Category: Knowledge and Concepts

Everything you want to know about Super Annuation

Posted on by Jagoinvestor

The only schemes that comes in your mind when it comes to retirement benefits are EPF, NPS & PPF. But there is one more scheme i.e. Super Annuation about which lot of people don’t even know. And those who know about it they don’t know how much corpus they have as their super annuation.

In this article I’m going to tell you what is super annuation and how to check your superannuation balance if your employer maintains it with LIC.

Super Annuation

First of all I would like to share with you an important thing, which one of my friend Subbu has figured out himself . Credit goes to him.

A lot of employees do not care to check there Superannuation amount, or they are not even aware that it exists. Knowing the amount of your superannuation can be helpful, because then you know that you have that much saving and hence when you plan your investments, you can factor in this information and take better decisions . This small amount make big chunks of your portfolio .

What is Superannuation?

Superannuation is a retirement Benefit by employer . It is a contribution made by employer each year on your behalf towards the group superannuation policy held by the employer. This is an important part of creating wealth for your retirement .

Features of Super annuation :

a) Superannuation Fund is a retirement benefit given to employees by the Company.

b) Normally the Company has a link with agencies like LIC Superannuation Fund, where their contributions are paid.

c) The Company pays 15% of basic wages as superannuation contribution. There is no contribution from the employee.>

d) This contribution is invested by the Fund in various securities as per investment pattern prescribed.

e) Interest on contributions is credited to the members account. Normally the rate of interest is equivalent to the PF interest rate. Read what is EPF and PPF ?
f) On attaining the retirement age, the member is eligible to take 25% of the balance available in his/her account as a tax free benefit.

g) The balance 75% is put in a annuity fund, and the agency (LIC) will pay the member a monthly/quarterly/periodic annuity returns depending on the option exercised by the member. This payment received regularly is taxable.

h) In the case of resignation of the employee, the employee has the option to transfer his amount to the new employer. If the new employer does not have a Superannuation scheme, then the employee can withdraw the amount in the account, subject to deduction of tax and approval of IT department, or retain the amount in the Fund, till the superannuation age.

Source : https://www.citehr.com

What happens with your superannuation after your retirement?

Once you get retired you can use the amount of your super annuation in 2 ways, either withdraw the total amount which will be completely taxable if withdrawn at once, or withdraw 1/3rd of it which will be tax free and convert the 2/3rd amount in regular pension scheme.

Tax will be applicable on the remaining 2/3rd of the superannuation amount and returns on it.

What happens if you resign?

This is the concern of most of the people today. When you resign the job, you can transfer your Super Annuation from your current employer to new employer and can continue it till your retirement.

If your new employer does not have the superannuation scheam, then you have 2 options, either withdraw all the money on which tax will be applicable, Or let it be in your superannuation fund and use it after your retirement as per the above mentions tax rules.

How SuperAnnuation is calculated?

The interest rate on Super annuation is similar to the interest rate applicable on PPF. Whereas the returns may differ depending upon the underlying insurance company and the superannuation scheam that your company has taken.

The interest in calculated and deposited to your account yearly. This is the interest paid by the insurance company and also your employers contribution.

Super annuation chart:

[su_table]

Years of Employment  Amount of Super Annuation 
  Less than 1 year   NIL
  Between 1 and 2 years   50% of the contribution + interest earned
  Between 2 and 3 years   75% of the contribution + interest earned
  More than 3 years   100% of the contribution + interest earned

[/su_table]

Interest Earned :

This is interest paid by LIC every year on the contribution by employer.

Rules of Superannuation on Maturity

Once the employee completes 3 years of service and works till his/her retirement, he/she can make use of superannuation balance as a form of pension. He/She can withdraw 1/3rd of the accumulated balance after retirement and the rest can be availed as monthly pension till end of life.

Steps for checking Superannuation balance online?

1. Go to licindia.com

2. Register for a user id and password.

3. Login.

4. Click on ‘Group Scheme Details’ tab.

5. Click on ‘member’ radio button.

6. Get the group policy number for super annuation from your company’s payroll department and enter ” in the policy number text box and click ok. (Talk to your finance department for getting the group policy number , this will be unique for all the employees of a company).

7. It will ask for LIC Id no and Date of Birth fields.

8. To get LIC Id no, call LIC branch with which your employer has a super annuation account and inform that you are calling from your company and provide your name to the LIC official. They will give your LIC ID No.

9. Since most companies had not furnished the date of birth details to LIC, enter ’01/07/1960′ / ’07/01/1960′ (forgot the order, try both n check) in the date of birth field.

10. You will get the policy enrolled and you can click on the policy number to view the details. The details will contain the accumulated balance till the last financial year. It also shows contribution made by your employer i the current financial year.

Are you able to see Superannuation Balance for yourself ? Were you aware of it ? Please share with us in comments section . Also please share if you find any discrepancies with the steps .

NPS , New Pension Scheme , A detailed Explanation

Posted on by Jagoinvestor

Today we will be talking about the “New Pension Scheme” Launched by Govt. of India.

What is NPS?

Its a pension system recently launched by Govt of India from 1st April, 2009.. You can regularly invest your money in this and get a lump sum at your retirement and a fixed monthly income for the lifetime . It will work almost the same way as Private Pension Schemes.

new pension scheme

Until now the pension schemes was available to Govt employees and employees of Big companies who has Provident fund facility. Any other person had to go with Private Pension schemes provided by Insurance Companies. IT as not a govt scheme for common person, With NPS now its a common person gateway to Pension Schemes.

Read previous post which was a guest post by Nooresh Merani on “How does a day trader looks like”Features

– No upper limit of Investment
– Minimum limit of 6,000 per year (Rs.500 per month).
– Annual Fees of .00009% (90 paisa for Rs.10,000) for Managing the fund.
– Tax benefit under sec 80C.
– Any Indian citizen between 18 and 55 years can invest in NPS.

