INVESTING BASICS

So, What's YOUR favourite of all stock market

for beginners guides?
The Best Stock Market for Beginners guides? That's a question I would have loved to
have found answers to, when I began my investing journey in the Indian stock
market in 2005.
The ride has been thrilling with its fair share of highs and some humbling lows!Mr.
Market keeps teaching new lessons in his own ways. Enthralling and educating as is
this intense journey...of learning about the stock market...there are some things I
wish I had chanced upon first, while digesting regular stock market basics.
These pages are an attempt to accelerate the learning curve for investing newbies
(exceeding an investing-for-dummies kind of scope) by providing access to complete
do-it-yourself models that cover
How to get to the best companies in India?
How to analyse their businesses in depth?
How to value a stocks worth - decide a fair price to pay?
How to quickly find fundamental data for analysis?
Scores of current stock analysis and valuation exercises
Useful resources for the Indian Stock market
Ready-to-use Stock Analysis & Valuation Templates
The Ten-minute Test

I am sure if I can do some justice to the above, we will find answers to what we
started with, The Best Stock Market for Beginners guides!
Investing basics |learn how to invest |do-it-yourself online investing
Investing Basics -for newbie investors willing to take charge of their financial
future; from taking first steps, to pros & cons of common financial
instruments, to long term wealth strategies!
Stock Market Basics - a beginner's guide
Stock market basics arent difficult to understand and the tools for finding
great stocks are available to everyone if one is prepared to invest enough
time, work hard, and be disciplined about it.

Stock Research | Indian stock market research

In-depth, independent stock research on Indian stocks is hard to find? Not
anymore! Check out some of the most promising long-term opportunities
here.
Stock Screener tools and tips HQ
Stock Screener tips to create screens that make practical sense. Variety of
proven screens - O'Shaughnessy, T. Rowe Price, Geraldine Weiss, Benjamin
Graham, Peter Lynch, Cash Rich, Low PE, High Yield.
Stock Market for Beginners Blog
A newbie investors stock market for beginners mini-journal - with complete
do-it-yourself stock basics, research, and valuation guides - to wheres the
best bang for my buck? Subscribe here.
India stock market | Sector stocks | Compare stocks
India Stock Market: Useful resource page for sector stocks, sector issues &
analysis guidelines, peer comparisons, investor checklists, as also in-depth
research on sector-specific stocks.
Stock Market News | India Stock Market News
Keep yourself updated with the latest stock market news, company and
business news, and the Indian economy in general from leading business
dailies and the web.
Contact Me |Stock-Picks-Focus |Collaborate with Me
Contact me Do You have comments? Questions? Feedback? Communicate
with me, here. Passionate about learning stock investing? Invite you to
collaborate with me, here.
Stock Market Articles | Selected India Stock Market articles
Best stock market articles? Dont worry if you dont have the time. This
section will bring you our selection of thought-provoking, interesting articles
appearing in Indian business media, every week.
Stock Market Terms | Stock Market Glossary
Useful resource page for stock market terms. Learn more on how you can
practically use these stock terms to evaluate and analyse companies on a
range of useful metrics.

Investing Basics
A senior investor, while explaining investing basics, once put it to me, very simply.
Its important to consider first Why should you invest, before learning How to
invest and Where to invest, while going on to ask When to invest!
This Investing Basics section is for newbie investors willing to take charge of their
financial future; from taking first steps, to pros & cons of common financial
instruments, to long term wealth building.
Learn how to get started, how and where to research investments, deal with online
brokerages and invest online, while forming hopefully some foundations of your long
term capital-building strategies.
Investing tutorials
Why should you invest?
How to Invest? - Part I
How to Invest? - Part II
Where to Invest?
When to Invest?

Getting started
First Steps
Researching Investments
Online Brokerages
Buying your first investment

Sometimes you find that you can take a leaf out of another's book, right? When I
started out in 2005, I found it extremely useful to read up answers to questions
asked by other newbie investors.
So here's a compilation of some the common investing basics questions I have
helped answer. Perhaps you will find these useful!
Investing Basics practicals
How should I invest to accummulate 50 lakhs in 10
years?
How should I invest my money for growth with
security?
Investing for my sons (10 months old) career. Best
plans suited for me?
Investing in stocks, but need to learn the ropes. How
do I start?

Useful starting
blocks
7 steps to invest in a SIP
Plan
How to get a PAN card
SIP Advantages? Good
time for a SIP?
PEG ratio of indian
company shares

Why Invest at all?

Why invest? This came to me sometime in late 2004/early 2005 as I strongly felt the
need for making my money work better for me. We were blessed with twin
daughters, and full of hopes and dreams.
I was transforming to become more financially responsible and aware. No one
needed to educate me on why invest, as I suddenly realised that to achieve these
dreams, I needed to shed a bit of my happy-go-lucky attitude and set longer term
financial goals. And to achieve these financial goals, I needed to invest!
Investing to me, is focused primarily on making my own money (work harder, and)
make more money for me. It is clearly about long term financial goals. As I started
reading up and thinking more about building long-term capital, certain simple why
invest basics became very very clear to me.

Time Value of Money

Like most things in life, the early bird catches the worm! I understood I was already
late into the game. Realised I could never play catch up - even if I doubled the
stakes - compared to having started just 10 years earlier.
Consider the graphic below. Suppose you start early at age 20, invest Rs.20,000
yearly for 10 years in a safe government-backed instrument like PPF (Public
Provident Fund) and forget about it-just let it lie in the bank till retirement. And
somone who wakes up somewhat later in life, at age 31, and starts investing double
that amount Rs.40,000 every year for 30 years, till he reaches the age of 60.

At age 60 You, the Early Starter would have invested just Rs. 200,000 and seen your
investment grow to ~Rs. 3.4 million, and seen a return of 16x. Someone like me who
woke up later, will have invested a not inconsiderable Rs. 1.2 miliion, but seen only a
3x return!
Wished I could start the game all over again? You bet, I did! Understood perfectly
this aspect of time value of money or what is also called the power of compounding.
The longer your money remains invested, the better it works for You! Why Invest,
became a no-brainer.
By now my mind had started ticking! Hey wait, what if I could make my money work
just a bit faster?

Compounding at different rates

It appeared to me now hey, there are other financial instruments too. If I can make
my own money work just a bit harder and faster, perhaps I could play catch up? Lets
see how the figures stack up.

Now this was getting interesting. Compounding at just 2 percent more per year
every year for next 20 years made for a sizeable 44 percent difference in overall
returns. And over 40 years the 2 percent difference more than doubled the returns!
Why Invest, indeed!
Now I had learnt my math in school, and knew this is due to the power of
compounding! But had I ever worked figures through like this? The miracle of the
power of compounding ensures that our investment makes money and the return on
that investment makes some more money - keep it that way for a number of years
and our investment quickly starts exploding. The more the time our money remains
invested and/or earns a higher return, the higher the trajectory of our returns graph.

The Thumb Rule of 72

How long will it take to double my money? From a why invest novice, someone was
getting greedier here!
The Thumb rule of 72 comes in handy here. Just divide 72 by the interest rate and
you have the number of years it takes to double your money, roughly. So if we are
getting a 8% interest rate, it will take 9 years. And at a 15% rate, your money
doubles in roughly 5 years. Use a calculator, or an excel worksheet to Test this! Its
an amazing thumb rule to keep in your head.
So the next time an agent comes to you, preaches why invest, and talks about
doubling your money in 10 years, you know that it means compunding at a rate of
7.2% only. And that you have better options. On the other hand if he is promising
the moon, you know how to bring him down to earth with some quick incisive
queries.

Other Why Invest considerations

There are a few other considerations too.

