yourself from committing these mistakes, we hope that you would become a better investor in the long run. Happy Investing!

January 16, 2020 Rajarshi Bose Invest Intelligently, Mutual Funds 3 comments

Mutual Fund Taxation – How Mutual Fund Returns Are Taxed in India?

An overview of Mutual Fund Taxation in India: Hello Investors. Today, we are going to discuss mutual fund taxation. By the end of this article, you’ll understand how mutual fund returns are taxed in India.

If you invest in the stock market, you might already know that the taxation on the capital gains through stocks depends on two factors- the type of investment and the holding period. This means that the rate of taxation in ‘delivery’ is different than that of ‘Intraday’. Moreover, the holding period also plays an important role while deciding taxation. Long-term capital gain taxes are lower than short-term capital gains. (Also read: What are the capital gain taxes on share in India?)

Similar to stock market investing, mutual fund taxation also depends on the type of fund and the holding period of your investments.

In order to clearly understand the mutual fund taxation in India, first, you’ll need to learn the common types of mutual funds. And then, you will need to understand how short-term and long-term investments are defined based on the holding period of mutual funds.

Overall, it’s going to be a long post. However, taxation is a very important topic which no one should ignore. Besides, I guarantee it that this post will be worth reading. So, without wasting any further time, let’s get started.

1. Types of mutual funds

Although there are dozens of types of mutual funds in India, however, here is a broad classification based on the asset type and fund characteristics:

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

B. Debt Funds: These are funds that invest in debt instruments (fixed return investments like bonds, government securities, etc). Debt funds have low risks compared to equity funds. However, the expected returns while investing in debt funds are also lower.

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

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

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

Read more here: 23 Must-Know Mutual fund Terms for Investors

2. The short-term and long-term investments in mutual funds

Now, let us understand what is a short-term investment and long-term investment based on the holding period of the funds.

In the case of equity-based mutual funds and balanced funds, if the holding period is less than 12 months, then it is considered a short-term investment. Further, if the holding period is more than 12 months, then it is called a long-term investment. (Holding period is the difference between your purchase date and selling date).

For the debt-based mutual funds, an investment with holding period fewer than 36 months (3 Years) is regarded as a short-term investment. On the other hand, a holding period greater than 36 months for debt-funds are considered as a long-term investment.

Here’s a quick summary of the short-term and long-term investment classification on mutual funds based on their holding period.

Funds	Short-term	Long-term
Equity Funds	< 12 months	>= 12 months
Balanced Funds	< 12 months	>= 12 months
Debt Funds	< 36 months	>= 36 months

3. Mutual fund Taxation based on fund-type

As mentioned earlier, mutual fund taxation depends on the type of fund and the holding period. Here is the rate of taxation on different mutual funds in India-

1. Equity-based Mutual funds

Long-term capital gain(LTCG) tax on equity-based schemes is tax-free up to a profit of Rs 1 lakh. However, for the profits above Rs 1 lakh, you have to pay a tax at a rate of 10% on the additional capital gains.

For short-term equity-based mutual funds (where the holding period is less than 12 months), you have to pay a flat tax of 15% on the profits.

Clearly, a long-term (holding period greater than 12 months) is a better choice as there is no tax up to a capital gain of Rs 1 lakh. For an average Indian investor, Rs 1 lakh profit is a big amount.

For example, if you invest Rs 5 lakh in mutual funds and get a decent return of 20% in a year, then you’ll make a profit of Rs 1 lakh. This profit will be tax-free. You do not have to pay any tax on the long-term capital gains up to Rs 1 lakh.

In the second case, let’s assume that your profit is Rs 1,10,000 in long-term. Here, you have to pay a tax of 10% on the profit greater than Rs 1 lakh (i.e. Rs 1,10,000- 1,00,000 = Rs 10,000). In short, you have to pay a 10% LTCG Tax on Rs ten thousand.

2. Debt-based mutual funds

For the debt mutual funds, the long-term capital gain tax is equal to 20% after indexation.

Note: Indexation is a method of reducing the capital gains by factoring the rise in inflation between the years the fund was bought and the year when they are sold. The longer the holding period, the higher are the benefits of indexation. Overall, indexation helps you to save tax on gains from debt mutual funds and enhance your earnings. Read more about indexation here.

For the short term capital gains (STCG) on debt funds (where the holding period is less than 36 months), the profit will be added to your income and is subject to taxation as per your income slab. Therefore, if you’re in the highest income-tax slab, you have to pay a tax up to 30%.

3. Tax Saving Equity Funds

Equity Linked Saving Schemes (ELSS) is used for tax saving along with capital appreciation. It is an efficient tax-saving instrument under section 80C of the Income-tax Act of 1961. You can claim a tax deduction of up to Rs 1.5 lakh and save taxes up to Rs 45k by investing in ELSS. However, there is a lock-in period of 3 years for these funds.

After 3 years, the LTCG tax will be applied similar to equity funds. Therefore, the capital gain up to Rs 1 lakh is tax-free. But, profits above Rs 1 lakh is taxable at a rate of 10%.

4. Balanced (Hybrid) Funds

Balanced funds are treated similarly to the equity-based mutual funds and hence they have the same mutual fund taxation structure. This is because the balance funds are equity-based hybrid funds that invest at least 65% of its assets in equities. This allocation percentage can differ depending on the goal of the fund.

