Your Guide To Understanding Equities

September 2016
Preface
Have you heard of great Warren Buffett or Sir John Templeton? Of course you have, right? It
would be rare to find an investor who hasnt heard about these great investment gurus.
Success stories of their profitable investments are shared across the globe. They have a
huge fan following, having made a fortune investing in stocks.
As you may know, globally, equity is one of the prominent asset classes. However, in India
equity exposure of retail investors remains miniscule despite of Indias huge population
base and comparatively well developed markets. You may be surprised to know that less
than 2% of domestic household savings are channelised in equity shares and debentures.
Thats because Indians traditionally love physical assets. Accordingly, gold and real estate
account for about 2/3rd of household savings in India. There may be several reasons for such
lower retail participation in equities, which we will talk about later in this guide.
But can you criticize equity as an asset class?

Globally, equity is a well-accepted asset class that is sought after by investors for wealth
creation. This is because, over the long-term equity as an asset class has proven its ability to
beat the inflation bug and compound your wealth.
In this guide PersonalFN has endeavoured to shed light on most of the aspects of equity
investing; right from fundamental factors affecting movement of equity to smart ways of
investing in equity as an asset class.
We hope you find this guide helpful in your journey of wealth creation
and wish you a VERY HAPPY INVESTING!!
Team Personal FN
An Investor Education and Awareness Initiative 2

by Quantum Mutual Fund in Association with PersonalFN
Disclaimer
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Index
Section I: Introduction to Equity 05
Why invest in Equity? 07
How equity can generate high inflation adjusted returns? 08
Things to remember before you invest in equity shares 09
Section II: Capital Markets in India 12
S&P BSE Sensex and CNX Nifty - The barometer of the Indian economy 14
Importance of historical valuation 15
Section III: Fundamentals of Equity Investing 16
Why stock markets move up or down? 16
Some economic concepts 19
Where you can possibly go wrong? 22
Section IV: Evaluation Methods 25
What are ratios? 27
Market Valuations 31
Section V: Ways to Invest in Equities 34
Equity Mutual Funds 37
How to select a mutual fund? 40
Investing in Mutual Funds through SIPs 46
Section VI: Your Action that Counts 49

I: Introduction to Equity
Many people aspire to start their own business but
many a times they cannot, for variety of reasons.
Building a business or creating a brand is not an
easy thing to do. It takes a lot of effort and skills to
commence a business and run it successfully. As you
may know, finance is the lifeblood of any business. No business can survive for even a single
day, in absence of finance. So, having adequate capital is critical for starting your own
establishment.
Those who do not have adequate monetary resources, usually borrow from banks or other
sources, paying them interest in return until the outstanding loan amount is repaid in full.
And often relying on this source of finance is not viable in the long run. In this process,
banks or other lenders dont participate in the business of the borrower, be it an individual
or be it an entity, as the borrower retains all rights to take decisions pertaining to business
activities. Hence as a long term source of finance, companies often rely on equity, by
offering a share in ownership of company to its investors.
A company in need of long-term source of finance makes an offer for subscription, Investors
who subscribe to the issue and to whom shares are allotted become the shareholders of the
company or to simply put, the part owners of the company (to the extent of the shares held
by them)and thus they get to participate in the business of the company through the
voting right conferred on them. However the management of the company is left to
professional hands or to the founders. Shareholders are also entitled to a share in the
profits earned by the company in the form of dividends as they evince interest in the
companys prospects for the long term.
It is noteworthy that while raising money through issue of equity shares, it does not carry
with it a prefixed rate of interest (as in case of borrowed funds). Equity as a source of
finance is relatively expensive vis--vis debt. This is because the company enjoys tax benefit

as against the interest defrayed to its lenders, while dividends are appropriation of profits
which are not tax deductible. Likewise if the company goes bankrupt and liquidation
proceedings are initiated, debt holders or lenders have a first claim on the assets of the
company, while equity shareholders take the risk of losing their money. Thus on account of
high risk involved in equity, they needed to be rewarded well through high returns.
Now having understood equity, it is vital to move a step forward and learn about equity
market at this juncture.
Equity market: Investopedia.com defines equity market as,

the market in which shares are issued and traded, either
through exchanges or over-the-counter markets. Also known
as the stock market, it is one of the most vital areas of a
market economy because it gives companies access to
capital and investors a slice of ownership in a company with the potential to realize gains
based on its future performance.
Equity markets can be further classified as primary markets and secondary markets.
A primary market is a place where companies get access to capital by issuing fresh equity
shares. You may have heard about Initial Public Offers (IPOs). It is a process by which a
privately owned company goes public by offering equity shares against capital
contributions.
Primary Market
(Also called IPO Market)
Companies Raise Capital Investors Get Shares
No transaction among investors
On the other hand, a secondary market is a place where shares which have already been
issued by companies are traded (bought and sold) among investors. Here, there is no
involvement of the share issuing company.

Secondary Market
(Routinely called as stock
Buyers Bid for Shares market) Sellers Offer their Shares
No involvement of the company
Before you read further allow us to quickly introduce a new term that so far we havent
discuss.
Market Capitalisation: The market value of all outstanding shares of a

company is called market capitalisation. So to simply put, if you were to
completely buyout a company today, assuming that everything else
remains the same, you would have to pay the sum that equals to market
capitalisation of a company. If you add up market caps of all listed
companies, you would get total worth of the secondary market.
Based on market capitalisations, stocks listed in the secondary markets (on stock
exchanges) are classified as large caps, mid caps, small caps and micro caps depending on
their size.
Why invest in Equity?
We earn money to meet our expenses. But the inflation bug

often causes a concern as it eats into the purchasing power of
our hard earned money. Hence, while we save a portion of our
disposable income, it becomes imperative to invest in wealth
creating asset classes, so as to keep our financial health in pink
and come to our rescue. Equity as an asset class is an effective
wealth multiplier which can help you meet your long term financial goals such as buying a
dream home, a car, planning for childs future (their education and marriage) and even
while planning for ones retirement, provided invested wisely to facilitate clocking high real
rate of returns.

How equity can generate high inflation adjusted returns?
As you may know, investing in equity offers you a chance to

participate in the profits of the company. Your investments in
equity are likely to beat inflation. As long as the prospects of
the company are bright, it increases the prospects to earn
luring profits for the company in the backdrop of the
macroeconomic development in the country. In a favourable scenario you would earn luring
returns on your investment in the company by way of dividend as well as capital
appreciation. But when it comes to dividend it would not be always fair to assume that that
the company would pay dividend every year. In all possibility it could also plough back the
profits for further growth and expansion in the endeavour to create value for its
shareholders in the long run. So when you sell your equity shares in the secondary market,
there is a likely chance that, you profit by selling shares at a rate higher than what you paid
for acquiring them. But you lose the chance of being a beneficiary of further upside hidden
in the potential value unlocking.
So your investment in equity can reward you in two ways:
1) Dividends
2) Capital Appreciation
You got to be careful while investing in equities. It is worth taking lesson from some famous
quotes of legendary investor, Mr Warren Buffett.