Post-tax returns
Many instruments are subject to tax, while some are not. I might be getting a nice
9% annual return on say my fixed deposit, but what is my effective post-tax return?
Probably no more than 6.5% compounded annually. You know that's a paltry return
vis-a-vis some other risk-free return instruments, right?
Real Returns - Inflation
And there is the bigger factor of inflation. Inflation, measured as an annual
percentage increase, is a sustained increase in the general level of prices for goods
and services. As inflation rises, every rupee you own buys a smaller percentage of a
good or service. None of us could have missed (even if someone else buys our
groceries) the high inflation figures cited by the press in 2008 - so what happens to
my real rate of return? Post-tax return minus inflation? While 2008 saw inflation
figures topping 11%, the long term average rate of inflation is ~5% in India.
With a 6.5% post-tax return and a 5% inflation figure to absorb, my real rate of
return was zilch. I didn't need more pointers on why invest. Do you?

Different Investment Options

Now that you are better informed on the why invest proposition and the horrifying
real-rate of return, you sure want to understand more about the common investment
options available to us in India, the pros and cons, taxability, risk and typical return
levels associated with each instrument.
Certificates of Deposits
These are short-to-medium-term interest bearing, debt instruments offered by
banks. And are low-risk, low-return instruments. There is usually an early withdrawal
penalty. Fixed deposits, recurring deposits etc. are some of these.
Average rate of return is usually between 5-9%, depending on duration/instrument.
Returns are taxable.
Bonds
These are fixed income (debt) instruments issued for a period of more than one year
with the purpose of raising capital. The central or state government, corporations
and similar institutions sell bonds. A bond is generally a promise to repay the
principal along with fixed rate of interest on a specified maturity date.
The average rate of return on bonds and securities in India has been around 10-12%
p.a. Returns are taxable.
Public Provident Fund (PPF)
One of the best instruments available. Must have in your investment portfolio.
Scheme can be opened with SBI, leading Pvt. Banks, and Post offices. This is a long
term investment vehicle with a term 15 years. Max deposit in a year Rs. 70,000 with

the current rate of return fixed at 8%. It's a good idea to first max this Rs. 70,000
limit every year before putting surplus money into other investments.
Why? For one, because of the longer term you can unleash the miracle power of
compunding to good effect here. Besides its a tax saving instrument, completely
safe, risk-free government guaranteed instrument. Returns too are currently, tax
free.
Post Office MIS (POMIS)
This is another popular scheme among those who need some regular monthly
income, say e.g. Senior Citizens. You may not need the regular monthly income, but
hey you could put that regular stream of cash to other investment avenues, such as
a reputed mutual fund SIP, compounding at a higher rate, ofcourse!
Again a risk-free instrument you can invest with at Post Offices. Maturity period is of
6 years, with current rate of interest fixed at 8% compounding. Automatic credit
facility of monthly interest to a linked savings account at the post office. There is a
bonus 5% payable on maturity, so effective compounding return goes over 10%.
Returns are taxable.
Stocks
Investment in shares of companies, is investing in Stocks. Stocks can be bought/sold
from the exchanges (secondary market) or via IPOs Initial Public Offerings
(primary market).
However unlike Bonds or Certificate of Deposits, investing in stocks isn't risk free.
The market returns over the long term is dependent on the company's business
performance - after all buying a share is a part ownership in the company! If you are
going to trust your investment with a company for the longer term, you need to be
reasonably sure the company will stay in business for next 10-15 years, and
profitably! Investing in shares is not for everyone, requires hard work, a lot of
discipline and patience to make a success of it. Else all the analysts would be sitting
at home and rolling in the moolah, right!
Having said that, history shows us that investment in quality stocks have proven to
be the ideal long term investment. On an average an investment in stocks in India
has provided returns of 15-25% p.a. over the medium to long term. Dividend Income
and Long Term Capital gains (>1 year) in India are currently, tax free.
Mutual Funds
These are open and close ended funds operated by an investment company which
raises money from the public and invests in a group of assets, based on a published
set of objectives.
Investing in Mutual Funds provide benefits of diversification (investments spread
over a larger number of stocks and thus lesser risk)and professional money
management -they have the team of researchers and analysts to pick the best stocks
for you.

The rate of return again is market-performance related; generally substantially more

than what is earned in fixed deposits. Each mutual fund has a rate of return
dependent on how well its stock-picks have performed in the market.
Good Mutual funds in India have given a return of 1520% p.a. over the long term.
Dividend Income and Long Term Capital gains (>1 year) in India are currently, tax
free.
Others
There are also other savings and investment vehicles such as gold, real estate,
commodities, art and crafts, antiques, foreign currency etc., which too can be
considered.

Wealth Creation studies in India

Finally as I dug in more on the why invest case, I was lucky to come across the
extensive
Wealth Creation studies conducted and documented by Motilal Oswal on the most
consistent wealth creators in India.
That was an eye opener for me as I learnt how some of the best and trusted names
in India have delivered more than 30% compounded returns annually (with all
dividends re-invested), over the last 15 years and more. Names like HDFC, Infosys,
ITC figure here - but more on that, later.
Using the thumb rule, I knew a 30% compounding rate means doubling the money in
2.4 years. Amazing. I was even more astounded when I used the excel sheet to work
out that with 30% compounding, an investment of Rs. 20,000 in ITC 15 years back
and left untouched, would have grown to Rs. 1.02 million, or grown over 51 times!
Why Invest I asked no more, I became a convert.
As I digested this better, I resolved to gift my wife 100 ITC shares, for her next
birthday. To her credit, she didn't quiz me on why invest! But you are, I know, I know
...there are no gurantees, but what the heck, that smokers will keep smoking is a
good enough bet, or what?
Well that's the run-down on some important basic why invest realisations that
convinced me why I should invest and made me a committed long-term investor.
Hope, it is equally convincing for you too.

How to invest: the basic principles

Now that you have figured out why investing is a smart thing to do,
let's move on to how to invest.
For a beginner investor its tough not to get overwhelmed market publications and websites are full of 5-star rated Mutual Funds, ULIPs that
promise the best of insurance and investment (but actually isn't), the lure of

momentum stocks that everyone at office seems to be making a quick buck on - hell,
just how and where does one start?
Relax. This 2 part series, on how to invest, will make life simpler.
First you will need to understand the relationship between risk and return, and the
associated trade-offs between the two. Next you will learn established ways of
mitigating such risks.
Equally important is to understand how your individual circumstances affect your
investment decisions. Your tolerance for risk (can you stomach a 10% temporary
loss), your return requirements (are you investing towards buying a house, or you
need some regular monthly income), your investment horizon (the time you can
remain invested), as also your tax status will impact decisions on what kinds of
investments to go for, and what to avoid.
The 2nd part of this series - how to invest: Your individual investment profile, will
address that.
So much for an overall picture on the how to invest decision making process. Let's
get started on the details.

First things first

Before we get going on return and risk principles and how to invest, we will first need
to talk a little bit on how to structure your financial life to make it possible to invest.
When you start investing you must do so with a clean slate. There's no point in
trying to save while you have high-interest credit card or personal loan debts
accumulating by the day. Sure, some kind of debts can be low-interest or useful for
tax-saving purposes such as your housing-loan. But you will be well-advised to get
ready to close off your high interest debts, before you start thinking on how to
invest.
Next get into the habit of forced saving. You pay bills every month - electricity, to
mobile to cable bills, right. Just add yourself at the top of the list. Every month as
you get your salary credited to you account, set aside a sum to save or invest. Start
with a minimum of 20%. The more you save, the more wealth you can create. Even
a few rupees saved now will do more than lots of rupees saved later!