The long-term capital gain tax on the balanced mutual fund is tax-free up to a gain of Rs 1 lakh. The profits above Rs 1 lakh is taxed at a rate of 10%. The short-term capital gain tax on the balanced funds is equal to 15% of the profits.

5. Systematic Investment Plans (SIPs)

You can start a SIP with either an equity fund, debt fund, or balanced fund. The gains made from SIPs are taxed as per the type of mutual fund and holding period.

Here, each SIP is treated as a fresh investment and they are taxed separately. For example, if you are investing monthly Rs 5,000 in equity funds, then all the monthly investments will be considered as a separate investment. This simplifies the holding period.

Assume that you bought your first equity-based SIP in January 2017 and consequently SIPs in the upcoming months. Then by the end of Jan 2018, only the first investment will be considered as long-investment. The other investment is for a period of fewer than 12 months and hence, you have to pay an STCG Tax of rest SIPs if you redeemed all of them in Jan 2018.

In short, each SIP is considered a separate investment, and their holding period are calculated accordingly to define the taxation.

3. Conclusion

Here is a quick summary of the mutual fund taxation in India.

Fund Type	Short-term Period	Long Term After	Short-term Gains Taxed At	Long-term Gains Taxed At
Equity oriented schemes	Up to 12 months	More than 12 months	15%	10%*
Balanced/Hybrid Funds	Up to 12 months	More than 12 months	15%	10%*
Debt Funds	Up to 36 months	More than 36 months	Income Tax Slab Rate of Investor	20% after indexation

* Long-term capital gain(LTCG) tax on equity-based schemes is tax-free up to a profit of Rs 1 lakh. However, for the profits above Rs 1 lakh, you have to pay a tax at a rate of 10% on the additional capital gains.

The secret to save taxes and build wealth is still the same- Invest for the long term. In most of the equity-based funds, you can enjoy a tax-exemption for a profit up to Rs 1 lakhs when you invest for the long term. Further, while investing in the debt-funds for the long-term, you can enjoy the benefits of indexation to save taxes. Overall, if you want to save more taxes – Invest longer.

I hope this post is useful to you. Feel free to comment below if you’ve any doubts. I’ll be happy to help. #HappyInvesting

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 14, 2020 Kritesh Abhishek Investment Basics, Mutual Funds 4 comments

sbi smart- demat and trading account in SBI

How to Open a Demat and Trading Account in SBI?

A quick guide to open a demat and trading account in SBI (SBI Cap / SBI Smart): Last few months, I received a number of emails asking how to start trading using State Bank of India (SBI) account. Therefore, in this post, I am going to explain the complete procedure required to open your demat and trading account at SBI in a simple & easy way.

First of all, I would like to mention that you do not need to open a new SBI saving account if you already have an existing one. You can easily link your existing SBI saving account with the demat and trading account. However, if you do not have an SBI saving account, you can also open a 3-in-1 account i.e. a Saving + Demat + Trading account. All three accounts will be linked here.

Documents Required

The photocopy of the following documents are required to open your demat and trading account at SBI:

PAN CARD
Aadhar Card (for address proof)
One passport size photo
Existing SBI saving account passbook (optional)

If you remember your SBI account number and its IFSC code, then the SBI saving account passbook photocopy is not required. You just have to fill your savings account details in the account opening form. However, it’s good to keep the photocopy, just in case.

Charges in SBI Demat & Trading Account

Here are the different charges applicable to the demat and trading account in SBI. This is available on SBI smart website in the ‘Charge’ section under ‘Quick access’ – https://www.sbismart.com/customer-service

Account opening Charges for SBI Demat & Trading

There are different plans which you can opt for while opening demat & trading accounts at SBI. However, most beginners are inclined towards the basic plan.

The basic charges for opening the demat and trading account in SBI is Rs 850 plus GST charges. The GST charged on this is 18% on the account opening charge i.e. 18% of Rs 850 = Rs 153. Therefore, the total amount for opening the account is Rs 850 + Rs 153 = Rs 1,003.

Moreover, this amount will be deducted directly from your SBI saving account with which you will be linking your demat and trading account. Therefore, there’s no need to pay it upfront.

Quick Note: Once your demat account is opened with SBI, you also have to pay an annual maintenance charges (AMC) of ₹500 per year to the bank.

— Ongoing Cashback plan

Nevertheless, in the basic plan, SBI is also giving a cashback up to Rs 650 on the brokerage amount if you invest/trade in the first 6 months after opening your demat and trading accounts.

For example, let’s say you bought stocks of ITC worth Rs 50,000 within 6 months after opening the account. The brokerage charge for such investment is 0.5% on your investment amount (if you are investing in ‘delivery’ i.e. holding the stocks for more than 1 day).

Here, brokerage charge will be 0.5% of Rs 50,000 = Rs 250. SBI will cashback this Rs 250 in your savings account.

As the total cashback is up to Rs 650, therefore we can say that the effective account opening charge is (Rs 1,003 – Rs 650) i.e. around Rs 350, including GST Charges.

Also read: Different Charges on Share Trading Explained- Brokerage, STT & More

In addition, there are few other account opening plans also available which you can discuss with your SBI local relationship manager. Different plans have different cash backs options, annual maintenance charge rates, etc.

How to open a demat and trading account in SBI?

