Useful links for investment decisions

Investment is always a factor of information available. The more updated and exhaustive information one has got the better he/she can decide on investing. This article is dedicated to the different websites available to explore mostly the Indian market conditions, to do preliminary research on individual companies and to get help in investing. Though the list is not exhaustive, the team has tried to come with sites available on different information needed for investment related areas. The list will be modified in future as the new sites bring more and more relevant information for the investors.

Websites of the premier stock exchanges in India

www.nseindia.com

www.bseindia.com

Websites for some of the online brokerages in India –

www.icicidirect.com

www.sharekhan.com

www.kotaksecurities.com

www.motilaloswal.com

www.reliancemoney.com

Sites for extensive financial information about the market, company and financial news – Most of these sites not only give the movement of index during market hours, but also updates on the news so that can be related with movement in indices. Its’ also provides information about the companies in terms of current trading price, volume recent news etc. In depth report on financial statements can also be found here.

www.myiris.com

www.finance.yahoo.co.in

www.moneycontrol.com

www.money.rediff.com

www.moneycentral.msn.com

www.valuenotes.com

Comprehensive lists of business managers can be found at- www.ceoexpress.com

A few sites, which give the insight of happening at the international level -

www.bloomberg.com

www.wallpost.com

www.finance.yahoo.com

www.wsj.com

How an amateur can make intelligent investment?

Why this many people lose in market? One obvious reason for that is people seems to be more comfortable in investing in business they are entirely ignorant about. Decision of investing in a particular industry should not be based upon speculation or some ones’ recommendation as long as one can’t see which business company is in.

An individual, who decides to invest on his own, should not listen to the professionals or hot tips, pick of the week etc from the brokerage firms. He should rather invest in the companies whose business he could understand. There is no more scarcity of information about the financial strength and business opportunities for the companies. A personal visit to the factory outlet of Arvind mills – “MegaMart” could give an idea of the business model of the outlets. A further observation and basic calculation about the contribution of the revenue from MegaMart to the Arvind mills can suggest if the recent decision of Arvind mills to come with another 1500 outlets will be a success or not. Another example could be Future Group. Anyone who has visited Big Bazaar and Food Bazaar can experience the operation of the firm and decide whether to invest in such a firm or not. For such an open industry one does not need to seek suggestion of a broker. You know it before the market gets to know it. But how about financial institutions like IFCI, Reliance Capital, India Bulls etc.? These are all public companies and the balance sheets as well as income statements for different periods are publicly available. In a country like India, which has got maximum number of news channels with 3-4 channels dedicated solely to business, it is no more a challenge to get the up-to-date news about any happening in the economy and market.

Before starting investment, the individual should analyse ones’ trust on the economy, the growth, the future prospect and the rampant impact of economic changes on behaviour of market. For example, before investing in infrastructure industry, one will have to understand that the infrastructure industry is closely coupled with the growth trend of the country. One will also have to do self analysis to see how much of risk he is comfortable with, whether he is a short term investor or a long term investor, and how will he react to the sudden, unexpected and severe drops in the prices. The potential market victims are those who invest everything out available with them when market is at its all time high and abandons all hope & reason when market is down and sells out at loss. Almost all of us read the same news paper, listen to the same channels and economists, it is personal preparation as well as knowledge & research that distinguish the successful investors from the chronic losers. Investor should only invest what you could afford to lose without that loss having any effect on daily life in the foreseeable future.

No one can predict market and anticipate recession; hence it is prudent to look for profitable companies with strong fundamentals available at attractive price.

Why many mutual funds fail to perform?

Mutual fund is a wonderful financial instrument for people who have neither time nor the inclination to test their understanding of the stock market. It helps people with a very small amount of money to diversify their portfolio to minimize the risk. But even then quite often amateurs easily outperform many mutual funds. In fact in long run most of the mutual funds underperform in comparison to their respective benchmark index.