Understanding Return and Risk

At the core, understanding how to invest is all about returns and risk. Return is
measured by how much one's money has grown over the investment period. Returns
are not known in advance. Instead, you can only make an educated guess as to what
kind of return to expect.
Expecting a return of 25% just because your stock-investing friend say's that's what
you will make may be unreasonable. Most expectations are based on what's

happened in the past. Unfortunately history doesnt always repeat itself! We have all
seen the highs of 2007, followed by the lows in 2008, haven't we?
However we can draw reasonable conclusions about future returns by looking at
longer-term data - 5yr and 10yr records - ofcourse with the express understanding
that these returns are not guaranteed.
Even if your return expectations are reasonable, there is the possibility that your
actual returns turn out different than expected. You run the risk of losing some or all
of your original investment.
Why is that? Because of an uncertain future ( e.g. global economic environment),
uncertainity over the quality and stability of investment, and some other
uncertainities. In general, greater the uncertainity, greater the risk. Some common
sources of uncertainity or risks that we must absorb, while we learn how to invest,
are:
Business and Industry Risk
There might be a industry-wide slowdown, or even a global economic recession as
we are experiencing now. That presents an uncertain future for any business, isn't it.
Or the business might see its earnings dropping significantly say, due to
management ineptitude/wrong decisions. The lower earnings (due to any of the
above) may cause the companys stock to fall.
Inflation Risk
The money you earn today is always worth more than the same amount of money at
a future date. This is because goods and services usually cost more in the future,
due to inflation. So its important that your investment return beats the inflation rate.
If it merely keeps pace with inflation then your investment return is not worth much.
We have seen inflation soaring upto 11% in 2008, now in 2009 its at 1 or 2% levels.
Perhaps an average inflation rate over next 10 years may work out at 5-6%. Who
knows, there's enough uncertainity here too.
Market Risk
Market Risk is about the uncertainity faced in the stock market. Several macro and
micro economic details singularly or plurally can spook the market. We have seen
how the massive mandate in elections 2009 has re-invigorated the market. On the
other hand, A fragmented hung parliament may have caused the market to
nosedive? Even for a well-managed business growing profitably, its stock may drop in
value simply because the overall stock market has fallen.
Liquidity Risk
Sometimes you are not able to get out of your investment conveniently, and at a
reasonable price. For example in 2008, you may have found it tough to sell your
house at a price you wanted. In 2007 however you could have gone laughing to the
bank. The market may simply be inactive or it may be just volatile - and that means
you cant sell your investment or get the price you want, if you needed to sell
immediately.
Now here comes an important takeway in learning how to invest - understanding the
risks associated with different asset classes.

The degree of risk varies widely between asset classes and even among investment
options in a asset class. We all appreciate that a govt-backedbond like a NSC
or PPF scheme is safer than that offered by a reputed corporate. Next consider
inflation risk - stocks face far lesser inflation risk than bonds. While bonds have
managed to just keep pace with inflation, stocks have historically outpaced inflation,
by some 10% annually on an average in India. However short-term bonds and
money market investments face very little liquidity risk, while stocks face relatively
greater liquidity risk.

The risk return trade-off

The next important takeaway in learning how to invest, is understanding risk/return
analysis or trade-offs. Every investor would want the highest possible return for the
level of risk (uncertainity) that he is willing to accept. In a competitive marketplace,
this results in a trade-off. Low-risk investments naturally are associated with low
potential returns and high-risk investments with high potential returns.
If we look at long term returns, stocks in India have historically produced returns
that average 15% annually, while bonds have averaged 6-9% annually. This reflects
the risk/return trade-off.
Its important to remember that this is on an average for the asset class. Specific
investment options may produce far higher or lower returns. For example an
investment in ITC for the last 15 years has provided returns in excess of 30%
annually. It's useful to remember that the risk is in the uncertainity. If you can
evaluate a stock investment and weigh the potential returns with the uncertainities
(or, relative lack of uncertainity) vis-a-vis another stock investment, you stand to
gain tremendously from these trade-offs too!
There's another useful service these risk/return trade-offs serve. They flag off highly
risky investments. Any scheme advertising high potential returns usually flags high
risk, even though the risks may not be apparent at first glance. For example, quite
often we see Corporate Bonds offering far higher yields than usual (usually, from
unknown companies), don't we - now that you know how to invest basics and the
risk/return trade-offs, I am sure you will treat these with caution and a healthy dose
of skepticism!

Diversification: Mitigating Risks

Diversification is a strategy that can be neatly summed up by the timeless adage
"Don't put all your eggs in one basket." We have learnt how to invest, is all about
returns and risk principles. You will now probably look to invest in a stock only after
analysing that you will be compensated well (for the risk you are taking by investing
in the stock), from the stock's returns.
Now consider the scenario that you are invested in a single stock ABC Ltd. What
happens if ABC Ltd. performs badly. You will not be compensated for the risk you
have taken with the stock. Now consider the other scenario when you are invested in
a portfolio of 10 stocks - ABC Ltd. and 9 other unrelated stocks. What happens again
if ABC Ltd. performs badly? Your total returns are not hurt as badly, right. You have

mitigated the business risk substantially by diversifying your investment among 10

different stocks!
The return of ABC Ltd. remains the same, please note. Also note that, each stock's
return is affected by different factors (say the stocks belonged to different sectors
-telecom, Banking, Steel,etc.) and they face different risks. So its important to invest
across different categories or stocks - to diversify and reduce risks substantially.
We have seen before that different asset categories - stocks, fixed-income and
money market investments -face varying degree of risks w.r.t. liquidity, inflation and
market risks. So it makes sense that you should diversify across these major
investment categories. Diversification within an asset category such as stocks (across
sectors and large-cap, mid-cap, blue-chip stocks) and even fixed-income products
(long term bonds, money market funds) will further reduce market and inflation
risks. And we have already seen business risk can be mitigated by diversifying across
a portfolio of unrelated stocks.
Now don't go overboard and over-diversify (say across 100 stocks). You run the
over-diversification risk then! There are bound to be pockets of similarity, the
incremental risk mitigation will be minimal. And you lose the benefits of stock
concentration (as opposed to diversification) - but that's another discussion and let's
leave it for another article.
As a senior investor once put to me: Invert the logic. If you do not diversify, you are
putting all your eggs in one basket, and are taking on too much of a risk; it's likely
you will not get compensated for it, by your returns.

Time Diversification
There is another important how to invest mechanism through which we can mitigate
risks substantially - remain invested for a longer time and across different market
cycles. Let's say you invested in 2006 and 2007 in the Indian stock market. If you
had to withdraw money anytime in 2008, you would have incurred substantial losses.
However if you remained invested through 2008 till now you would have pared your
losses significantly and even made gains in some. This works even better across
longer time-periods of 5 years to 10 years.
This is diversification over time and it ensures that you avoid the worst periods of
economic cycles. Time diversification is especially useful for highly volatile
investment categories such as stocks, where prices can fluctuate over the short
term. Staying invested over longer term smoothes these fluctuations.
Which brings us to another important how to invest takeway. If you cannot remain
invested in (volatile) stock investments for relatively long time periods, you should
avoid such investments. Obviously time diversification is less important for relatively
stable investments such as bonds, Money market investments and fixed deposits.
Another senior investor time diversification tip: It is always better to invest or
withdraw large sums of money gradually over time, instead of bulk investment or
withdrawl. Use time diversification to average out costs/gains and reduce risks.

How to invest: is the foundation strong?