SBI Smart Website: https://www.sbismart.com

There are 3 ways in which you can open a demat and trading account in SBI as mentioned below:

Visit the local SBI branch and open the accounts there.
Fill the online application form available at SBI website.
Contact the customer care and they will help to open your demat & trading account.

— Method 1: Visting SBI Branch

The first way is quite effective, although a little tiresome if the local SBI branch is far from your home. However, if you are able to visit the branch, then you can easily complete all the documentation work within a day. Further, you can get all your doubts cleared regarding brokerage charges, Annual maintenance charge (AMC) etc from the representatives present at the bank.

— Method 2: Online Process to Open SBI demat account

The second way is good for the young generations. They can easily fill the documents and upload it online. If you want to open your demat and trading account using the SBI website, here is the link: https://www.sbismart.com/customer-service

— Method 3*: Requesting SBI Relationship manager to visit home

The third way is the best and easiest. You just have to follow few simple steps to get your demat and trading account opened. Here are they:

Visit the Contact us page on SBI Smart website: https://www.sbismart.com/contact-us
Fill the contact form or call the Toll free number and give your details. They will ask your name, city, pin code, and phone number.
The local SBI Relationship manager from your city will call you within 2 working days and walk you through the process.

NOTE: You can fill be contact form by navigating on the ‘CUSTOMER SERVICE’ tab and clicking on ‘OPEN AN ACCOUNT’ option present on the right side of the screen.

Otherwise, you can call the SBI customer executive at 1800-209-9345 and tell your details.

Call from Local Relationship Manager

When your local relationship manager from your city will call, you can also request him to meet you at your address with the account opening form. Generally, they agree to visit your desired location to get the account opening form signed and collect the documents (Photocopy of PAN Card, Aadhar card & Passport size photo).

Once you have submitted the account opening form, your account will be activated within 15 days. You will get a mail from SBI smart with your username & password along with instructions for how to start investing/trading in SBI smart.

After receiving your login credentials, you can start trading by visiting the SBI Smart website (https://www.sbismart.com) and selecting ‘Trade Login’ present in the drop-down menu on ‘login’. Enter the credentials there and start trading.

Also read: How to buy a Stock using SBI demat account?

Also read: 8 Best Discount Brokers in India – Stockbrokers List 2020

Closing Thoughts

SBI demat and trading account offered by SBI Cap is a trusted brand and Subsidiary of State Bank of India, the country’s largest bank of India. As most Indian’s have a saving account in SBI, they might prefer to open a demat and trading account in SBI. Moreover, the account opening process involved with the SBI cap is similar to any other broker that you choose to open your account. You have to fill your application form (either online or offline) and submit the docs (Pan card, Aadhar Card & bank details) to them.

That’s all. Isn’t it simple? Now go and get your SBI demat and trading account opened. I hope this post on how to open a demat and trading account in SBI is useful to the readers. If you have any further doubts, please comment below. I will be happy to help you out. Happy Investing!

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 12, 2020 Kritesh Abhishek Investment Basics, Online Brokers 27 comments

100 Minus Your Age Rule – The Easiest Asset Allocation Method!

100 minus your age rule: It’s always tricky to decide how much you should save and how much you should invest. Especially in riskier investment options like stocks or mutual funds. This is because the answer varies on different factors like the age, geography, or financial situation of the person. Moreover, the investing strategy of a 22-year-old need not be the same as that of a 60-year old. But, how much you should actually invest in different assets at the particular stage of your life?

There is no single correct answer to this question, and there can be multiple answers. However, it this post we are going to discuss one of the most popular allocation methods, known as the 100 minus your age rule.

What is 100 Minus Age Asset Allocation?

The 100 Minus Age Asset Allocation Rule is one of the earliest and elementary methods of Asset Allocation, which proffers a rational procedure to determine the distribution of equity and debt in the portfolio.

This rule is devised on the vital axiom of curtailing risks as we gradually turn old. It also interprets the Asset Allocation which is completely based on the stage of your life. Over time, various theories and models have been devised in an endeavor to lend advice about this crucial decision. The 100 Minus Age Asset Allocation Rule provides extensive assistance to decide the ratio of our investment in debt and equity.

The 100 Minus Age Asset Allocation Rule which states that we should take 100 as the minuend and our age as the subtrahend. The enumerated difference is the percentage of our network that we should be designating in stocks as of today, i.e. at our current age.

Examples of 100 Minus Age Asset Allocation Rule

At first, we will decode the definition by taking a person belonging to the younger age bracket.

AGE OF AN INDIVIDUAL: 22 YEARS

As per the definition, we will subtract it from 100.

(100-22) Years = 78 Years = 78/100*100= 78 %

Thus, according to the rule, he/she should keep 78% of his/her portfolio in equities. The rest of the portion should include high-grade bonds, government debt, fixed deposits, and other relatively safer assets. On the other hand, when he/she reaches the age of 80, he/she would diminish his/her allocation to stocks to just 20%.

Now, we will explain the definition by taking a person belonging to the older age bracket.

AGE OF AN INDIVIDUAL: 67 YEARS

As per the definition, we will subtract it from 100.

(100-67) Years = 33 Years = 33/100*100= 33 %

Thus, according to the rule, he/she should keep 33% of his/her portfolio in stocks or riskier investment options. The rest of the portion should include high-grade bonds, government debt, fixed deposits, and other relatively safer assets.

How does the 100 Minus Age Rule work?