As Peter Lynch says, this is not because of the inability of the fund managers, but it is the inherent fear of losing. Success is one thing, but it is more important not to look bad if you fail. Managers are quite aware that if they lose even 20-30% of investors’ money on company like Reliance, people will question Reliance for its failure than the manager to predict such movement. But a 10% loss on IFCI could call for reasoning behind such investment. It is better to fail on conventional stocks to keep the job safe than to try unconventional stocks and brings the job in jeopardy. That is the reason why most of the fund managers keep looking for reasons not to buy exciting stocks.

The other issue with mutual fund is the fee that management charges to their investor for managing their fund. An entry load of 2.25% brings down the returns by a significant level and again the exit load (In case of most of the mutual funds) of 2.25% further takes away return from the investors. According to Buffet, in Wall-Street, such management fund causes mutual funds giving less than 80% of return in comparison to the index funds.

Another hurdle with mutual fund is the regulation imposed by monitoring authority like Security and Exchange Board of India (SEBI). The upper cap of stake on a particular stock forces fund managers to look for some less attractive stocks than to increase stake on stocks which are bound to give better returns. Specially, in case of Small-Cap, size prevents manager to buy in such companies, because it is not possible to buy enough shares to have noticeable improvement in fund’s performance.

In such a situation, one of the alternative investors could think of is putting money in index funds, which do not need any management and hence can save the entry and exit load. Index funds are kind of exchange traded fund, where individuals’ money is put in different constituents on the index in proportion to their weight in the index. For example the index fund of NIFTY consists of 50 stocks which are constituent of S&P CNX NIFTY, and the money invested in this index-fund is proportionally distributed among these 50 stocks. One can also look for funds which have outperformed the index consistently in past 3 to 5 years. There are a few good mutual-funds which have beaten the index by a significant difference and hence preferred even after the management fee. More importantly, an individual needs to look at the fund-managers’ performance rather than the funds’ performance. As change of management could lead to change in ideology and can have impact on returns as well.

Aren’t stocks riskier than other financial instruments?.. and the more after the recent fall?

This is quite common doubt among most of the people who stay away from the market and are satisfied with meager returns from their fixed deposits or bonds. It is quite probable that market condition change with time, causing a great company to lose its business and its stock to fall. But, rarely a stock is priced below its fundamental value and if at all it does, there could not be a better opportunity to buy such strong stocks. A realistic investor will move from stock to stock with the change in market condition hence averting any such loses.


In last 5 years, NIFTY Index has moved from 1051.80 on June 16^th 2003 to 4517.10 on June 13^th 2008. Had someone invested in Index fund 5 years ago would have made an average of more than 60% return at simple interest and more than 30% return even if taken in compounded terms. And all this return would have come without any botheration of switching from one stock to another(except for the fact that constituents of Nifty are changed).A 30% return overshadows all the misgivings about the risk involved with investing in equity. Equity might be riskier in short term but it becomes safer as the duration increases. The graph does reflect unexpected fall in 2004, 2006 and again in 2008, but such negative returns has always remained for short term and a long term investor would not bother for such movement. Such an impressive return even after taking the latest fall into account gives a clear impression that investment in fundamentally sound company would rarely disappoint.

A retail investor is often scared of speculation in market. Speculators are bound to be there, and this in fact helps in increasing the volume of trade. It brings down the impact cost, as a buyer will always find someone available to sell at that price and vice versa. Most of the speculation happens in small-cap companies. But looking at the fundamentals will easily filter out such stocks from investment perspective. Moreover the speculators have also started moving to derivatives from these small-caps, making equity more reliable.

Investor loses when he buys the right stocks at the wrong price and at the wrong time. Recent fall of DLF Limited is an example of such a stock which came below its issue price. A month back buy of this stock could be termed as right pick at wrong time. Though the stock is fundamentally strong, the recent slow down and doubt about the economic growth in coming days brought down the price of infrastructure firms drastically and DLF was no exception.