Things to remember before you invest in equity shares
Never invest in a business you cannot understand - Warren
Buffett
Risk comes from not knowing what youre doing - Warren
Buffett
As the legendary investor, Mr Warren Buffett has described it

perfectly; you shouldnt blindly invest in equity shares of a company if you are unfamiliar to
the business of the company. If you invest in a company based on tips given by your friends,
relatives or self-proclaimed advisors, there are likely chances that, you may lose money.
While Investing in equity assets has the potential to generate superior returns, it also
exposes you to risk of losing capital. This therefore suggests that while you may want to
invest in equity, you must first check your risk appetite and thereafter take a call as to how
much you should allocate in equity. Apart from your risk appetite, factors that may affect
your investment decision include:
- Your age,
- Your income and expense pattern,
- Financial goals you have envisioned and
- Years left in your retirement among host of others.
Buy a business; don't rent stocks Warren Buffett

The stock market is a no-called-strike game. You dont have to swing at everything
you can wait for your pitch. - Warren Buffett
You shouldnt indulge in trading or gambling while taking exposure to equity. Trading
involves a lot of speculation and makes it essential for you to time your entry and exits.
Mistiming may result in severe loss of capital. Trading and gambling always keeps you
guessing about the stock prices taking away your attention from fundamental factors
affecting the business of a company, which is bad for any investor. Moreover, trading and

gambling can be hazardous to your wealth and health. Remember, good investing is
essentially boring and you should be a long term investor while having exposure to equity.
Always invest for the long term. - Warren Buffett

If you dont feel comfortable owning something for 10 years, then dont own it for 10
minutes. - Warren Buffett
Equity investing is purely for long term players. If your time horizon is only 1-2 years, you
would be better-off avoiding equity as an asset class. Your time horizon for investing in
equity should be at least 3 to 5 years. Good business strategies need time to pay back.
Unless business strategies work and company grows, it is unlikely that your stocks would
reward you. This is why you need to have enough patience and thus should be very careful
while buying equity shares.
But as we mentioned earlier that, despite being a popular asset class across the globe, in
India the exposure taken by retail investors remain miniscule to less than 2% of the
domestic household savings vis--vis 2/3rd of Indian household savings being in physical
assets like gold and real estate.
There may be several reasons for lower retail participation in equities, which include:
Lack of awareness: There are quite a few misconceptions about investing in equities.
Many perceive investing in equity as a gambling activity. They fail to recognise that a
well thought out investment strategy with patience is required to make a fortune in
stock markets.
Lack of knowledge: In the early years of development of capital markets in India, equity
investing was an activity confined to smaller circles of investors. Even after decades, a
large chunk of our population still lacks the knowledge of investing in equities.
Risk appetite: Traditionally, Indians are risk averse. In the yesteryears, risk appetite of
investors was very low, which over past few years, especially in times of exuberance,

has seen an upswing. Also, the financial and educational background which one comes
from sets his / her risk appetite.
Reluctance to take professional help: In India, while investing in stocks, many rely on
tips from friends and family. There is resistance to seek professional help. While many
stock brokers too offer so-called advice, they are essentially tips which come with a
disclaimer in a commission driven model adopted by them. Commission driven model
and lack of unbiased approach to advisory services has always undermined the
importance of investors interest. Therefore, in case of most investors their first
experience with equity investing has not been encouraging.

II: Capital Markets in India
The structure of capital markets in India is in line with internationally followed practices.
Over the years, Indian markets have not only seen exponential growth but have also
witnessed tremendous sophistication. The stock market activity was initially confined to a
few players and was infamous for possibility of fraud and insiders trading. However, with
introduction of technology and transparent platform based trading, the Indian stock market
benefited immensely.
Components of Indian Capital Market
The development in capital market has been more rapid in post-liberalisation times i.e. after
1992 wherein they have witnessed substantial growth. While the Bombay Stock Exchange
(BSE) was established about 150 years back and is the oldest stock exchange in India; the
genesis of capital market regulations was when the Securities and Exchange Board of India
(SEBI) became operational a little over 2 decades ago. With vigilant regulations in the
interest of investors and companies at large, there has been a phenomenal evolvement of

the Indian capital market. Today, Indian capital markets are well-developed and are one of
the strictly regulated in the world.
Indian Markets A quick glance

How many?
Major stock markets 2
Corporate Brokers Cash Segment 4,196
Sub-Brokers 44,540
Registered Foreign Portfolio Investors(FPIs) 782
Merchant Bankers 198
Venture Capital Funds 201
Foreign Venture Capital Investors 201
Portfolio Managers 193
Mutual Funds 49
(Source: SEBI Handbook of Statistics on Indian Securities Markets, 2014, Data Compiled by PersonalFN Research)
There are over 5,500 companies listed on BSE as per latest reports. It has recently found a
place in worlds top 10 equity markets. Total market cap of BSE has grown by leaps and
bounds over the yearsand thanks to the Foreign Institutional Investors (FIIs) who have
primarily driven the Indian equity market evincing faith and confidence in the Indian
economy.
The growth of the Indian equity market over the last decade
Total market capitalisation of BSE has grown almost four times over last 10 years. From a
little over Rs 30.2 lakh crore in 2005-06, market cap of BSE crossed Rs 100 lakh crore mark
in the Financial Year (FY) 2015-16.

S&P BSE Sensex and CNX Nifty - The barometer of the Indian economy
This could come as another surprise to you. Despite being
one of the oldest stock exchanges in the world, BSE
launched Bombay Stock Exchange Sensitive Index, popularly
known as S&P BSE Sensex in January 1986. BSE Sensex is a
well-diversified index of Indias 30 large sized companies
covering some of the prominent sectors. Over the years, a
number of changes have taken place in methodology for calculating the index value. There
is a long list of companies that have been in and moved out of the index. Nonetheless, S&P
BSE Sensex foretells the shape of the Indian economy and therefore is known as a
bellwether index.
The National Stock Exchange (NSE) which is the second exchange in the country was
incorporated later in November 1992 and got recognition as a stock exchange in April 1993.
Much as the BSE, NSE too has its Index known as the CNX Nifty, which constitutes to be
index of Top 50 stocks by market capitalisation.
The stock exchanges including the BSE have various indices capturing the price action of
shares. Categorisation of companies is usually done based on the sector they belong to,
depending upon the market capitalisation (size) of the company. Therefore as you have a
large cap index which reflects movement of large-sized companies only, you have the mid
cap and small cap indices which reflects movement of mid-sized and smaller companies
respectively. There are sector specific indices too, such as the banking Index, capital good
index, consumer durable index, FMCG index, healthcare index, realty index, amongst many
others that capture the movement companies falling within the scope of respective indices.
Although there are tens of indices on the stock exchange, usually the valuation of the whole
market is judged based on the valuation of the bellwether index. Since the S&P BSE Sensex
is one of the most widely tracked bellwether indices of India, it is vital to know how it is

valued. Therefore, when you are valuing a company, you may always like to refer to
valuations of the S&P BSE Sensex.
Historical Market Valuation
Data as on March 31, 2016

(Source: BSE, PersonalFN Research)
Importance of historical valuation

You may feel, if markets are always forward looking why one should
bother about historical valuations. True, but as it goes while selecting a
cricket team, past performance of the player is always taken into
consideration. Similarly, to know as to where do markets stand today,
you need some past reference. Study of historical valuations provides you just that. Please
have a look at the graph given above. Wouldnt it have been easy for you to know that,
markets might be undervalued, have you had looked at this chart in 2008-09? Yet, many
people exited equities fearing a further fall. This is called unpredictability of the market.
Going one step ahead, if you referred to historical valuations in 2007, you would have taken
a minute to recognise that markets were overvalued.