The logic is simple. When you are old, you will have a lot more responsibilities and expenses compared to when you’re young. For example, if you’re at 58, you might be worried about the retirement fund, retirement home, higher education of your kids, the marriage of your daughter/son, etc. On the contrary, when you are young, you do not have much expenses or responsibility. That’s why it is considered wise to take more risks and invest in high risk, high return investment opportunities when you are young.

In professional vocabulary, this is attributed as a “Declining Equity Glide Path.” Every year or, at an interval of a few years, we would have to decline our share in equities which in turn will diminish the volatility and level of uncertainty of our investment portfolio.

As we get older, one of the most essential guidelines of investing is to eventually scale down our risk level since retired personnel get no scope for second chances in reference to the revival of the market after a sharp plunge. Therefore, this example depicts the simple perception behind the 100 Minus Age Asset Allocation Rule that strives to conclude that lesser the age, higher the risk-withstanding capacity & more the age, lesser the competency to combat the storm of the stock market and vice versa.

Drawbacks of the 100 Minus Age Rule

100 Minus Age Asset Allocation Method comprises of several loopholes. Let us analyze each of them in a detailed discussion.

1. Presumption of the fact that the process of financial planning is similar for everybody

The ultimate truth is that the procedure of financial planning varies from person to person where everyone has their exclusive preference and needs for Asset Allocation.

2. Inconsiderate about the basic factors for asset allocation

Asset Allocation requires a well-defined consideration of diversified factors like financial situation, preferences, risk-taking ability, time horizon, goals, and investors’ psychology.

However, the recognized path to asset allocation is to elaborate our risk profile at the very first stage. Assessing our risk profile will aid us to contemplate the approximate risk we are ready to undertake for the investment.

The second thing that needs to be taken into account is the time horizon for the purpose of investment. On the basis of the analyzed risk profile and time horizon, the decision regarding the asset class is executed!

For example, if you are an aggressive risk pursuer and have a long term time horizon for investment then you can allocate a major portion of your asset to equities. The percentage can be 80 % or, 90% to stocks and rest into debts. In exceptional cases, if you are someone having a supreme risk appetite, you can even invest 100 % of your assets. On the contrary, if you have a short time horizon in your mind, then it always recommended investing in a debt fund despite being an aggressive risk-taker.

3. Inconsiderate about the change in Life Expectancy

Over the past few decades, there has been an unwavering increment in life expectancy around the globe. The hike is driven mainly by improvements in medical facilities and infrastructure. However, as the majority of the people have started surviving longer than before, many financial advisors feel that there is a dire need for amendment in the rule.

According to experts, the modified figures should be closer to 110 minus the age or, 120 minus the age. There is another aspect that has been absolutely overlooked by the 100 Minus Age Asset Allocation Method. On average, women live nearly four to five years longer than men and thus, required corrections definitely need to be made in the rule to cater to the investment needs of women population.

4. Inconsistent results in reference to market fluctuations

Academicians and researchers had commenced a project to test the accuracy and performance of the 100 Minus Age Asset Allocation Method aka Declining Equity Glide Path in different market cycles. Intensive research reports display that in bear cycles or, during poor market conditions, this method has delivered distressing outcomes. In reference to the market happenings of 1966, if somebody retired during that year, they would have run out of money 30 years after retirement.

The same experiment was also applied to a bull cycle or, in strong market conditions. During the booming period, the 100 Minus Age Asset Allocation Method generated good results with the strongest ending account values. However, it is not possible to predict or foresee future market performances at the time of an individual’s retirement. Thus, it would be wise to chalk out a sound allocation method that sails through the crests and troughs of the stock market.

Conclusion

The 100 minus your age is a simple, yet effective way to easily allocate assets depending on the stage of your life. This age rule is based on the principle of minimizing risks as you grow old and hence, simplifies the asset allocation. However, this rule also has a lot of drawbacks and hence while deciding the asset allocation, you should keep in mind your priorities and financial situation.

Also read: How to Invest in Share Market? A Complete Beginner’s Guide

That’s all. I hope it post is useful to the readers. Happy Investing.

January 10, 2020 Oindrila Chowdhury Personal Finance, Save money 1 comment

Corporate Social Responsibility (CSR) – What does it actually mean?

Corporate social responsibility, which is known as CSR, is a type of mechanical business model that can help a company to be socially accountable and responsible to all the stakeholders and the public related to the interests of the company. With the help of corporate social responsibility, a company can be socially accountable to the people, and it means that it owes something to them. It is a type of corporate citizenship that a company has over time.

First of all, CSR helps in image building formation.

With the help of the corporate social responsibility, a company can be conscious of the type of image that it creates to the society and impacts on the well-being of the people, directly and indirectly. There is a lot of impacts that the company can source out to the public. This can be done with the help of the economic, social, and environmental kind of ways.

If your company wants to engage in the work of corporate social responsibility, then they have to socially responsible for the well-being of the public whose interest lies in the company. It has to operate in such a way that it can be good and enhance the presence of the company, socially or culturally.

Corporate social responsibility in India

When it comes to India, then it is the leading source of business from all around the world. It is the first country that has made corporate social responsibility CSR mandatory, which the help of passing a law in the amendment in April 2014. With the help of these companies act passed onto by India, now businesses can directly invest their profit into the area of the society, they can help the community to have a better formation for the further source, and in the best way, CSR becomes a hunger for every company out there in the market.