People start believing stocks to be prudent investment when it is not. Last year was golden year for many people who blindly invested in stocks without looking even at basic fundamentals like balance sheet & income statements and made decent gain. Stock was hyped all the way to be the obvious choice, but the correction taken place this year has made people believe it to be riskier and safe to stay away thing. And this happened when many stocks are available at bargain price which should have been bought.

To sum up – People lose in market because they seem to be more comfortable in investing in business they are entirely ignorant about. The stock becomes riskier for those who get into market without any planning and knowledge. Hence, one needs to do self analysis to see how much of risk he is comfortable with, whether he is a short term investor or a long term investor, and how will he react to the sudden, unexpected and severe drops in the prices.

Derivatives: Basics

Since 'Derivatives' are so much talked about these days and we haven't covered it in this blog, let me talk something basic about Derivatives. As we know, Derivatives are financial instruments which derive its value from one or more underlying asset (from the word 'derived'). Though underlying price is the most dominant factor in the price of a derivative, other things like risk free rate, volatility in the underlying, duration of the contract, kind of settlement, etc. are few other factors that help in determine the price of a derivative instrument.

So, the more important question which arises is why do we need derivatives? Why can't we straight away trade in the underlying? Well, we need derivatives to hedge the risk. In a developed market, everyone wants to hedge his/her risk and derivatives help him/her to do so. An example for this can be a farmer who wants to sell potatoes after two months when he will harvest his produce. He knows that in future, prices may go up or down. He knows the approximate produce that he is going to have but have to wait for two months to get the physical commodity(Potatoes) to sell in the market. What if prices fall by this time? This is a big fear for the farmer. On the other hand lets assume a chips manufacturing company which has secured a huge order for potato chips to be delivered after 3 months and it required potato supply after two months. The company fears the prices may go up and reduce its profitability. Here is a typical situation in which the two complementary parties share a common risk and are willing to reduce it. What if the farmer and the company agrees to have the deal that farmer will sell a fixed quantity of potatoes to the company after two months at some price which is fixed today. So, they enter into an forward contract ( a kind of derivative instrument, since the price at which contract is done is dependent on the price of potato, the underlying commodity). This way, the farmer and the company hedges the risk. (for farmer, risk is of prices going down in future, while for company, the risk is of prices going up).

Now, coming to the types of derivatives, lets start with the forwards contract. In forwards contract, buyer agrees to buy specific quantity of goods from seller at a fixed price (futures price) on a future date. So in the above example, suppose the company agrees to buy 100 kg of potatoes at 10Rs/Kg after 3 months from now, it will be a forwards contract. Now, in these type of contracts the major problem is of default risk. If prices go up then farmer will try to default and if prices go down then company will try to look for other sellers. Hence, futures contracts are used. In futures, contracts are more standardized and are traded on a future exchange. default risk is taken care by margin which is charged by the exchange from both buyer and seller. Most contracts are settled through cash settlement. Margin requirements can be reduced or waived off for those who have physical ownership of the commodity.

Now we come to the question as to how to decide on the futures price. Now the futures price has to be greater than the spot price else, people will make profit. This can be seen from the following example. Say, If spot price is 100 Rs and futures price is also 100 Rs, then a person will buy futures of 100 Rs and sell stock of 100 Rs. He will earn interest on those 100 Rs which will be his profit (arbitrage). So, future price is always higher than spot price. Theoretically future price is calculated by continuous compounding and is given by S * exp(r*t) where S is spot price, r is rate of interest (risk free rate) and t is fraction of time. Now, if theoretical futures price is greater than actual futures price, then the asset is underpriced and we will like to buy futures and sell stock. And if theoretical futures price is lower than actual futures price, then the asset is overpriced and we will like to sell futures and buy stock. Theoretical futures price will eventually tend to be equal to spot price as we approach the maturity date. This is termed as principle of convergence. Difference of spot price and future price is defined as basis (spot price – future price). When difference increases, we say that basis strengthens and is good for short hedger. When difference decreases, we say that basis weakens and is good for long hedger.