Let's try and ensure that you truly absorb the how to invest principles of return and
risk. Your investing success depends on how strong this foundation is.
1. Returns are not known in advance. So, you must make your investment decision
using return expectations that are reasonable and mesh with reality
2. Your actual return may not meet your expectations. Be aware of that possibility
while making all investments
3. Risk comes from the uncertainty surrounding the actual outcome of your
investment; greater the uncertainty, greater the risk
4. Business or industry risk, inflation risk, liquidity risk, and market risk - these are
the major sources of risk. All investments face each of these risks, but to varying
degrees
5. There is a trade-off between risk and potential return: higher the potential
returns, greater the risk; lower the potential returns, lower the risks. Be wary of
claims of high returns, there may be hidden risks
6. These risks can be reduced significantly through diversification. Always diversify
across asset categories (stocks, bonds,money market instruments), within asset
categories, and across individual securities
7. Diversification is also important across market environments the longer your
holding period, the better. Do not invest in volatile investments like stocks if you
cannot remain invested for atleast three to five years

How to Invest: Your Investment Profile

Now that you have an understanding of the how to invest: basic investing principles,
its time to determine your investment style, or investmentment profile. The
investment profile plays a crucial role in devising an investment strategy that can
help you meet your investment goals without exceeding your tolerance for risk.
Your investing decisions are heavily influenced by your financial circumstances and
your personality. No two individuals are alike in terms of their financial situation,
their requirements from an investing plan, or in their ability to handle or tolerate
risks. Infact each individual needs to tailor the investment strategy, or how to invest,
based on his/her investment profile. Thus crafting your own investment strategy
would require an understanding of how various aspects of your investment profile
affect your investment decisions.

Your Investment Profile

We have seen in the first article in this series - how to invest: basic investing
principles - how investment decisions are based on the risk/return trade-offsand the
ways you can mitigate the risks. You will now see how your investment profile affects

the risk/return trade-offs you may be willing to make and thus your ability to reduce
the risks. Your investment profile decides how to invest, depending on your financial
circumstances and personality traits, as below:
-

your
your
your
your

return requirements; whether you need current income or future growth

tolerance for risk
time horizon, that you can stay invested
tax exposure

Let's examine these aspects individually and their impact on investment decisions,
now in more detail.

Return Requirements
Our return requirements are often dictated by our financial situation.
Some will be looking at how to invest strategies to save for a future event such as
buying a house, a child's higher education or marriage. These circumstances would
require that the investments are aimed at generating higher returns for healthy
growth. Since the investment is meant for meeting a future financial goal, you will be
willing to stay invested for a longer term.
There will be some who want how to invest strategies that make annualised (or even
monthly) returns every year to augment their current income. These circumstances
dictate that the investments generate consistent annual payouts and that the capital
is protected. You will probably be looking to remain invested for the medium to long
term in such investments.
There will also be some who want some current income as well as future growth.
Let's see how the how to invest - common investment options stack up on these
risk/return trade-offs.

The how to invest risk/return trade-offs become apparent here isnt it. If principal
protection is important, you will have to settle for lower return instruments such
as bank FDs or Bonds. This is because the more certain the annual payments, the
less risky the investment, and therefore lower the potential return in the form of
growth.
On the other hand if you are looking for growth strategies, you will need to settle for
less certain principal protection and thus take on more risks by investing in highquality Stocks or reputed Mutual Funds.
Looking at the above table and the examples of how to invest options with return
characteristics may help you identify your return requirements. One may invest in
other investment options (Equity Diversified Mutual Funds, Balanced Mutual Funds,
or Gold for instance) with their attendant return characteristics. It is certainly
possible to meet your return requirments by diversifying across different how to
invest options in proper proportion, as long as you have identified them properly
along the lines, as exemplified above.

Risk Tolerance
Now we have come to a crucial aspect of your investment profile - your tolerance for
risk. How much risk are you willing and able to take on is extremely important for
defining your how to invest profile. We all know the consequences of taking on too
much risk.
We have seen/read about how many investors panicked during the recent stock
market crash of 2008 and withdrew their investments at inopportune times suffering
heavy losses. Had they stayed on for the whole of 2008 and continued till now (May
2009) they would have recovered most of these losses and possibly made some
gains.
Properly assessing your tolerance for risk is designed to prevent you from making
panic decisions and abandoning your how to invest plan mid-stream at the worst
possible times. So how do we measure risk tolerance?

Looking at the table it might be possible for you to identify what kind of risk you may
be willing and able to take on.

There is another way to approach this. We have seen the how to invest risk/return
trade-offs for some investment options earlier. So if you are drawn towards a
particular type of investment, you probably have a tolerance for risk approaching
that type of investment option. For example, if you are drawn only to FDs and bonds,
you risk tolerance is probably the conservative type.
If you drawn to high-quality dividend paying stocks, your risk tolerance probably is
moderate. On the other hand, if you are drawn to aggressive growth and momentum
stocks, or quality small and mid-cap stock portfolios, your risk tolerance is certainly
the aggressive type.
Its important to note that an investor with a "defensive" risk-tolerance can diversify
into riskier investments with a portion (say 20%) of the portfolio for better returns,
while still maintaining a low-risk profile.
What this boils down to then, is that your risk tolerance profile indicates where the
bulk of your portfolio investment could be. However proper diversification across
investment categories is essential to ensure a balance between capital safety and
growth.

Time Horizon
Now we come to another important how to invest aspect - Time Horizon - or the time
you can or will remain invested.
We have discussed in the first article in this series - how to invest: basic investing
principles - how Time Diversification, or remaining invested through various market
cycles, helps reduce risk. Time diversification is especially useful for highly volatile
investment categories such as stocks, where prices can fluctuate over the short
term. Staying invested over longer term smoothes these fluctuations.
Because you can reduce some of the risks through time diversification, a longer time
horizon allows you to take on greater risks, for a higher return potential. Naturally,
with a shorter time horizon you cannot effectively diversify across market or
economic cycles, and thus will need to settle for lower-risk, low-return investments.
So, how do we decide on our time horizon -short, long or medium?
Your time horizon is effectively dictated by when you need to take out the money. So
if you are investing for a future event such as buying a house, a child's education or
marriage - 10 years away - the time horizon, is simply 10 years - the time when you
need the cash.
However if you are investing for your retirement requirements - say, 20 years away when you will need money for periodic withdrawls - the time horizon is simple, till
retirement. But when the withdrawls begin, you may need to take out only part of
your investment portfolio. Here, the time horizon becomes a blend - short-term, as
well as medium to long-term.
And, how do we decide what is long term?
To make the most of time diversification, we have learnt we must remain invested
over one complete economic cycle, at the least. In general an economic cycle lasts

about 5 years. So a time horizon over 5 years can be considered long term. And
longer time horizons over 10 or 20 years works best as they would see through
multiple economic cycles. As we have mentioned before, Stocks are a good bet for
longer term horizons.
And short and medium term horizons? Well if you need the money within a year or
two, you are obviously restricted to the money market funds, short-term fixed
deposits and bonds. A medium term horizon of 2-5 years implies you could go in for
a mix of medium term bonds and/or high-quality dividend paying stocks. And you
will be well-advised to stay out of growth stocks.

Tax exposure
Fortunately in India, there are several tax incentives for investing in stocks and
mutual funds (MF). However fixed deposits and bonds are subject to tax, as usual.
Dividends from both stocks and mutual funds are tax-exempt in the hands of the
investor. The corporate distributing the dividends needs to incur the dividend tax, of
course.
And on Capital Gains, there is even better news. Currently, capital gains from any
stock/MF investment held for more than a year (12 months) from date of purchase,
is completely tax-exempt again. Capital gains from anything sold within a year is
subject to a short-term capital gains tax of 15%.
So the tax structure in India, incentivises you to invest in stocks and mutual funds
for the medium to long term and avoid the very short-term.