III: Fundamentals of Equity Investing
Why stock markets move up or down?
There are thousands of companies listed on stock exchanges;

investors actively buy or sell shares among themselves.
However, it is difficult to know the market mood unless the
pulse of the market is felt. The number of investors willing to
buy a stock vis--vis the number of sellers helps you
determine the pulse of the market. This active participation of both buyers and sellers in
the equity market helps to get a sense on the direction of the market whether it is in the
grip of the bulls or bears.
Over the years along with their bellwether index, stock exchanges have launched variety of
indices capturing the movement of shares of underlying companies within the respective
market capitalisation, sector and theme. The index value is calculated based on a number of
factors including the weightages given to different companies and change in their market
capitalisations among others. The bellwether index gives idea about the broader trend of
the entire market, while the indices capturing market capitalisations, sectors and themes
reflect the trend within their respective domain.
At the macro level, the bellwether index of the stock market is considered a barometer to
measure the potential of the economy. So, when the economy is anticipated to do well,
stock markets usually show a positive movement and vice-versa.
And what affects stock prices?

Everything else remaining the same, stock prices are affected simply by demand-supply gap.
So, typically when there are more buyers chasing a stock, the price moves up as potential
sellers seek higher prices for giving way to buyers. Conversely, when there are more sellers
ready to dump stocks, potential buyers seek lower prices to accept the dumped stocks. So
in other words, we need to see what affects the demand-supply equation of a stock.

Factors moving stock prices
Company Risk
Specific Appetite of
Factors Stock Investors
Prices
Money Supply
However, we live in a dynamic world and thus the demand and supply equations are driven
by host of dynamic variables which could be at the macroeconomic level, political level,
industry level, and company level. It is a combination of all these factors that builds the
investment sentiments either in the positive or negative towards stock prices.
In times of euphoria when everything seems hunky-dory, it is a period of risk-on; which

means investors appetite for risk is high, making market breath and investor sentiments
positive. A supportive factor to this is also the money supply in the market, which allows the
mood to be buoyant, as more money chases risky assets such as equity. Moreover, along
with the domestic macroeconomic factors in play, global cues also have a bearing on
domestic equity.

Domestic Economy (India)
Company Risk
Specific Appetite of
Factors Investors
Stock
Prices
Money Supply
Global Economy
The diagram above depicts that, how every facet explained above has a bearing on stock
prices and they dont work in isolation. Each facet is subset to the other and reflects
interlinks of events which have effect on stock prices. In this era of globalisation no
company or no investor can stay unaffected by what happens outside the domestic
economy. Interdependence of economies affects equity markets across the globe, although
the degree may vary.
To make it simple and easy for you to understand how stock markets are affected, we have
highlighted various scenarios in the below table, which would help you assess the likely
impact on stock movements.

Understanding market trends.
Scenario
Company specific Risk appetite of Money Impact on stock
factors investors supply market movement
Positive High High Positive
Negative High High Moderately positive
Positive Low High Moderately positive
Positive High Low Moderately positive
Negative Low High Moderately Negative
Negative High Low Moderately Negative
Positive Low Low Moderately Negative
Negative Low Low Negative
The table presents different scenarios along with likely impact on the stock market. It is
clear that, when all three factors are positive, markets would by and large have a positive
impact and vice versa. But when one of the factors turns negative, markets may not benefit
as much as they would have otherwise benefited when all three factors were positive.
Similarly when only one of the factors is positive, markets turn moderately negative. In
other words, before you invest in equities, you would have to analyse how these factors
play under different economic conditions.
You must be wondering how you can analyse aforesaid factors if you have no prior
experience. Dont worry, it is not impossible for you. You only need to learn few concepts,
check out some indicators and apply common sense.
To begin with lets brush up some economic concepts:

As you may be aware not all countries are at the same stage of
economic development. A few countries are far more
developed, while the others are developing and emerging. Thus
when compared on infrastructure facilities, employment
opportunities, education, healthcare facilities and so on, each of
them will paint a different picture. Hence, some countries struggle to build infrastructure
and healthcare facilities; while are way ahead in employment opportunities and education.
Therefore countries are classified as developed, developing and emerging economies.
Usually, the economic growth rate is higher in less developed or developing countries and is
naturally lower in case of developed countries. Today, investors are not restrained by any
geography. Thats why we have foreign investors participating in our economy and the
domestic ones investing overseas in accordance to laws in force. In the pursuit of clocking a
high returns, investors are on a lookout for promising investment destinations which leads
to shift in capital across economies depending on their underlying fundamentals.
While looking at promising investment destinations, it is vital to ascertain economic cycles

rightly and assess the stage of development in the economy. If the economic growth of a
nation is accelerating, risk appetite towards such an economy would be greater. This is
because, rapid development throws ample opportunities for businesses to flourish and earn
high profits. Growth springs in more employment opportunities and rise in income, which in
turn facilitates a better savings rate if the inflation bug is kept in check.
Economic cycle
As you may know, any economy can rarely advance unilaterally. There are four basic phases
in an economic cycle. As shown in the diagram below, a phase of boom is followed by a
phase of recession. A more severe recession leads to depression, but at some point in time
the economy starts recovering and eventually another boom phase shapes up.
Economic cycles

It is noteworthy that, risk taking ability of businesses and that of the investors is at the
highest point when the economy is booming and it starts dipping at every stage of
slowdown in the pace of economic development. Risk averseness is at the highest point
when economy is depressed. But then a few businesses and investors take a counter view
and start betting aggressively against the tide. As others see success of these early movers,
they also start feeling confident about and risk taking ability re-emerges.
There are a few indicators that help you identify the health of economy; and yes, lets not
forget stock market movement is one of them.
Economic Indicators
Although economic indicators may not narrate the entire story, when tracked carefully and
in an appropriate manner, they can help you form a fair estimate about the health of
economy. There are broadly seven economic indicators which are:
Gross Domestic Product (GDP);

Unemployment rate;
Rate of inflation;
Direction of interest rates;
Exchange rate (currency movement);
Fiscal deficit; and
Performance of stock market
It should be noted that while the stock market is the barometer of the economy, it is vital to
carefully study the other forces as well which guide the trend for the stock market. This is
because of inter-connectivity of these indicators.

Stock market phases
Now that you know about economic cycles and economic indicators and recognise there
pertinence; lets move forward and understand the stock market phases.
Well, like in economic cycles we have period of boom, recession, depression and recovery,
in stock market we broadly have two - a bull phase and a bear phase. When indices are
moving up; it is safe to assume that, the markets are in the grip of bulls while on the
downward spiral it can be assumed to be in the paws of the bears. Therefore a phase where
general bias of the market movement is upward is known as the bull phase, while when the
general bias of the market movement is downward, it is known as bearish phase. But
sometimes markets also depict a sideways movement where there is no clear indication
whether it is in the hands of bulls or bears. Thus, such a phase is also called a phase of
consolidation.
Economic phase vs. market phase
As seen above, stock market phases and the economic cycles are closely interrelated; only
that they may not always move in congruence. This is because, while everything may seem
hunky-dory for the domestic economy, there could be global economic headwinds in play,
which may lead to the stock market behaving strange. Stock markets are always sniffing
around on news. They are forward looking. They reflect the expectation about future course
of economic development. In other words, markets may reach their peak before the
economic cycle may float in boom and start to correct before the lowest point in the
economic cycle is reached.
Where you can possibly go wrong?