Company’s Act passed for maintaining CSR by Indian Companies

According to the whole of the company’s act, which was passed onto by India, it was sourced that the net worth of any business will now be a part of the CSR here. To the net profit of about 5 crores made by any company, around 2% of the same target is to be spend around for the well-being and management of the society as a whole so that the community can profit from the revenue which is managed by these companies.

Before the same, India made it mandatory for the companies to disclose all their corporate social responsibility reports to the stakeholders and the shareholders of the company.

They should be liable and should be a part of the company’s profit-earning capacity as well. These were included for the projects related to the company’s activities and the projects that were related to the activities taken by the company on-board.

It was recommended all by the CSR committee as a whole to cover all the items listed in the source of the Companies Act, which was stated during the time of amendment.

Also read: What is Corporate Governance? Principles, Examples & More

What is the whole methodology of the CSR Technique?

With the help and including CSR for companies out there, it can help them to profit and earn them for the scope of the long run. It is the procedure of assessing all the impact of the organization on society and then slowly evaluating all their responsibilities. These responsibilities, which are managed by the group of organizations that uses CSR is to help the community become a better place by distributing the part of the revenue which is made and even sourcing out the following aspects which are presented below.

1. Channeling the needs of the customers

The customers are the central part of it. With the help of the customers, an organization can run smoothly. With the use of corporate social responsibility, a business can go in for the long drive of run with the source of the customer that they have. It can help them to the pan and rule out the odds.

2. Helping the suppliers to earn

Another one which comes on the second lot is the suppliers of the business. A business can only profit when the suppliers are pleased. These are done with the help of corporate social responsibility. When the part revenue is distributed, the suppliers can be happy and supply more for the business and include their service for a longer time.

3. Creating a proper work environment

The environment where the business is incorporating should be steady, as well. If the climate is not stable, then a company cannot lead its growth and go towards the best. This is why corporate social responsibility can help to enhance the working environment, inside and out of the organization.

4. Helping the communities

The communities are a huge part of society. These are the forums and groups through which the whole nation is based. If the business has to go for a longer duration, then they have to please the community members. This is done with the source of CSR and maintaining a cordial relationship with the communities of the society for a better outcome of results from altogether. The cities are the prime, and any organization should know it.

5. Providing comfort to the employees

The last one who lies here is the employees of the organization. If the working members of the organization are pleased, then only a business can run. Labor is what every organization needs out there and especially if they are skilled enough to do the job. CSR helps to have a proper relationship between the business and the labor.

Also read: Top 10 Companies in India by Market Capitalization

Legislation management for CSR

The most effective plan of corporate social responsibility for any business is to create legislation and to comply with it. Their investment for the source of the company should be a part of the whole society, and every decision that a company takes, the community should be a wholesome concern. The investments are a part of growth for any type of business out there, and only when the growth helps the community to lean towards the work of a company, the organization can have a more profitable revenue for the working years.

Organizations in India always thrives for corporate social responsibility

There are a lot of organizations located in India which thrives on the source of corporate social responsibility and have benefitted from the whole idea. They have to take special CSR initiatives altogether, which can help them to integrate the cause and to work on the entire business process on the run. With the upcoming years in the market, all these have become an endless source of income for the business as a whole, and it has helped them to gain revenue.

Besides growing your business, you should respect the culture and the beliefs of the people who are around you. With the help of respect, it creates a massive value of the business in the eyes of the public. It can help them to shape the business, which can be sourced out to a higher chance of collecting more revenue.

Businesses tend to profit more

With the help of CSR, an industry can source out their impending management and shape their responsibilities altogether. It can help them to understand the community at a large and also tend, adhere to the needs of the city. Companies do have a specific source and type of demand, which can help the department and the teamwork towards the development of particular purposes.

CSR management in Indian companies

CSR programs help the whole business to work for separate budgets and then support them in a wholesome way. It can improve the business to scope out the primary source of profit by looking after the well-being of society. When it comes to managing the source of work, then companies do have a specific source of the department which handles the work of corporate social responsibility. These are the departments that set up the policies of the CSR and then come up with freshly integrated ideas.

January 6, 2020 Meghashree Das Economics, News No comments yet

Rakesh Jhunjhunwala Success Story- Rs 5,000 to Rs 19,000 Crores!!

Rakesh Jhunjhunwala success story: According to the latest updates on Forbes, the net worth of Rakesh Jhunjhunwala is $3.1 Billion, which is equivalent to over Rs 19,000 Crores. So, how did a regular guy from Mumbai with just Rs 5,000 became one of the most successful stock investors in Indian history? This is what we are going to discuss today.

In this post, we are going to walk you through the journey of Rakesh Jhunjhunwala in the Indian stock market. How he made over Rs 19,000 Crores starting from just Rs 5,000. Let’s get started.

Rakesh Jhunjhunwala success story

— Childhood

Rakesh Jhunjhunwala, also known as the ‘big bull’ or ‘Indian Warren Buffett’ was born on 5th July 1960 in Mumbai. His father was an Income tax officer.

Rakesh Jhunjhunwala consistently used to hear his father discussing stock market with his friends. As he was very curious about stocks, so once he asked his father why the stock price fluctuates daily? His father suggested him to read newspapers as its the news that makes the price of stocks to fluctuate.