Life Cycle Investing

As you progress from early career to mid career and acquire more assets and
become more financially secure, your risk tolerance may undergo changes. Form a
purely growth and capital building requirement, your needs may change to capital
preservation. For some part (or a major part) of your investment portfolio you may
turn "defensive" and may want to preserve capital first?
Similarly as you grow older and approach retirement your time horizon may shift you may opt for a mix of short, medium and long term horizon instruments.

We have tried to show an instance of how your investing profile may undergo

changes as you go through different life cycle stages. Investment profiles are highly
individual. Your own individual profile may be very different from this at any stage.
Or, your investment profile may match one of the stages shown here - early
retirement for example - but you may be at a different life cycle stage yourself, such
as early career.
You need to achive a balance between the risks you are willing to take and the
returns you require to achive your financial goals. If you have understood the
different aspects of your individual profile well, then you are in a position to assess
that proper balance, and create an effective investment portfolio.
Well there, if you are done with your investment profile, get ready to move on to the
next step - Where to Invest: Asset allocation - maximising return and minimising
risk, by matching your investment profile with the characteristics of individual asset
categories.

Where to invest: Asset allocation decisions

Where to Invest decisions and how you allocate your portfolio among the 3 main
asset categories - stocks, bonds, or cash (money market funds and short-term FDs)
has a great impact on your investment portfolio's long-term performance. Infact my
seniors tell me, this impact over the long-term is far greater than any specific
investment decision (like investing in XYZ stock) you might ever make.
Where to Invest: Asset allocation is important because it has a major impact on
whether you will meet your financial goal. If you don't include enough risk in your
portfolio, your investments may not earn a large enough return to meet your goal.
For example, if you are saving for a long-term goal, such as buying your dream
house, most financial experts agree that you will likely need to include at least some
stock or stock mutual funds in your portfolio.
On the other hand, if you include too much risk in your portfolio, the money for your
goal may not be there when you need it. A portfolio heavily weighted in stock or
stock mutual funds, for instance, would be inappropriate for a short-term goal, such
as saving for the family's Europe trip, next summer.
Now look at this in another way. Let's say you have followed basic investing
principles well, and in particular are well-diversified within each asset category, you
would have eliminated most risks associated with any single investment. However,
you could still end up not meeting your financial goals if you got your where to
invest: asset allocation wrong.
For example, let's say you have a nice diversified portfolio of 20 stocks. Your
decision, several years ago, to invest in Wipro rather than Infosys may have caused
you to kick yourself once or twice, but this would have cost you far less than a
decision several years ago to invest only 20% of your total portfolio in the stock
market, and the rest in cash investments.
So, we are clear now how important it is to get your Where to Invest decisions, or
your asset allocation right. Great! But how do you go on to make the right where to
invest: asset allocation decisions for yourself? There are two components that can

help you in this decision making process.

1. Historical returns/risks associated with the 3 major asset categories, and
2. Your own Investment profile
Balancing these risks and potential returns based on your investment profile, will
lead us to the right where to invest decisions.

Historical Returns
We never know what the future will hold. But we do know the past. We sure can use
historical data from the past to serve as a guide for our where to invest decisions,
provided we remain aware of the limitations.
Fistly, the past may not be repeated, we should be fully aware of that! Second, it is
important to look over enough of the past to cover various economic and market
conditions. Yet avoid extending so far back that we view conditions that may no
longer be applicable due to structural changes in the economy.
I couldn't get data for the Indian stock market extending so far back, so I have used
S&P 500 index data from 1946-2004, as presented below. As I looked at this data
and tried to interpret, it's clear to me that similar where to invest conclusions will
hold for the Indian markets as well.
So what are these where to invest conclusions?
I thought it best to include the following data, analysis & interpretation based almost
entirely on an American Association of Individual Investors (AAII) journal article.
The where to invest stock data presented here covers the Standard & Poors 500
index, which consists of larger, established companies. The bond data is for
intermediate-term government bonds, with a maturity of about five years. Cash is
represented by Treasury bills, the most conservative segment of the cash investment
market. This where to invest data represents the core areas in which most investors
will concentrate, but there are more volatile segments of each category - small
stocks and longer-term bonds, for instance.
The where to invest data includes annual returns for the overall period, as well as
annual returns based on 1, 5, 10, and 20 year holding periods, to indicate how the
risk/return equation can change with time. (These holding period returns encompass
all the years using rolling holding periods. For instance, five-year periods include
1946 through 1950; 1947 through 1951, etc.). The data also indicates the
percentage of holding period returns that were losses, and the percentage of holding
period returns that were below the rate of inflation.

Using the where to invest historical data, you can start to get an idea concerning the
risks and potential returns of the three major asset categories.
Market risks

Both stocks and bonds face substantial market risk - a rise or fall in the value of the
investment due to market conditions. A good indication of market risk is to simply
examine the best and worst returns over one-year holding periods. Those returns
were the kinds of variations that may occur within that category.
Stock market risk is due to the volatility of the overall market, which can cause even
reputed stocks to drop in price. For one-year holding periods, stock returns were
extremely volatile (and therefore uncertain)- ranging from a high of 52.6% to a low
of 26.5%, a substantial loss. In addition, 24% of the one-year holding periods
returns have been losses.Stock market risk for stocks does decrease with longer
holding periods, as the longterm growth benefits kick in. Check out the 10 & 20 yr
holding periods.
Bonds also face substantial market risk due to fluctuating interest rates; this risk is
referred to as interest rate risk. Rising interest rates cause existing bonds to drop in
value, while falling interest rates cause existing bonds to rise in value; the effect is
greater the longer the maturity of the bond. Interest rate risk has caused
intermediate-term bond returns to range between 29.1% and 5.1% for one-year
holding periods, and suffer losses 12% of the time for one-year holding
periods. Interest rate risk decreases only slightly as the holding period increases.
Cash investments face no market risk because their return is solely based on their
current yield.
Inflation risk
All investments face inflation risk - the risk that inflation will erode the real value of
the investment. There are two good indications of inflation risk: an investments real
return (its return after inflation) and the percentage of holding period returns that
are below inflation.
Stocks face the least inflation risk. Over the entire period, they have produced an
annual real return of 7.5%. In contrast, bonds have outpaced inflation by only 1.8%
annually, and cash by only 0.5%. Individual holding period returns also indicate the
substantial inflation risk facing bond investments. For one-year holding periods, bond
returns were below inflation fully 44% of the time; for longer holding periods,
inflation risk was similar for bonds and cash; stocks suffered the least.

Please spend some time over the table above. It summarises quite well the where to
invest risk/return characteristics of the 3 major asset categories, and thus what you
can or should do, about them. I am re-emphasising these where to invest
characteristics for better effect!
1. To beat inflation risk over the long term, there is no alternative but stocks.
So if you are investing for a future event that's 10 or 20 years away (buying a house,
child's marriage/education, retirement) - you gotta be invested in stocks or stock
mutual funds. So you need to take higher risks with some part of your portfolio for
these kind of requirements. Else, inflation would have eaten away all your returns!
2. To reduce liquidity risk, some portion of one's portfolio has to be in Cash,
cash equivalents (money market funds, short-term, medium-term FDs). This would
mean if you need cash urgently, you might not need to sell out of stocks or stock
mutual funds at inopportune moments at a loss.
3. To reduce business risk, one's stock or stock mutual fund investment portfolio
needs to be well-diversified.
4. To reduce stock market risk one should invest in schemes like the Public Provident
Fundand other such government-backed investment schemes in India, like NSC and
KVP schemes.
But all these, are on an individual asset category basis. A more efficient approach is
to weigh the risks and return potential of your overall portfolio, not just the individual
parts. Diversifying among the asset categories reduces the individual category risks
and allows you to build a portfolio that matches your investment profile.