Novice investors (and even the mature ones in some cases)
while they read into the economic data and newsflashes, they
make a mistake of looking at the present and speculating;
which can be hazardous to their wealth and health. It is
important to be forward looking and reckon the implications

and take a prudent investment decision. Often investors follow a practice of investing in
euphoria and exiting in a panic; and this is why, usually, investors lose their hard earned
money. Prudently, one should be investing in a panic and exiting in a euphoria, whereby you
buy low and sell high. Would you go out shopping and buy something when its expensive?
Certainly not, right? Similarly, while you invest in equities in your endeavour of wealth
creation, alike prudence needs to be adopted.
While investing, both positive and negative economic indicators need to be assessed. It
could be economic growth, inflation (measured by Consumer Price Index), unemployment
data, corporate spending and so on. If the negatives outnumber the positives, the stock
market could be under the paws of the bear, while in vice versa, locked up in the horns of
bulls. Therefore sensing this animal spirit of the market is imperative. Investors often miss
the transitions in the equity market phases as the data points fail to convince them. And
mind you, it would be incorrect to be under the impression that the transition from bull
phase to bear phase and vice-a-versa would be immediate.
Since we are in the midst of discussing economic cycles and stock market phases, allow us
to take you some historical facts to recognise how long a cycle can last and how would it
impact your investments.
Every economy goes through cycle of boom, recession, depression and then a recovery. In
United States (which is the largest economy of the world), there have been 33 such cycles
recorded since 1854 to 2009 as per data published by National Bureau of Economic
Research, USA. Average time lag between the peak of one cycle and the peak other, is
about 55 months or close to about 5 years. Similarly, average time lag between two troughs
(or bottom of economic cycle) is about 56 months; which is again close to 5 years. The
minimum time taken to reach from a peak to peak (or even from trough to trough) has
rarely been less than 3 years. Another theory (Monte Carlo Simulation) suggests that losses
may less frequently occur if the investor stays invested for longer duration. Therefore,
concept of staying invested in equities with a minimum time horizon of 3-5 years has been
largely and rightly been advocated, which is backed by actual data and proven theories. The

idea is to stay invested for the entire economic cycle. However, using this as rule of thumb
overlooking some compelling facts may not be advisable. To gain more insights while
investing in equity, it is imperative to study the relation between equity market phases and
economic market cycles.

IV: Evaluation Methods
As you are now aware that equity is essentially for long term,
you need to be extremely careful while picking stocks for your
portfolio. It may seem very easy to some of you, but mind you
there are some nitty-gritties that you should consider in the
process of stock selection. Study of relationship between
economic cycles and stock market cycles validates that selection
of a right company would involve a lot of forecasting taking into account host of parameters
if you want to earn decent returns on your investments.
There are various methods used in selection of stocks; but when it comes to approaches
there are primarily two approaches to look for investment opportunities.
Top-down approach: As the name suggests, a follower of this approach would start
assessing the broader socio-political and economic trends to begin with and then finally
zero on companies pertaining to a particular theme or a sector which seems to have the
potential.
Bottom-up Approach: Under the bottom-up approach one believes that a company with
strong fundamental can create wealth for its shareholders despite sailing through economic
cycle and even stock market phases. Therefore, followers of bottom-up approach spend
more time on identifying company strengths based on some of the following factors:

Quality of management
Financial strength
Market share of the company
Product portfolio and upcoming launches
Future plans
Ideally, you should prefer a company with strong, responsive and responsible management
having a healthy market share, good product portfolio and has a good understanding on
how the market for its products is shaping. But mind you these are only some of the aspects
and you can delve into much more to get a better sense of the companys business in which
you wish to invest your hard earned money.
Now apart from the independent approaches seen above, you may also use a combination
of top-down and bottom-up approach to investing. This helps in getting a fair sense of
theme which is appearing promising (in the backdrop of socio-economic and political
scenario) as well as helps you evince faith in those companies which look fundamentally
strong to deliver value in the long run.
But while you may follow any or a combination of these approaches, it is vital to cognisance
of valuations. Imagine you went to buy basmati rice to make your favourite biryani;
identified good quality rice but paid twice for it and dug a hole in your pocket. So prudently
you would have assessed the rates at 10 different shops to strike a fair deal to make it
comfortable on your pocket and enjoyable on your palate, isnt it? Likewise, while you buy
shares you need to do exactly that: lookout for a valuable proposition which holds potential
to create wealth for you. But unlike buying rice where you can compare and cross check
rates, in shares the price is dynamic. Rates are rather derived and they keep fluctuating
almost every single minute. Therefore when you are buying shares you should be using
different valuation methods to judge the right price.
You need not learn complex models or depend on complicated matrices. But at least learn a
few basic ratios to begin with and as you start getting a good hang of them, you may try
out difficult valuation models.
What are ratios?
If you want to know the progress of your children, what do

you usually do? You look at their report card. You check their
scores at exams. You see the rating given to their projects.
You depend on comments made by their teachers and so on.
Similarly, if you want to know whether the company has

sound fundamentals and is available at a right price you need
to not only thoroughly understand its business but also read and evaluate their financial
statements. Balance sheet, profit & loss account, cash flow statements, annual reports,
press releases, management interviews, company visits, etc. are the primary sources to
know more about the company you wish to invest in. Here are 6 basic ratios which are a
must in the process of analysing a company while there are many others to ascertain how
the finances at the company are managed.
Earnings Per Share (EPS): This ratio gives you an idea about how much profit a company
earns against every single equity share held in the company. So for example, a company
earns Rs 100 crore over a given time period (after all expenses and having defrayed
dividends to preference shareholders) and has 10 crore equity shares (also known as
common shares) outstanding on its books as on that date; the EPS of the company would be
Rs 10.
Therefore by formula:
EPS = Net Income available to Common Share Holders

Average Outstanding Common Shares
Hence EPS is nothing but against each share held in the company, the profit earned
thereon. While you are gauging EPS across companies, you need to be careful so as to
compare apples to apples and not apples to oranges. Meaning, one should compare EPS
of companies within the same industry. Also, while you do this analysis within the company

you need to reckon the size of the companies whether they are large cap, mid cap or small
cap. You need to separate the men from boys to do a prudent study.
Your chance to create wealth is hinged upon the price you paid to ascertain the growth
potential which company holds. So unless you evaluate a company on this ratio there are
chances of you going wrong with your investments. Higher the EPS ratio, the better it is. But
as market prices are dynamic you also need the next ratio.
Price-to-Earnings (P/E) Ratio: This ratio helps to evaluate how many times the share of a
company is trading in the market against its earnings per share. So for example, if share of a
company is trading at a market price of Rs 280 and EPS of the company is Rs 14; you are
paying 20 times more to acquire shares of that company against it present earnings.
P/E Ratio = Market Price Per Share

Earnings Per Share
You would think why would one pay more? As stated in earlier, equity markets are forward
looking. It is possible that, a company earns less today but has a potential of earning higher
profits in future, which then justifies the premium which you pay today. But care should be
taken to judiciously recognise the potential and not get swayed by exuberance. Today while
going public via IPO (Initial Public Offering), companies issue shares at a premium to the
face value. This is on a rationale that a company which has already been in business for the
last few years has a track record (although not in the public domain) and holds potential to
do even better with plans in place. While a lower P/E is considered better it is vital to take
cognisance of the reasons why the share price is commanding a premium.
Price-to-Book Value (P/B) Ratio: This ratio is quite similar to the P/E ratio. The only
difference is while we consider EPS for measuring how overvalued or undervalued the share
is, Price-to-Book Value is considers the net tangible assets with respect to market value of
the share.

You can calculate this ratio as under:
P/B Ratio = Market Price Per Share .