Rakesh Jhunjhunwala also expressed his wish to pursue a career in the stock market. However, his father suggested him to first get a graduate degree from a college. Rakesh Jhunjhunwala graduated from Sydenham College in 1985 as a chartered accountant.

After graduation, he again discussed his career goal as a stock market investor with his father. To this, his father replied that he is permitted to pursue any career. However, he also added that he’s not going to give him any money, nor he can ask the initial capital from any of his father’s friends.

— Entering the stock market world

Mr. Rakesh Jhunjhunwala entered the stock market with just Rs 5,000 in 1985. At that time, Sensex was at 150 points (currently Sensex is hovering at 35,000 points).

Nevertheless, soon Rakesh Jhunjhunwala was able to take an amount of Rs 2.5 lakhs from one of his brother’s clients by promising to give higher returns compared to the fixed deposits.

Rakesh Jhunjhunwala’s first big profit was Rs 0.5 million in 1986. He bought 5,000 shares of Tata Tea at Rs 43 and within 3 months it was trading at Rs 143. He made a profit of over 3 times by selling the stocks of Tata tea.

In the next few years. Rakesh Jhunjhunwala made a number of good profits from stocks. Between 1986-89, he earned Rs 20-25 lakhs. His next big investment was Sesa Goa, which he initially bought at Rs 28 and then increased his investment at Rs 35. Soon, the stock rallied to Rs 65.

— Multi-baggers stocks in Rakesh Jhunjhunwala’s Portfolio

Rakesh Jhunjhunwala manages a privately owned stock trading firm called ‘RARE Enterprises’. The name is derived from the first two initials of his name and his wife Mrs. Rekha Jhunjhunwala’s name.

During his long career in the stock market, Rakesh Jhunjhunwala invested in a number of multi-bagger stocks.

In 2002-03, Rakesh Jhunjhunwala bought ‘Titan Company Limited’ at an average price of Rs 3 and currently it is trading at a price of Rs 817. He is holding over 7.5 crore shares of titan company. He has an ‘overall’ holding of 8.45% in the company.

In 2006, he invested in LUPIN and his average purchase price was Rs 150. Today, LUPIN is trading at Rs 822.20. A few other multi-baggers in Rakesh Jhunjhunwala’s portfolio are CRISIL, PRAJ IND, Aurobindo Pharma, NCC, etc.

Quick Fact: Apart from being in the board of directors of big companies like Prime Focus Ltd, Geojit BNP Paribas financial services, Praj Industries, Concord Biotech, etc, Rakesh Jhunjhunwala is also a movie producer. He has produced movies like ‘English-Vinglish’, ‘Shamitabh’, ‘Ki and Ka’. He is the chairman of Hungama Digital media entertainment Pvt Ltd.

Also read: D-Mart Founder- RK Damani Success Story [Bio, Facts, Net worth & More]

— Latest Stock Portfolio (Sept 19)

Here are the latest stocks with the most weightage in Rakesh Jhunjhunwala’s Portfolio (the table is updated until September 2019):

Stock Name	Last Trading Price (Rs)	Quantity Held	Holding Percent	Holding Value (Rs.)
Titan Company Ltd.	1159.05	5,77,51,220	6.51%	6,693.7 Cr
Crisil Ltd.	1789.8	39,65,000	5.48%	709.7 Cr
Escorts Ltd.	622.65	1,00,00,000	8.16%	622.7 Cr
Lupin Ltd.	770.6	70,70,605	1.56%	544.9 Cr
Federal Bank Ltd.	86.7	6,07,21,060	3.11%	526.5 Cr
Delta Corp Ltd.	209.1	2,00,00,000	7.38%	418.2 Cr
NCC Ltd.	54	6,23,33,266	10.38%	336.6 Cr
Rallis India Ltd.	172.6	1,89,80,820	9.76%	327.6 Cr
VIP Industries Ltd.	422.75	75,00,400	5.31%	317.1 Cr
Jubilant Life Sciences Ltd.	539.5	55,00,000	3.45%	296.7 Cr
Multi Commodity Exchange of India Ltd.	1158.55	20,00,000	3.92%	231.7 Cr
Karur Vysya Bank Ltd.	59.95	3,36,33,516	4.21%	201.6 Cr
Fortis Healthcare Ltd.	137.6	1,25,00,000	1.66%	172 Cr
Aptech Ltd.	168.15	96,68,840	24.24%	162.6 Cr
Agro Tech Foods Ltd.	608.4	20,03,259	8.22%	121.9 Cr
Edelweiss Financial Services Ltd.	115.7	1,00,00,000	1.07%	115.7 Cr
Spicejet Ltd.	99.4	1,00,00,000	1.67%	99.4 Cr

Also read: How to find where the Big Players are Investing in the Market?

— Rakesh Jhunjhunwala Stock Market Philosophy

Rakesh Jhunjhunwala considers himself as both a trader and a long-term investor. Here’s a quote from his interview with Economic times:

“Short-term trading is for short-term gain. Long-term trading is for long-term capital formation. Trading is what gives you the capital to invest. My trading also helps my investing in the sense I use a lot of technical analysis for trading at times.

If the stock is overpriced, I should sell but my trading skills tell me that the stock can remain overvalued or get more overvalued. Hence, I hold on to my investments.

So, I think they complement each other in many ways but they are two distinct compartments totally.”

(Source: Economic Times- The journey of Rakesh Jhunjhunwala )

Further, Rakesh Jhunjhunwala is extremely bullish towards India’s growing economy and its success as an emerging market.