Your Investment Profile

As discussed at length before, your investment profile includes your tolerance for
risk, yourreturn requirments, your time horizon, and your tax exposure.

So let's see how can we go about using the data above to build a where to invest
portfolio - allocate your assets with the right balance - that can meet your return
requirements without exceeding your tolerance for risk.
Risk Tolerance
We can use the worst-case scenario - the maximum loss for all categories - as a
guide to how much of a loss you can stomach. In the examples below, I have used
the worst one-year holding period returns.
Return Requirments
We can use the average annual returns for the entire period, average annual growth
and the average income figures to help put a perspective on what you can expect on
your growth and annual income requirments, but keep in mind these are long-term
figures; variations year-to-year can be significant.
With the background set, we can now examine various possible asset category
combinations to see how they might fit your personal investment profile. We will use
the
risk and return characteristics of the individual categories to help you decide what to
emphasize. Then we will examine the risk and return characteristics of the total
portfolio.

Portfolio 1 is heavily invested in stocks, which indicates that this is for a long-term
investor with a primary need for long-term growth that outweighs the short-term
stock market risk considerations. The overall characteristics of the portfolio reflect
the investors profile: a high tolerance for risk (the downside risk is 21.2%); less
emphasis on annual income; and a higher requirement for growth return. This
portfolio tends to match an aggressive investor, or the characteristics of many
individuals in their early, or mid-career stages of theinvesting life cycle.
Portfolio 2 is suited for a more moderate risk taker, with a downside risk of 16.9%.
The trade-off is ofcourse lower growth.

Portfolio 3 stresses a higher annual income and lower downside risk. The trade-off
again, is considerably lower growth. This portfolio tends to match the characteristics
of a defensiveinvestor, say someone in early retirement.
And, there are some investors with a portfolio completely devoid of stocks - only
bonds and cash. These are the ultra conservative investors for whom capital
protection is a must. This kind of portfolio matches the characteristics of someone in
late retirement.

As is evident, you could use several combinations to match your specific individual
profile - your unique risk tolerance and return requirments. Each individual is unique
and one's asset allocation could potentially use any combination to achieve the
needed balance between return requirements and risk tolerance.
If you want to play around with other combinations, you can use the formulas as
mentioned above. Have fun!
You now probably have a rough idea of your overall where to invest: asset allocation
decisions. Equipped with this, you can now go on to make selections within each
asset category - while maintaining this broad allocation across asset categories.

Investing Basics practicals:

Investing Basics: Accumulating 50 lakhs in 10

years
I am 41. I have an investing basics query. Income is 6 lakhs per year. I pay LIC
premium of 1.2 lakhs per year. How should I invest to accumulate 50 lakhs in 10
years? I am interested in Mutual Funds, PPF, Bank FD etc.
- Palash Bhattacharya, Mumbai

50 lakhs accumulation in 10 years is a tough call, especially as you do not have

the benefit of starting young and therefore unable to take on more risks. In the

absence of details, I assume your risk tolerance may not be high, and you would
rather play safe, at this stage of your life.
Having said that, its doable in 15+ years, through sound & safe investment modes,
without taking much risks.
Here's what I suggest. Don't be taken aback by this. Its your money and it can be
made to work much faster & better. Paying LIC premium of 1.2 lakhs per year is a
sheer waste. Here's why and what you can do about it.
1. Surrender your current LIC policy and ask your LIC Agent to convert to a Term
Plan. For about 20K annual premium, you should be able to get an LIC Term
Assurance cover of Rs. 30 lakhs approx, at your age. Check this out from this LIC
Insurance Premium Calculator. (Select Term Assurance Plan - Amulya Jeevan). If
your LIC policy has already done 3 yrs, then you are eligible to surrender.
To educate yourself on investment basics - why a term plan is much much better and
why Insurance & investment should not be mixed - consider these two excellent
articles.
Investments? Insurance? Or both?
Insurance vs Mutual Funds
2. After deducting this 20K, you are left with Rs. 1 lakh annually that you can
gainfully invest in a mix of PPF & conservative 5-Star rated mutual funds. I suggest a
mix of 60:40 i.e. Rs. 60,000 in PPF (complete safety) and 40,000 in 5-star rated MFs
(reasonable safety, over the long term of 10-15 years)
3. PPF currently gives you a compounded rate of 8%. And most top-rated diversified
mutual funds have given 15-20% plus, if one stayed invested over the long term.
You could consider SBI Contra, HDFC Prudence, HDFC Taxsaver, Reliance Growth.
These are funds with fantastic track records (low to average risk with high to above
average returns). Check out latest updated ratings for the best performing mutual
funds at ValueResearchOnline Top Rated Funds.

4. Finally, this recommended asset allocation could deliver you 50+ lakhs in 15
years, or get you close enough, with your investments in the completely safe PPF
and relatively safe conservative instruments such as 5-Star rated MFs. The table
above shows you why and how, it should get accomplished.
Some Investing Basics Caveats
Life is never so linear! You will need to monitor performance of the selected funds
once in 6 months or so. PPF rates getting revised downwards is always on the cards.
And we haven't considered inflation diminishing your returnssay @6% on an
average, per year. So to stay on target, you might like to top up your annual
contributions by an additional 10K in PPF and 10K in the mutual funds of choice.
Good luck!

Growth Investing Basics: How to invest my

money for growth with security
Interested in Growth Investing basics. I want to invest my money for growth. Please
suggest me where can I invest my money (with security)? I am working in an MNC
in India, salary 15,000 per month.
-Vima DK

I am guessing you are someone in the initial years of your career. And am glad that
you are asking these questions now. There is nothing like starting early, in your
investing life and use the power of compounding to your advantage.
Next, you can invest in a mix of the following growth investing strategies, depending
on your return requirements and risk tolerance, as indicated below. Invest only those
funds that you do not need. Get in the habit of saving 30-35% of your salary
regularly. Create an emergency fund, roughly equal to 4-6 months of regular
monthly expenses. Once this is covered, you may have funds that you will not need
say for next 3-5 years for regular or emergency expenses. Use these funds to invest
wisely. You need to remain invested for the long term, since you want capital growth.
Conservative Risk Profile (you seem to be of this type; someone who wants his
principle to be secure and is looking for a decent growth over the long term)
1. PPF (Public Provident Fund) - account can be opened with any State Bank of India
branch, or at the Post Office. This currently gives you a compounded 8% return per
year, is currently tax free, and is the safest instrument available. Invest 50% of
funds you can spare in that.
2. A Balanced mutual fund like HDFC Prudence Fund - This Mutual Fund invests in
both equity (65%) and debt (35%) instruments. This is one of the safest funds with
a great track record of over 14 years, and has been giving a compounding return of
around 20-25% per year. This fund has one important virtue: it manages to lose less
than the category average in periods of downside. Couple this with its tendency to
top charts & you get a safe & sure fund in HDFC Prudence. Invest 30% of the funds
in HDPC Prudence. Check out HDFC Prudence fund performance at
ValueResearchOnline.
3. Equity Diversified MF - like SBI Magnum Contra, Reliance Growth. These are funds
having a very good long term record in delivering great returns with low to average
risk. They have figured among the top fund ratings for a very long time. Invest the
balance 20% in funds like these. Check out more on the
top rated funds at ValueResearchOnline.
Recommendations for other risk profiles
Moderate: (someone who can take a little more risk with some of his money)
PPF -40%; HDFC Prudence -30%; SBI Contra or Reliance Growth fund -30%
Aggressive: (someone who can take higher risks with some of his money)
PPF-20%; HDFC Prudence -30%; SBI Contra or Reliance Growth - 50%

Investing for kids: Which are the best plans

for a child's career?
Investing for kids. I wanted to invest money on some funds for my sons (10 months
old) career. Can you suggest me what are the plans suited for me? I am ready to

invest 1lakh rupees.