Net Tangible Assets - Liabilities
A lower P/B ratio is considered better. But you shouldnt use P/B ratio in isolation, as P/B
ratio of a capital intensive business may be higher than that of a company with higher
intellectual assets. The book value gives a fair idea as to what will be paid to you as the
shareholder if the company goes into liquidation. Thus the P/B ratio would also give a fair
clue of whether you are paying too much or too less for what would be left if the company
needs to liquidate in future.
Return on Equity (ROE): This ratio exhibits how much net profit the company has generated
in a year as a percentage of shareholders equity. Shareholders equity here is the total
equity shareholder funds in the company represented as share capital plus retained
earnings, but after deducting for miscellaneous expenditure (to the extend not written-off
or adjusted). Higher the ROE ratio the better it is and indicates efficiency of management in
rewarding shareholders. ROE can be calculated in the following manner:
ROE = Net Profit After Tax Dividend to Preference Shareholders

Average Shareholders Equity
However, it is noteworthy that, one shouldnt compare ROE of a company with that of
another unless both belong to the same sector or a theme.
Debt-to-Equity Ratio: This ratio will help you to ascertain how leveraged a company is vis--
vis its total equity (also known as Shareholders Equity). It is desirable that, a company has a
lower burden of debts as a proportion to shareholders funds, otherwise it would construe
that the company relies on borrowed funds than its own funds. This also helps to ascertain
how the capital of the company is geared and is calculated as under:

Debt / Equity Ratio = Total debt
Total Equity
If the debt-to-equity ratio of the company is more than 1 it means more than half of the
business capital is financed through borrowed funds and the remaining through equity.
Hence, lower this ratio the better it is.
Dividend Yield Ratio: Lets not forget, the most primary intent of investing is to be a
shareholder and have a share in companys earnings or profitability. Hence if you wish to
reap the benefits of investing over a long term and enjoy dividend, this ratio can be useful
to you. This ratio indicates how much the company pays out in dividend vis--vis its share
price. Dividend Yield is calculated as under:
Dividend Yield Ratio = Dividend per share

Market price of the share
Say if a company pays Rs 5 as divided for the year and is trading at Rs 250; the dividend
yield would be 2%. If the dividend yield of a stock is higher, the better it is since dividend is
measure of total return for investors. But if the market price of the share of a company is
too high, it would result in lower dividend yield. Thus while you evaluate using this, do not
judge this ratio in isolation but also assess the companys dividend track record thus far and
its potential to declare dividends in future. Future growth plans, nature of business and
economic environment among others affect the frequency and the quantum of dividend
pay-outs. Some companies while they may earn good profits may choose not to declare a
very luring dividend and plough back profits for future expansion. This should also be taken
into consideration while investing for the growth opportunities.

There are host of many other ratios used to read the pulse of the company, but even if you
use the aforementioned ones they can act as powerful tools giving you appropriate
direction while you invest.
Market Valuations
Apart from reading ratios at company level and comparing

them with other peers in the respective industry, you ought
to also ascertain the valuations of the broader market. So,
just as you do a P/E ratio study at company level you would
also need to ascertain the P/E of the index which could be
the broader index or even sectoral indices.
The process doesnt change only that, instead of market price per share you consider the
index level and in place of EPS of the company you take consolidated EPS of companies
forming the index as per their weightage. Similarly, you can calculate other ratios such as
P/B Ratio, Dividend Yield Ratio and so on.
Usually, index ratios or market ratios speak about general trend in the broader market as
against this; the company specific ratios give you an idea only about that company. For
example, while the P/E ratio of a broader index is high, it wont be unfair to say that, the
market is fairly valued or overvalued. However, if P/E ratio of a stock is on the higher side,
you cant even assume that, because P/E ratio can vary across stocks in the industry, based
on their size.
Importance of forecasting in valuation
In the process of evaluation of a company forecasting also plays a

vital role. Therefore, in addition to knowing how a company has done
so far, you need to be fairly sure that going forward company would

do well.
In simple words, you need to judge how much cash the company can make going forward.
In finance, research analysts popularly use the Discounted Cash Flow (DCF) model for
forecasting how remunerative the investment would be, going forward. The model tries to
determine the value of future cash flows in todays terms discounting them at the weighted
average cost of capital. Weighted average cost of capital considers the weighted average
cost of equity as well as debt.
Here are some factors that you need to consider while using discounted cash flow model.
Current phase in the life cycle of the company - It is always important to know the
current state of affairs in the company and management estimates of growth
Size of the company - Predictability of growth is easier for larger companies than that
for smaller companies
Tentative time period of extraordinary growth - A company cant grow at a very high
rate forever
Competition - Competitive advantages play a major role in deciding how fast the
company grows
Period of forecast - It is comparatively easy to predict growth over the short term rather
than that on the long term due to change in environment
Sum Of The Parts (SOTP) is another method of evaluating a company and used particularly
when the company runs multiple businesses. The idea is to value each business
independently to predict the overall valuation. SOTP analysis is extremely useful when
company is planning to spin-off businesses, which is commonly known as value unlocking.
For example, a company might be operating in two businesses - cement manufacturing and
textiles. It is possible that cement business is doing far better than the textile business.
Therefore, if the company plans to form two separate companies demerging the textile
business; one should also gauge the value unlocking that may happen for investors.

Dont forget basic concepts and valuation approaches are universal. Whether you are
tracking markets in the United States or in India, basics dont change much. Yet, it is always
important for you to understand a few things about the market in which you plan to invest
your money.

V: Ways to Invest in Equity
After having known the methods of evaluation, you can think
about investing into equities. Today with advancement of
technology investing in stocks (or even mutual funds) has been
made simple. It is just a click away.
While you wish to invest in equity, there are two options
Direct Investing: You could opt to invest directly into stocks.

Direct equity investing is considered more dynamic by the
investor community and thus, those who can keep a continuous
tab on the equity markets prefer the direct equity route as it
gives them much needed zing and excitement. However, the
dynamism in the direct equity investment comes with risk. Now
while this is considered to be a dynamic and active approach to invest into equities, you
need to be confident, well-versed and keep a continuous tab on the equity markets.
Hence, only if you are able to understand the nitty-gritty of the equity markets and are able
to devote time and energy, you can adopt this route to equity investments.
So, heres what you need to have if you wish to directly invest in equities:
A trading account with a registered stock broker
A demat account with a depository participant, which may be a registered broker or a
bank
And of course, the capital to invest - the money!
Apart from aforesaid things, you need to also have a savings bank account which can be
linked to your demat account and also comply with the Know Your Client (KYC)
requirements by furnishing the requisite documents.

Moreover, access to internet based platforms would allow you to perform real time
transactions on your own without much of hassles, rather than calling up your broker to
transact.
But there are some limitations of investing in stocks directly:
- Selecting and monitoring the stocks is a time consuming task

- Stock selection requires a skill of being able to foresee industry trends and assess the
potential of a company to capitalise on opportunities
- At times you might wrongly interpret the situation, based on your rationale towards a
company or the group
- Moreover, there are chances of you missing key information about a stock and taking
investment decision based on inadequate information
To avoid the above mentioned circumstances, while investing directly in stocks you might
always take help from professionals who can provide you unbiased views and guidance.
Indirect Investing: Not all investors are same in their intelligence

and understanding levels. And even if someone has the ability to
understand the direct equity route, he or she lacks the time to
devote to such investment activity and thus prefer taking the
indirect route to equity investments via mutual funds.
So if you arent able to understand the nitty-gritty of the equity

markets and devote time; look out to invest in equity via the second option i.e. through
equity mutual funds, which is an indirect way. Mutual funds provide the much needed ease
while investing in the equity asset class.