Overall, Rakesh Jhunjhunwala’s success story is really inspiring for new and old investors. In the end, here’s an amazing quote by Rakesh Jhunjhunwala:

“Passionate investors always make money in stock markets. You will never fail in any work if you do it with passion.” – Rakesh Jhunjhunwala

That’s all for the article. Let me know what do you think of Rakesh Jhunjhunwala’s success story in the comment section below. HappyInvesting

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 5, 2020 Kritesh Abhishek INDIAN BULLS 15 comments

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

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 reasons 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:

The 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 that 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 the 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.

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.

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 recommendations 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 realistic expectations 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 savings 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.

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.

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!

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 3, 2020 Kritesh Abhishek Invest Intelligently, Investment Basics 11 comments

7 Best Value Investing Books That You Cannot Afford to Miss.

Best Value Investing Books For Stock Market Investors: Hi there. This post is based on public demand. Past few weeks, I’ve received dozens of emails regarding the suggestions on best value investing books. That’s why I decided to write this blog discussing my personal favorite value investing books which I highly recommend to my readers to read.

Quick note: There may be chances that I might miss a few amazing value investing books in this post. This can be either because I’ve never read that book or just because it might not be so popular with respect to Indian stock market. Nevertheless, if I missed any best value investing book that you think is worth mentioning for the readers, please recommend below in the comment box.

7 Best Value Investing Books That You Cannot Afford to Miss

Here is the list of the best value investing books worth reading for the stock market investors.

1. The Intelligent Investor by Benjamin Graham

Warren Buffett considers this one as the best book ever written on investing (check the cover with Warren Buffett’s comment). And, I agree!! This book contains tons of important concepts to build a foundation of value investing.

The author of this book- Benjamin Graham is considered as the father of investing. He’s famously credited for popularizing the concept of value investing in the investing population. Coincidentally, he was also the mentor of Warren Buffett at Columbia Business School. After graduation, Graham hired Warren Buffett to work (and learn) in his investing firm. Warren Buffett inherited the principles of value investing from Benjamin Graham, which later helped him to build a great fortune and becoming one of the most successful stock market investors of all time.

This book contains a number of time-tested lessons like investment vs speculation, the margin of safety, the concept of Mr market (the fictional manic-depressive character), different approaches for defensive and enterprise (aggressive) investors etc. Many people consider this book as the bible of value investing.

Overall, this is definitely one of the best value investing books and for the serious investors- this is a must read. If you want to build a strong value investing foundation, I’ll highly recommend you to read this book.

You can read the complete book review of The intelligent investor here.

Quick Note: Benjamin Graham has also authored another book named Security Analysis, which is also a best-seller. The first edition of this book was published in 1934, shortly after the Wall Street crash and start of the Great Depression in the US. The fact that Benjamin Graham survived the great depression (where dow fell nearly 90% in a stretched period of three years), itself adds credibility to his investing knowledge and experience.

2. The Little Book That Beats the Market by Joel Greenblatt

This is probably the shortest book that I’ve ever read on investing. You can easily finish this book in one sitting.

In this book, the author -Joel Greenblatt explains the concept of value investing and his approach to pick winning stocks. He also shares his strategy of ‘Magic Formula’ (that consists of two financial ratios- Return on capital and Earnings Yield) which helped him to pick fundamentally strong companies year-after-year.

Overall, it’s a nice read and an excellent place to start reading if you have never invested in stocks before. You can read the full book review of the little book that beats the market here.

3. The Warren Buffett Way by Robert Hagstrom

I started reading this book because I’m a fan of Warren Buffett and wanted to learn his value investing principles and strategies. The book contains all the things that it promises.

Hagstrom describes the necessary aspects to achieve similar success like Buffett that you can apply immediately to your own portfolio. The good thing about The Warren Buffett Way is the author tends to stay away from high faulting words that make it understandable to anyone willing to learn value investment.

The book begins by introducing Warren Buffett’s early life and education and also discusses his first investment at the age of 11 (and the lessons that he learned from it). In next chapter, the book covers his journey of how he read ‘The Intelligent Investor’, got influenced by the author Benjamin Graham, and later end up joining the Columbia Business School, just to learn to invest from Graham. The book also mentions Charlie Munger, the business partner of Warren Buffett and the Vice-Chairman of Berkshire Hathaway and how he influenced Warren Buffett’s investing style.

There are a number of key takeaways from this book on management, capital market and business, which can be applied to a wide variety of investing strategies. Overall, The Warren Buffett Way book is a definite guide that can help you to decide how to make critical decisions while researching any company to invest.

4. Value Investing and behavioral finance by Parag Parikh

This is one of the best books written by an Indian author that I ever read. The book educates the readers about the much-needed topics that are ignored by most financial websites, books, and media.

The Value Investing and behavioral finance book is well structured and contains 12 chapters. Few of the best ones are- Understanding behavioral traits, Behavioural obstacles to value investing, Contrarian investing, Public sector units, Sector investing, Initial public offerings, Index investing & Bubble trap. I particularly enjoyed reading the chapters on Contrarian investing, IPOs and bubble trap.

If you want to get a good insight into value investing in the Indian stock market, then this book is a must-read. You can read the complete book review of Value Investing and behavioral finance book here.