-Srinivas

Congratulations! not many parents start thinking so early about investing for their
kids. So you are on the right path. What you are looking to ensure probably is that
you have some bulk funds available every year from the time your son turns 16, till
the time he attains 23-24 years of age. To take care of his college and postgraduate
education.
Most insurance companies claim to cater to investing for kids requirments like yours
by way of Children's Plans (which are nothing but ULIP Plans) where these
companies pay a percentage of the sum assured+Bonus at identified intervals.
Parents feel secure also because of the Insurance cover component.
However these plans are not wise investments, because of the high premiums
associated. As much as 30% of the premiums go in various costs incl. the agents
commission and only 70% of your money gets invested in the Units linked to
Insurance Plans, or ULIPs. The huge comissions are not just for the first year but
continue for several years before they come down to levels comparable with that
charged by Mutual Funds - which seems paltry in comparison - a mere 2.5%. Now if
you understand the power of compounding, this itself is a huge reason for you to
forget about considering ULIPs.
The best way, in my opinion, to invest for such investing for kids requirements is to
invest your money for the long term in some of the best 5-star rated Mutual Funds.
You can spread the proposed 1 lakh between HDFC Prudence (40%) for safety, SBI
Magnum Contra (20%) for steady returns and Reliance Growth (40%) for high
growth. These are perhaps the best funds with excellent long term track records
having withstood both bear market lows and prospered from bull market highs.
Check them out, and the latest top-rated funds at ValueResearchOnline.
Your 1 lakh investment, if you leave it untouched for the next 15 years, can easily
grow compounded annually to a princely sum of Rs. 8 lakhs (15% compounding) to
over Rs. 15 lakhs (20% compounding).
So your money can be made to work much better by investing in these 5-star rated
relatively safe funds as mentioned above. Returns, which the ULIP plans can never
match because of higher costs. And none of the ULIP Plans yet have any track record
to match the best of the 5-star rated Mutual Funds. Consider this article to
compare Mutual Funds & ULIPs as investment vehicles.
The other thing to consider is will this be enough for your child's education 15 years
from now. If a professional college education costs Rs.5 lakhs today, with 7%
inflation rate, in 15 years that itself would cost almost 14 lakhs! All the more reason
that you need your money to work harder for your child in the best possible
schemes. My suggestion would be to invest another 1 lakh for your child as soon as
you can, to reap similar benefits.

Now, If you are thinking of an insurance cover additionally, go for a Term Assurance
Plan additionally at a fraction of the cost of the premiums in a child plan. Consider
also this excellent article on why Investment & Insuranceshould never be mixed.
Good Luck!

Investing in Stocks: How do I start?

I'm considering giving investing in stocks a shot but need to learn the ropes. Can
you give some tips and advice on how to start? Any advice is welcome.
- Nandita, Indore

I am glad you are trying to learn the ropes before jumping in. Congratulations! You
already have a head start over most newbie investors.
Like in everything else in life, there's nothing like starting early. Consider this popular
article about the benefits of starting early and why you should invest, starting Today!
Some other articles that will be really helpful to get you started, can be found in
our Investing Basics series.
Next, I would recommend you to start equipping yourself with a solid grounding for
investing in stocks. 3 must read books. If you haven't heard of these, buy them
NOW, today. They will be your invaluable guides to safe & prosperous investing and
future wealth creation.
1. Intelligent Investor - Benjamin Graham
Considered the bible for all investors, this will foremost teach you the basics and
most importantly, how not to lose money. That's the first lesson you need, believe
me.
2. One up on Wall Street - Peter Lynch
This is another classic. Tells you how to spot winners from what you see around you successful products, companies, where are the longest queues? Practically shows you
how you do not need to be a hot shot financial analyst to be able to spot good
opportunities for investing in stocks.
3. Common stocks and Uncommon Profits - Phil Fisher
As you dabble for 1 or 2 years, make some money and also make some (hopefully)
small mistakes, you will start itching to catch the multi-baggers, the ones that go up
4x-10x in a few years! This book tries to show you how to sift out probable winners.
It's hard to put in practice by everyone, but some sound principles to apply when
looking for the best businesses.
Start listening in on the financial channels, start reading a business daily, daily.
Check out some excellent investing basics articles at great sites like
About.Com

Investopedia.Com
Kiplinger.Com
And ask questions to the more experienced investors at popular forums, hang in and
lurk at some of the great investing forums for pearls of wisdom. When you have a
query that you just have to have answered post a quick one. You will be surprised,
there are enough people willing to help you with your queries - even if it's a basic
one. You may like to consider The Equity Desk - a solid stock investing forum,
focused on India stocks.
Good Luck. And get cracking, TODAY!

Investing Basics: 7 steps for newbies to

invest in a SIP Plan
Investing Basics first steps. What are the exact procedures one totally ignorant
person should follow to invest in SIP?
- Ribus

You could follow the investing basics first steps, as outlined below:
1. Get yourself a PAN (Permanent Account Number), if you don't have one. PAN
number is mandatory for any financial/investment transaction in India, including
Mutual Fund investments. Usually one receives the PAN card within 15-21 days of
application. See the details for applying for a PAN card here.
2. Open a trading account with ICICIDirect or an Investment account with Citibank.
If you already have a bank account with either bank, opening the investment or
trading account is fairly simple. You will need to fill up some additional forms, and
you can be ready to roll withing 7-10 days.
3. Next, you need to do some research, about the best funds to invest
in.ValueResearchOnline is a good, independent research site dedicated to the mutual
fund industry. Check out the top-rated funds here, funds that have a track record of
atleast 5 years or more of solid performance. Do some more research, read what the
analysts have to say about the fund, fund manager, and its track record, and things
like risk/return.
Its generally not advisable to start SIP in funds that have performed best in the last
1 yr, only. Make sure to check what their record is over the last 3 yrs, 5yrs and since
inception. Doing this, and reading the Fund Analysis will lead you to the funds with
the best track records. This is where you should be investing your SIP money in.
Why take chances with unproven funds when there are a host of great funds with
super track records like SBI Magnum Contra, HDFC Prudence, etc. It is advisable to
invest in only the 5-Star or 4-Star rated funds.

4. How do you pick which funds to invest in? Investment is all about
risk and return. So you must diversify your investments among funds of different
styles. You can do that effectively once you have identified your individual risk
tolerance.
5. Time to draw up your individual SIP plan now. Once you know your risk tolerance
profile, you may be able to decide what type of funds you will be comfortable with.
For example, a conservative investor may like to invest bulk of the portfolio in
reputed Balanced Funds, whereas a moderate investor may like to spread his
investments between reputed Balanced Funds and Equity-Diversified funds. An
aggressive investor perhaps would like to put bulk of his investment in reputed
Equity-Diversified funds.
Also, avoid investing in too many funds. You may end up in funds with similar styles
and your returns will end up getting fragmented. Pick 4-5 funds at most and split
your money equally to start with. If you have Rs. 2000 to put in SIPs every month,
go for 2 funds that you like. If there is Rs. 5000 that you can spare, go for 4-5 funds.
More than that, again split equally among the 4-5 funds.
The above allocation is a simple one that you can follow. However if you want to
learn to do this the right way, you may like to read up more on
Where to invest: asset allocation principles. Actually, while you are there it may be a
good idea to first educate yourself with the investing basics articles How to Invest:
basic principles and How to invest: your investment profile, before going on to asset
allocation.
6. Once funds are identified, you then need to use the SIP purchase option in
ICICIDirect or RIS (Regular Investment Scheme) in Citibank. Choose the Fund
Company, select the appropriate fund and click on SIP/RIS, enter monthly amount,
and you are done!
7. Make sure to monitor your investments every 3-6 months. Check what returns the
fund has given you. Periodically revisit Valueresearchonline to see what they have to
say about your fund and its rating. If a fund consistently underperforms for 6 months
to a year, its rating may have been downgraded. Follow the above research process
to rebalance your portfolio, as necessary.