So lets quickly understand what is a mutual fund?
A mutual fund is a legal vehicle that enables a collective group of individuals to:
- Pool their surplus funds and collectively invest in
instruments / assets for a common investment objective.
- Optimize the knowledge and experience of a fund
manager, a capacity that individually they may not have.
- Benefit from the economies of scale, which size enables
and may not be available on an individual basis.
Investing in a mutual fund is like an investment made by a collective. An individual as a

single investor is likely to have lesser amount of money at disposal than say, a group of
friends put together. Now, lets assume that this group of individuals is a novice in investing
and so the group turns over the pooled funds to an expert to make their money work for
them. This is what a professional Asset Management Company (AMC) does for mutual
funds. The AMC invests the investors money on their behalf into various assets towards a
common investment objective.
Hence, technically speaking, a mutual fund is an investment vehicle which pools investors
money and invests the same for and on behalf of investors, into stocks, bonds, money
market instruments and other assets. The money is received by the AMC with a promise
that it will be invested in a particular manner by a professional manager (commonly known
as fund manager). The fund managers are expected to honour this promise. The SEBI and
the Board of Trustees ensure that this actually happens.
The AMC employs various employees in different roles who are responsible for servicing
and managing investments. It offers various products i.e. Mutual Fund Schemes, which are
structured in a manner to benefit and suit the requirement of investors. Every scheme has
a portfolio statement, revenue account and balance sheet.

Equity Mutual Funds
As the name suggests, equity mutual funds invest in equity

markets on behalf of investors. They come in variations. Some of
them are diversified equity funds while the others are sector
funds, or maybe thematic funds.
Diversified Equity Funds

These funds diversify the equity component of their Asset Under
Management (AUM), across various stocks and sectors. Such funds offer the benefit of true
diversification and avoid taking sectorial bets i.e. investing more of their assets towards a
particular sector such as banking, oil & gas, etc. Thus, they use the diversification strategy to
reduce their overall portfolio risk.
Sector Funds
These funds are expected to invest predominantly in a specific sector, as per their
investment mandate. For instance, a banking fund will invest only in banking stocks.
Generally, such funds invest 65% of their total assets in a respective sector.
Index Funds
These funds seek to have a position which replicates the index, say S&P BSE Sensex, NSE
Nifty or CNX Midcap, etc. They maintain an investment portfolio that closely replicates the
composition of the chosen index, thus following a passive style of investing.

Why should we invest in mutual funds?
Well, mutual funds offer several important advantages over
direct stock-picking. These are
Diversification: Investing in stocks directly has one serious

drawback - lack of diversification. By putting all money in
just a few stocks, the investor subjects himself to
considerable risk should even one of those stocks decline. On the other hand, a mutual
fund scheme by investing in several stocks tries to overcome the risk of investing in just
3-4 stocks. By holding say 20 to 30 stocks or even more, the fund avoids the danger that
one rotten apple will spoil the whole portfolio. Mutual fund schemes own a couple of
dozen stocks in their portfolio. A diversified portfolio can generally hold its downside
even if a few stocks fall dramatically. This helps in containing the overall risks.
Professional management: No matter how sound an investment sense a stock investor

may have, sooner than later he will realize that active portfolio management requires
considerably more skill, not to mention a lot of time too. There is an ocean of difference
between part-time stock-picking and full-time fund management.
Now compare this to mutual fund investing; the mutual fund investor does not have to
track the prospects and potential of each and every company in the portfolio. Mutual
funds are managed by skilled professionals who continuously monitor these companies
and take decisions on whether to buy, sell or hold a particular stock in the portfolio.
Lower entry level: There are just few quality stocks today an investor can enter into,
with Rs 5,000 Rs 10,000. Investing in stocks can be an expensive affair. Sometimes
with as much as Rs 5,000 an investor can buy just a single stock. The minimum
investment in a mutual fund may be as low as Rs 500. This implies that with just Rs 500,

a mutual fund investor can take exposure in a fund portfolio of 20-30 stocks. The entry
barrier in mutual funds is low so as to encourage investor participation.
Economies of scale: By buying a handful of stocks, the stock investor loses out on
economies of scale. This tends to pull down the profitability of the portfolio. If the
investor actively buys and sells stocks in his personal capacity, it would also impact his
profitability due to various charges involved.
Due to frequent purchases/sales, mutual funds incur proportionately lower trading costs
than individuals. Lower costs translate into significantly better investment performance
and returns to the investors.
Liquidity: A stock investor may not always find the liquidity in a stock to his liking. There
could be days when the stock keeps hitting the up / down circuit and buying/selling is
curtailed. This does not allow him to enter / exit a stock.
Such liquidity problems are not confronted by a mutual fund investor. Sometimes a
mutual fund may be more liquid than other investment avenues. For instance, there are
days when there are no buyers or sellers for an individual stock. But an open-ended
fund can be bought / sold at that day's Net Asset Value (NAV) by simply approaching the
fund house or its registrar or AMFI registered distributor.
Minimises losses: Investing in mutual funds assures more safety of investment than
investing directly in stocks. A company may shut shop or may go bankrupt. According to
the law, the equity shareholders are paid last, after paying all dues to the creditors of
the company. A mutual fund may lose money, but may not go down as easily as a
company. The legal structure and stringent regulations that bind a mutual fund
safeguard a unit-holder's interests far better.

Innovative plans for investors: By investing in the stock market directly, the investor
deprives himself of various innovative plans that are offered by mutual funds. Mutual
funds offer automatic re-investment plans; systematic investment plans (SIPs),
systematic withdrawal plans (SWP), asset allocation plans, triggers, etc. These features
allow investors to enter/exit or switch from funds seamlessly and on the whole facilitate
investment ease significantly. This is something an investor can never duplicate
individually.
So as highlighted above, investing in mutual funds has some unique benefits that may not
be available to direct stock investors. However by no means are we insinuating that
investing via mutual funds is the only way of clocking growth. This can also be done even by
investing directly into the right stocks. However, mutual funds offer the investor a relatively
safer and surer way of picking growth minus the hassle and stress that has become
synonymous with stocks over the years.
On account of the aforementioned advantages which mutual funds offer, they (mutual
funds) have emerged as immensely popular investment vehicle, especially for retail
investors, and for investors looking for growth with relatively lower risks.
Investors should also keep in mind that selecting a mutual fund scheme is not alike buying
vegetables from a grocery store. A thorough analysis is required to select winning mutual
funds for ones portfolio in order to create wealth over the long term.
How to select a mutual fund?

Investors often get confused when it comes to selecting the right
fund from the plethora of mutual fund schemes available today.
Many investors also feel that 'any' mutual fund can help them
achieve their desired goals. But the fact is, not all mutual funds are
same. Hence you got to be careful and select a mutual fund
prudently. Heres what you should evaluate

Performance: The past performance of a fund is important in analysing a mutual fund.
But, remember that past performance is not everything, as it may or may not be
sustained in future and therefore should not be used as a basis for comparison with
other investments.
It just indicates the funds ability to clock returns across market conditions. And, if the
fund has a well-established track record, the likelihood of it performing well in the
future is higher than a fund which has not performed well.
Under the performance criteria, we must make a note of the following:

1. Comparison: A funds performance in isolation does not indicate anything. Hence, it
becomes crucial to compare the fund with its benchmark index and its peers, so as
to deduce a meaningful inference. Again, one must be careful while selecting the
peers for comparison. For instance, it doesnt make sense comparing the
performance of a mid-cap fund to that of a large-cap. Remember: Dont compare
apples with oranges.
2. Time Period: Its very important that investors have a long-term horizon (of at least
3-5 years) if they wish to invest in equity oriented funds. So, it becomes important
for them to evaluate the long-term performance of the funds. However this does not
imply that the short term performance should be ignored. Besides, it is equally
important to evaluate how a fund has performed over different market cycles
(especially during the downturn). During a rally it is easy for a fund to deliver above-
average returns; but the true measure of its performance is when it outperforms its
benchmark and peers during the downturn. Remember: Choose a fund like you
choose a spouse - one that will stand by you in sickness and in health.
3. Returns: Returns are obviously one of the important parameters that one must look
at while evaluating a fund. But remember, although it is one of the most important,
it is not the only parameter. Many investors simply invest in a fund because it has

given higher returns over the past few years. In our opinion, such an approach for
making investments is incomplete. In addition to the returns, one also needs to look
at the risk parameters, which explain how much risk the fund has undertaken to
clock higher returns.
4. Risk: To put it simply, risk is a result or outcome which is other than what is / was
expected. The outcome, when different from the expected outcome is referred to as
a deviation. When we talk about expected outcome, we are referring to the average
or what is technically called the mean of the multiple outcomes. Further filtering it,
the term risk simply means deviation from average or mean return.
Risk is normally measured by Standard Deviation (SD or STDEV) and signifies the
degree of risk the fund has exposed its investors to. From an investors perspective,
evaluating a fund on risk parameters is important because it will help to check
whether the funds risk profile is in line with their risk profile or not. For example, if
two funds have delivered similar returns, then a prudent investor will invest in the
fund which has taken less risk i.e. the fund that has a lower SD.
5. Risk-Adjusted Return: This is normally measured by Sharpe Ratio (SR). It signifies

how much return a fund has delivered vis--vis the risk taken. Higher the Sharpe
Ratio better is the funds performance. As investors, it is important to know the
same because they should choose a fund which has delivered higher risk-adjusted
returns. In fact, this ratio tells us whether the high returns of a fund are attributed to
good investment decisions, or to higher risk.
6. Portfolio Concentration: Funds that have a high concentration in particular stocks or

sectors tend to be very risky and volatile. Hence, investors should invest in these
funds only if they have a high risk appetite. Ideally, a well-diversified fund should

hold no more than 50% of its assets in its top-10 stock holdings. Remember: Make
sure your fund does not put all its eggs in one basket.
7. Portfolio Turnover: The portfolio turnover rate refers to the frequency with which
stocks are bought and sold in a funds portfolio. Higher the turnover rate, higher the
volatility. The fund might not be able to compensate the investors adequately for
the higher risk taken. Remember: Invest in funds with a low turnover rate if you want
lower volatility.
Fund Management: The performance of a mutual fund scheme is largely linked to the
fund manager and his team. Hence, its important that the team managing the fund
should have considerable experience in dealing with market ups and downs. As
mentioned earlier, investors should avoid funds that owe their performance to a star
fund manager. Simply because if the fund manager is present today, he might quit
tomorrow, and hence the fund will be unable to deliver its star performance without
its star fund manager. Therefore, the focus should be on the fund houses that are
strong in their systems and processes. Remember: Fund houses should be process-driven
and not 'star' fund-manager driven.
Costs: If two funds are similar in most contexts, it might not be worth buying mutual
fund scheme which has a high costs associated with it, only for a marginally better
performance than the other. Simply put, there is no reason for an AMC to incur higher
costs, other than its desire to have higher margins.
The two main costs incurred are:

1. Expense Ratio: Annual expenses involved in running the mutual fund include
administrative costs, management salary, overheads etc. Expense Ratio is the
percentage of assets that go towards these expenses. Every time the fund manager
churns his portfolio, he pays a brokerage fee, which is ultimately borne by investors

in the form of an expense ratio. Remember: Higher churning not only leads to higher
risk, but also higher cost to the investor.
2. Exit Load: An exit load is charged to investors when they sell units of a mutual fund
within a particular tenure; most equity funds charge exit load if the units are sold
within a period of one year from the date of purchase. As exit load is a fraction of
the NAV, it eats into your investment value. Remember: Invest in a fund with a low
expense ratio and stay invested in it for a longer duration.
Among the factors listed above, while few can be easily gauged by investors, there are
others on which information is not widely available in public domain. This makes analysis of
a fund difficult for investors and this is where the importance of a prudent and unbiased
mutual fund advisor comes into play.
Now one may say, why not go by fund ratings instead. While you can do that, as such
ratings are easily available on many online portals, here are some words of caution on
that.
In the recent times, giving "star ratings" to a fund has been the trend adopted by many
mutual fund research houses / rating agencies, in an effort to help investors to pick the
"right" mutual funds. And influenced by them, investors too fancy having star rated mutual
fund schemes in their portfolio. But the question which arises to our mind is that, can these
star rated funds be like real rock stars in the portfolio.
Today, interestingly the media - both print as well as the electronic media, also sermon
about star rated funds so often, that it has an influencing impact on the minds of many of
you. Banking on this environment, mutual fund distributors / agents / relationship
managers too are busy persuading their clients to invest in star rated mutual funds. But
question still remains unsolved, "are you buying rock stars or winning mutual fund schemes
to your portfolio?"

It is vital to recognise that just having blind faith and following the norm that more "stars"
there are on the scorecard, better is the fund's performance; sounded good or logical
during our school days when a 5 star for our homework, connoted that we were good
students.
But it is vital to recognise that evaluating a mutual fund's performance is far different!
It is noteworthy that most star ratings take into account only quantitative methodology
considering the past performance (returns), expense ratio, risk (Standard Deviation) and
risk-adjusted returns (Sharpe Ratio) of the respective fund. But they ignore the qualitative
factors such as the fund house history, its credentials, the investment systems and
processes followed by the fund house, portfolio characteristics, adherence to the stated
investment objectives etc.; which drives the performance of the fund in future. Remember,
forecasting the funds future performance is no cakewalk. It is not a simple function of
"sorting" on excel - as used in most of the rating methodology.
Moreover ratings subscribe to the "one size fits all" approach. They seem to suggest that if a
fund has earned a top-notch position, investors across categories can invest in the same.
But remember investing and financial planning are personalised activities. Hence, a fund
could be right for one investor and (despite its sterling performance) be completely
unsuitable for another. Yes, they could perhaps serve as starting points for identifying a
broader set of investment-worthy funds; but investing in a fund, based solely on number of
stars against its name may not be the right move.
The fact is, not all mutual funds are same. There are various aspects within a mutual fund
scheme, which are vital for you as an investor to study carefully before investing.

Investing in Mutual Funds through SIPs
Systematic Investment Plan (SIP) is a mode of investing in
mutual funds. Thus a SIP mode of investment in mutual funds
is similar to the one followed while investing in a recurring
deposit of a bank, where you deposit a fixed sum of money
into your recurring deposit account, and enjoy a fixed rate of
interest. But the only difference in case of SIPs is that, your money is deployed in a mutual
fund scheme (equity schemes and / or debt schemes), and the returns generated for you by
the respective funds are variable and are subject to market risks.
In case of SIPs, a fixed amount as desired by you, is debited from your bank account on a
specified date. And this is not it! You also have the flexibility to make your SIPs on a daily,
monthly or a quarterly basis. You can enrol for SIP either through an ECS mandate or
through post-dated cheques.
The amount so debited from your bank account is invested in the scheme(s) as selected by
you for a specified tenure (months, years). This thus enables you to invest regularly and
build wealth over the long-term.
Hence SIP enforces a disciplined approach towards investing, and infuses regular saving
habits which we all have probably learnt during our childhood days when we used to
maintain a piggy bank. Yes, those good old days where our parents provided us with some
pocket money, which after expenditure we deposited in our piggy banks and at the end of
particular tenure we saw that every penny saved became a large amount.
Today some Asset Management Companies (AMCs) / mutual fund houses also provide the
ease and convenience of transacting online. They have set up their own online transaction
platforms, where one can do SIP investments, through the IPIN (Internet Personal