5. The Little Book of Value Investing by Christopher H. Browne

Once you have read the lengthy 600-pages of The Intelligent Investor, this book might seem tiny one with similar powerful concepts.

In the book, Christopher Browne uses the analogy of supermarket shopping to explain the concept of buying stocks. At a supermarket, both glamorous and cheap products (on sale) are available. It totally depends on the buyer behavior whether he’ll buy a well packaged expensive product or will choose an undervalued product on sale. Only the value investors take the effort to dive into the market and look for items on discount.

There are a number of valuable investing concepts in this book like diversification of stocks, creating a margin of safety, preferring value over growth, shareholding, insider’s buying or selling pattern etc that can help you learn a lot of value investing strategies.

Overall, this little book will give you a lot of value investing tips and pieces of advice which can help you to shape your investing strategy.

6. The Dhandho Investor by Mohnish Pabrai

The concept of Dhandho Investing changed the way I look at investing. This is one of most simple yet influential book that I’ve ever read. The book is based on the central concept of “Heads I win, tails I don’t lose much” i.e. ‘low risk, high return’.

The author of this book, Mohnish Pabrai is an Indian-American Investor, businessman, and Philanthropist. He is the Managing Director of Pabrai Investment funds, an investment fund based on the similar model to that of Warren Buffett’s Partnerships in the 1950s. Since inception in 1999, this investment fund has given an annualized return of over 28% and hence has consistently beaten the S&P 500 Index.

Moreover, Pabrai’s idea to invest in businesses with low risk and high returns makes perfect sense. Isn’t the main aim of any investment is to get the maximum returns with minimizing risks?

In the book, The Dhandho Investor, Mohnish Pabrai clearly explains his concept of ‘low risk and high returns’ with the help of few case studies in the first few chapters like Richard Branson of Virgin Company, Laxmipati Mittal of ArcelorMittal- world’s largest steelmaking company and few more.

Overall, this is an amazing book to deepen the basics of value investing principles. The book is quite simple to read and complex investing principles are simplified in an easy-to-understand manner. You can read the complete book review of The Dhandho investor here.

7. Warren Buffett letters to shareholders

This is not exactly a book but a collection of letters written by Warren Buffett to his shareholders at Berkshire Hathaway. Warren Buffett has been writing these letters for over the past 50 years. And if you merge all the letters, the learnings are more than that of 50 books combined.

Warren Buffett has never written a book himself. However, if you are interested to learn from him, these letters to shareholders serves the same purpose.

Learning from the wins and mistakes of the greatest investor of all time is itself very pleasing. Overall, it’s the definitive book summarizing the winning techniques of the world’s greatest investor.

Also read: 10 Must Read Books For Stock Market Investors.

Bonus 1: Margin of Safety by Seth Klarman

This is one of the most recommended books online for value investing and is on my watchlist at Amazon for a long time. It was originally written in 1991 and definitely contains many time-tested principles.

However, I am not able to read it yet because the price of this book is way too high (at least with respect to Indian currency). Right now, I’m not sure whether I can generate enough ROI after reading this book or not. Anyways, feel free to check out this book here.

Quick Note: If anyone wants to gift me this book, I’ll be highly obliged 😀

Bonus 2: Book on valuation

The Little Book of Valuation: By Aswath Damodaran

A short yet comprehensive book to learn how to value a company, pick a Stock and make profits. The author of this book, Aswath Damodaran is a Professor of Finance at the Stern School of Business at New York University (NYU), where he teaches corporate finance and equity valuation.

There’s also a long version of the valuation concept written by the same author, named Valuation by Damodaran. Both these books are amazing to build the foundation of valuing stocks.

Besides, Aswath Damodaran is also quite active on his youtube channel (with over 72k subscribers) where he teaches valuation and business modeling. Feel free to check out his youtube channel here.

Bonus 3: Not exactly value investing books, but covers crucial concepts

One Up on Wall Street, Learn to Earn and Beating the street by Peter Lynch

Probably the simplest, enjoyable, interactive yet highly educative books that I read on investing. Initially, I started with one up on wall street, then fell in love with the way the author describes the share market and end up reading all the three books written by him.

Peter Lynch was a star mutual fund manager at Fidelity investment. He has an amazing track record on a consistent average annual return of 29.2% over a stretched duration of 13 years when he managed the Magellan fund. During this period, the asset under management of his fund which was originally $18 million in 1977 increased to $14 billion. He is one of the rare fund managers who gave a fairly good return to their investors for 13 years in a row.

In his books, Peter Lynch shares his learnings as a fund manager and stock investor. All three of Lynch’s books follow his common sense investing approach, which insists that individual investors if they take the time to do their homework, can perform just as well or even better than the experts.

A few of the top pieces of advice given by Peter Lynch in his books are-

Invest in companies, not the stock market.
‘Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future’.
There are a few qualities which are required for a successful investor. They are Patience, self-reliance, common sense, open-mindedness, tolerance to pain, detachment, persistence, humility, flexibility, willingness to do independent research, an equal willingness to admit to mistakes, and an ability to ignore general panic.

You can read the complete book review of his book one up on wall street here.

Overall, all these three books written by Peter Lynch will guide you the concepts of investing in a simple, logical, pragmatic and replicable manner.

Kritesh Abhishek

www.linkedin.com/in/kriteshrules/

January 2, 2020 Kritesh Abhishek Books, Investment Basics 14 comments