Investing Basics: Getting a PAN card

Investing Basics pre-requisites. Want to start investing in MFs. I was told I need a
PAN Card first. What is the procedure of getting PAN card from Income Tax dept.?
-Anusha R

You can apply for a Permanenet Account Number (PAN) card by filling up Form 49A:
Application for Allotment of Permanent Account Number (PAN application form). You
can also apply for PAN online through NSDL-TIN website. (National Securities
Depository limited -Tax Information Network)

Following are the procedures:

1. You can submit your duly filled and signed PAN application form alongwith the
supporting documents to any of the TIN-FCs or PAN Centres managed by NSDL. Find
out a centre near you from the TIN facilitation centers list.
2. You have to submit the following documents with the application form:
A] Proof of identity (POI)
B] Proof of address (POA)
and Individual applicants should affix a recent colour photograph (size 3.5 cm x 2.5
cm) in the space provided on the form.
3. You have to pay Rs.60 (plus service tax, as applicable) to TIN-FCs as processing
fees while submitting Form 49A.
See complete details on procedure for obtaining PAN card at the NSDL-TIN website.

Systematic Investment Plan (SIP):

Advantages & Good time to start a SIP?
What are the advantages of a systematic investment plan (SIP)? Is it a good time for
starting a SIP?
-Subhash Raj, Bhopal

A Systematic Investment Plan or SIP allows us to take advantage of thegrowth

potential of stock mutual funds, even if we do not have a large sum of money to
invest. Infact most mutual funds require a minimum of just Rs.500 per month to get
started.
Most of us are used to paying for a car or home purchase with monthly EMIs
(Equated Monthly Investments). Think of a SIP investment along those lines - only,
you are paying yourself a monthly sum, and investing in the stock market, to build
long-term wealth!

Advantages of a Systematic Investment Plan

You can budget for a SIP investment every month if you are say, looking to invest
only a small amount on a regular basis.
Even if you have a lump sum to invest, you may not want to invest all of it at one go.
And a systematic investment plan where you spread out the investment in the stock
market over several months can provide several advantages. It will help you
mitigate market risk and volatility. It helps you test out the waters and build your
portfolio one step at a time.

Please look carefully at the table above. It becomes clear that most importantly, a
systematic investment plan provides the benefits of what is called "rupee cost
averaging". In other words, if the stock market goes down, your next payment will
buy more units. And If the market goes up, your investment will increase in value.

So, What's a good time to start a SIP?

We have seen record highs in 2007 and record lows too, in 2008. Now in June 2009,
we are seeing a market that showed a remarkable recovery from the lows of as
recent as March 2009. Will it sustain or go down again? No one knows. It is simply
not possible to time the market accurately. If it was that easy all the fund managers
would be sitting at home with their fortunes, isn't it.
So, how do you decide when is a good time to start investing in a SIP? The answer is
simple. Anytime is good. If you can maintain the discipline of making regular
monthly investments.
Consider the graphic below carefully. We are looking at an example where a investor
started at possibly the worst time in the recent history of our markets - February
2000 - at the peak of the dot-com bull market. He started investing Rs. 1000 every
month in a composite fund (consisting of the 10 largest open-ended equity funds
with 10 yr plus track records) and continued investing till Sep 2008.

With the hindsight knowledge of the huge fall from the dot-com/technology driven
high of year 2000, its a good bet that nobody would have advised the investor to
start a SIP at that time. But look at the annualised returns of 29%compounding even
after starting just before the market crashed! Now that's as good a record, as any.
So we can see that it really did not matter when he started. Neither did it matter as
much that again in Sep 2008 the market was touching record lows. 2001 to 2003
was a sticky bear market. But that meant that the investor was actually buying units
of the mutual fund at very low prices. His patience and discipline got rewarded when
the market finally took off in 2003.
And again from Sep 2008 to Mar 2009, if he continued investing he would have
purchased those units at low prices, and reaping the benefits now.
There is a lession from this history. That if you have a fairly long investingtimehorizon - upwards of 5 years, at the least - a systematic investment plan can reap
you huge rewards.
Now that you are convinced of the utility of a SIP, why SIP is a smart move, and why
you need to be regular with your instalments, you are probably ready to invest.

Which funds to invest in through SIP?

If you have reached this far, I am sure you are already asking but hullo, how do I
decide where to invest in, which funds have the potential to give me the best
returns, which are the top rated funds, etc.?
Not to worry, check out the top rated funds at ValueResearchOnline a site dedicated
to mutual fund investing that will give you all the answers you need, and more.

Good luck! Get started today!

Stock Research
This section is dedicated to stock research and analysis for documenting
- the most promising long-term opportunities in the Indian stock market
- the most consistent long-term performers in the Indian stock market

Independent, in-depth, Free Stock Research

Opto Circuits Stock Research & Analysis
Opto Circuits Stock Valuation
Opto Circuits Management Call | 24 Sep 2009
Opto Circuits Management Call | 25 Mar 2009
Glenmark Pharmaceuticals Stock Analysis
Glenmark Pharmaceuticals Stock Valuation
Want to check out the step-by-step Stock Analysis and Stock Valuation process that
I follow? Stock Analysis framework Stock Valuation framework

Stock Research Snaphots

Before we take up a stock for in-depth research and analysis, it usually goes through
a process of elaborate screening. The screening process is executed through simple,
but very effective, 5yr performance and valuation snapshots or, what we call stock
quick-check analysis.
PSU Bank Stocks
State Bank of India
Punjab National Bank
Private Bank Stocks
Axis Bank HDFC Bank

Bank of India

ICICI Bank

Andhra Bank

Bank of Baroda

Yes Bank

Quality Small Cap Stocks Research

Quality small cap stocks. For some time now I have wanted to research this space
extensively. This is the first time that we are coming close to be able to do that, on a
regular basis, from now on!
So how do we come across a shortlist of such stock ideas? Life has become pretty
simple now thanks to an advanced Stock Screener that is getting into Alpha trials
soon! Watch this space for further announcements!

Esab India

Manjushree Technopack

Check out more ideas in our Quality Small Company low PEG Stock Screener

Many newbie investors eventually come to the question -Which are the best
companies to invest in, in India? When I started out my quest was more like where
should I invest the Rs. 10,000 (I could spare), this month -naturally my stock
research efforts were frenetic and going nowhere. The market crash in May 2006
suddenly braught home to me hey, my investments in 3 stocks -Infosys, ITC, and
HDFC is what is propping up my portfolio (some 15 odd stocks) - comfortably
cushioning the combined downsides of the other 12. And I started wondering!
There must be a few more companies like these 3 that are equally great, consistent
businesses? Atleast 7-10 such companies? How do I find these? My quest changed
form where do I invest the Rs. 10,000 sparable this monthto when is the best time
to invest in an Infosys? And finding more of these businesses with great consistent
track records and a certain predictability!
Newbie investors will be surprised! There exists a wealth:) of stock research on
consistent wealth creators in the Indian stock market. Try the Motilal Oswal Wealth
Creation studies - an excellent compilation, and a must read.

Wealth Creation Stock Research

Motilal Oswal Wealth Creation Studies
Stern Stewart Economic Value Added (EVA) Analysis India 2008
The Tried and the True: Finding Indian Corporate El Dorados
Common Characteristics of Corporate El Dorados