Identification Number) provided by the AMC and following the procedure as made available
on their websites.
So, you have fewer hassles while investing as well as tracking your investment dates.
Here are some benefits of investing in equity mutual funds through SIPs
Light on the wallet: The SIP route enables you to invest
in smaller amounts at regular intervals (daily, monthly or
quarterly). This in turn reduces your burden of defraying
a lump-sum at one go from your bank account. So, if you
cannot invest Rs 5,000 in one shot dont worry. You can
simply take the SIP route and trigger the mutual fund
investment with as low as Rs 250 per month. Mind you, a daily SIP is also possible (if you
want to manage the volatility of the equity markets on daily basis).
Makes market timing irrelevant: Most investors try to time the stock markets; which in
our opinion is a complete waste of time and hazardous to your wealth as well as your
health! Remember having a long-term investment horizon is the key to wealth creation.
If bearish market conditions (as experienced during the turmoil of 2008 and early 2009),
gave you the jitters and made you feel that you had never invested in equities, then SIPs
would have been of help.
Timing the markets, apart from requiring a full time attention also requires expertise in
understanding economic cycles and market scenarios, which you may or may not
possess.
But, that does not necessarily make equities a loss-making investment proposition.
Studies have repeatedly highlighted the ability of equities to outperform other asset
classes (debt, gold, even real estate) over the long-term (at least 5 years) as also to
effectively counter inflation.

So, now one may ask if equities are such a great thing, why are so many investors
complaining. Well its because they either got their stock or the mutual fund wrong or
the timing wrong. In our opinion both these problems can be solved through SIP in a
mutual fund scheme having a steady track record, as the SIP route enables you to even-
out the volatility of the equity markets effectively.
Power of compounding: Your regular investments through the SIP route will help your
wealth grow by leaps and bounds. So, say you start a SIP of Rs 1,000 today, in a mutual
fund scheme following prudent investment system and processes, with a SIP tenure of
20 years. You will be amazed to see that your small savings of Rs 1,000 has grown into a
huge corpus of around Rs 10 lakh in 20 years (assuming a modest return of 12% p.a.).
Rupee cost averaging: In order for you to absorb the shocks of the volatile equity
markets well, SIP works better as opposed to one-time investing. This is because of
rupee-cost averaging.
Under rupee-cost averaging you would typically buy more of a mutual fund unit when
prices are low and similarly buy fewer mutual units when prices are high. This infuses
good discipline since it forces you to commit cash at market lows, when other investors
around you are wary and exiting the market. It also enables you to lower the average
cost of your investments.

VI: Your Action that Counts
After having read patiently till now, you might have started
feeling comfortable about equity as an asset class.
Moreover, it wouldnt have taken much time for you to
know that if you invest wisely, risk associated with
investing in equity can be substantially mitigated. If you
still keep thinking whether you should or you shouldnt
invest in equities, you might never be able to take a decision. Thus its time to act now.
Having said this, you shouldnt get over aggressive or even too casual for that matter; but
setting a ball rolling is important.
If you are new to equity investing, it might be a good idea to start investing in equities
through mutual funds. You might even opt for the direct route but in that case make sure
you understand risks thoroughly and you dont over-commit. You should also keep
upgrading your knowledge which will be helpful in taking right decisions.
In case you have overlooked or missed out on the most important aspects of equity
investing discussed in this guide here is a quick flashback for you.
Buying equity shares offers you a chance to participate in the business of the company
as you become a partial owner in the company
Equity as an asset class is purely for long term investors. In case you have a time
horizon of less than 1 year; just stay away from equities
Equity investments may help you generate better inflation-adjusted returns. But there
is always a risk to your capital which can be minimised by applying various strategies
but cant be eliminated completely
If you are investing directly in equity, you should know what to buy and what price
should you pay for it
In case you are not sure about anything that is critical to direct equity investing, you
would be better-off staying with mutual funds

Once you build a sound portfolio of equity shares and mutual funds, it is necessary to perform
periodic review.
HAPPY INVESTING!!
Mutual Fund Investments Are Subject To Market Risks, Read

All Scheme Related Documents Carefully.
CONTACT US
Quantum Asset Management Company Private Limited Quantum Information Services Private Limited
Regd. Office: 505, Regent Chambers, 5th Floor, Nariman [PersonalFN]
Point, Mumbai - 400021, India Regd. Office: 103, Regent Chambers, 1st Floor, Nariman
Toll Free No.: 1800-209-3863 / 1800-22-3863, Telephone Point, Mumbai - 400 021, India
No.: 91-22-61447800, Toll Free Fax no.:1800-22-3864 Telephone No.: 91-22-61361200 Fax.: 91-22-61361222
Email: Customercare@QuantumAMC.com, Website: Email: info@personalfn.com, Website: www.personalfn.com
www.QuantumAMC.com CIN: U65990MH2005PTC156152 CIN: U65990MH1989PTC054667


Your Guide To Understanding Equities

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Your Guide To Understanding Equities

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September 2016

But can you criticize equity as an asset class?

and wish you a VERY HAPPY INVESTING!!

An Investor Education and Awareness Initiative 2

An Investor Education and Awareness Initiative 3

Section I: Introduction to Equity 05

Why invest in Equity? 07

How equity can generate high inflation adjusted returns? 08

Things to remember before you invest in equity shares 09

Section II: Capital Markets in India 12

Importance of historical valuation 15

Section III: Fundamentals of Equity Investing 16

Why stock markets move up or down? 16

Some economic concepts 19

Where you can possibly go wrong? 22

Section IV: Evaluation Methods 25

What are ratios? 27

Section V: Ways to Invest in Equities 34

Equity Mutual Funds 37

How to select a mutual fund? 40

Investing in Mutual Funds through SIPs 46

Section VI: Your Action that Counts 49

An Investor Education and Awareness Initiative 4

An Investor Education and Awareness Initiative 5

Equity market: Investopedia.com defines equity market as,

An Investor Education and Awareness Initiative 6

Market Capitalisation: The market value of all outstanding shares of a

Why invest in Equity?

We earn money to meet our expenses. But the inflation bug

An Investor Education and Awareness Initiative 7

As you may know, investing in equity offers you a chance to

So your investment in equity can reward you in two ways:

quotes of legendary investor, Mr Warren Buffett.

An Investor Education and Awareness Initiative 8

Never invest in a business you cannot understand - Warren

As the legendary investor, Mr Warren Buffett has described it

Buy a business; don't rent stocks Warren Buffett

you can wait for your pitch. - Warren Buffett

An Investor Education and Awareness Initiative 9

Always invest for the long term. - Warren Buffett

minutes. - Warren Buffett

An Investor Education and Awareness Initiative 10

An Investor Education and Awareness Initiative 11

Components of Indian Capital Market

An Investor Education and Awareness Initiative 12

Indian Markets A quick glance

An Investor Education and Awareness Initiative 13

An Investor Education and Awareness Initiative 14

Historical Market Valuation

Data as on March 31, 2016

Importance of historical valuation

An Investor Education and Awareness Initiative 15

Why stock markets move up or down?

There are thousands of companies listed on stock exchanges;

And what affects stock prices?

An Investor Education and Awareness Initiative 16

In times of euphoria when everything seems hunky-dory, it is a period of risk-on; which

An Investor Education and Awareness Initiative 17

An Investor Education and Awareness Initiative 18

To begin with lets brush up some economic concepts:

While looking at promising investment destinations, it is vital to ascertain economic cycles

An Investor Education and Awareness Initiative 20

Gross Domestic Product (GDP);