Read other details below.

NPS Bodies

– Regulator : The one who will regulate the NPS System .
– Fund Managers : Who will invest the money
– Point of Presence : Responsible for Sales and Marketing .
– Central Record Keeping Agency : Responsible for all the document Keeping work (Record Keeper)

Lets see each of them In detail now .

Who will Regulate NPS?

PFRDA(Pension Fund Regulatory and Development Authority) will monitor and regulate all the activities under NPS. It checks how your money in invested and makes sure that the fund managers are following the rules and guidelines.

Its just like “SEBI for Stock Market” .

Who are the Fund Managers?

There will be 6 Fund houses appointed by Government to manage the funds under NPS. You can choose any one of them to be your Fund Managers. They are :

1. SBI Pension Funds Private Limited.
2. UTI Retirement Solutions Limited.
3. ICICI Prudential Pension Funds Management Company Limited.
4. Religare Pension Fund Limited.
5. IDFC Pension Funds Management Company Limited.
6. Kotak Mahindra Pension Fund Limited.

They will take all the decisions of where the money received under NPS should be invested in the best possible way considering all the rules and regulations set by PFRDA.

Watch this video to know about national pension scheme:

Who are Point of Presence?

The following entities have been approved by PFRDA for appointment as Points of Presence (POPs) under the New Pension System for all citizens other than Government employees covered under NPS.

1. Allahabad Bank
2. Axis Bank Ltd
3. Bajaj Allianz General Insurance Co Ltd
4. Central Bank of India
5. Citibank N.A
6. Computer Age Management Services Private Limited
7. ICICI Bank Ltd
8. IDBI Bank Ltd
9. IL&FS Securities Services Ltd
10. Kotak Mahindra Bank Limited
11. LIC of India
12. Oriental Bank of Commerce
13. Reliance Capital Ltd
14. State Bank of Bikaner & Jaipur
15. State Bank of Hyderabad
16. State Bank of India
17. State Bank of Indore
18. State Bank of Mysore
19. State Bank of Patiala
20. State Bank of Travancore
21. The South Indian Bank Ltd
22. Union Bank of India
23. UTI Asset Management Company Ltd

Who will be the CRA?

As per the website of PFRDA there is a Contact of negotiation is underway and NSDL is expected to be appointed as the CRA. there were other bodies too who wanted to be CRA, but the most suitable of all is CSDL. You can see them as the back office for maintaining records, administration and customer service functions.

What are the Steps of Investment?

  1. Visit a point of presence (PoP), fill up the prescribed form with the required documents.
  2. Once registered, CRA will send you a Permanent Retirement Account Number (PRAN). This will be unique to every person.
  3. Select your Amount and Investment Option.

Investment Options and Structure

Structure wise they are very similar to ULIP’s or ULPP’s from Investment Point of View . You have different kind of funds options with different exposure to –

– Equity Instruments
– Corporate Debt
– Fixed Income Instruments
– Govt Securities.

Different Options

– Risky option : The higher allocation in this option will be in Equity. To decrease the risk, Equity Investment is allowed only to invest in Index funds which tracks Sensex or Nifty. Also the equity exposure is caped at 50%.

– Moderate : IN this options Main exposure would be Corporate debt and Fixed income securities with some exposure in Equity and Govt securities. It will be moderately risky and rewarding.

– Safe : In this option mainly the investment will be done in Govt securities, and very little will be invested in Equity.

There will be a Default option , under which the allocation will be decided as per your age, where Equity Allocation will be high in the start and then it will come down as your age increases . You can also decide your own asset allocation as per your Risk appetite

Cost

There are different kind of Costs in NPS.

– Fund management charges of .0009% per Annam, which is excellent if compared to ULPP’s or Mutual funds charges .

– Annual Maintenance charges of Rs.350 and Rs.10 per transaction to CRA (soon, it will be Rs.280 per year, Rs.6 for per transaction).

– Rs.40 for registration with PoP and Rs.20 per transaction with them.

– There are other small costs too, lets leave it for now.

Taxation Issue

Sadly, As per the current law, the amount received at the end from NPS would be taxable, PFRDA is trying hard with govt to exempt the tax. You will get the 80C benefits on the amount invested in NPS.

UPDATE May 3, 2009

“Under following circumstances your account may be closed before attaining retirement age?

– death
– account value reduces to zero
– change in citizenship status.

Thanks to Viral for bringing up this point
Read NPS FAQ here

Conclusion

As per my views, Its a good initiative from Govt to introduce a Pension Scheme which will give common people a chance to invest in Pension schemes which is from Govt.

One important thing to understand and note is that Even though its a pension scheme, the returns are not guaranteed. It can vary drastically depending on your asset allocation and how you choose the fund options.

Other Negative point at this point is that the amount received at the end would be taxable which can have adverse affect on the return potential. But I am sure soon govt will make the final amount received non-taxable.

Currently I don’t rate it at par with PPF or EPF. At this point it would be wise to invest money in this if you have any money left over after your PPF and EPF contribution. Waiting for some more time before taking a call on this would be worthwile . Overall NPS passes 🙂

Question for you

– Are you personally impressed by NPS and will you invest in NPS?
– What else govt can make changes in NPS to make it attractive to you?

Previous Post : Nooresh Merani Guest post on How does a Day trader looks like?

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– Please leave your Comments/suggestions/disagreements .

 

3 M’s of Successful Trading

Posted on by Jagoinvestor

In the last Article , we had seen an Introduction to trading . In this section we will see what are the 3 M’s of Successful Trading as per Dr Alexander Elder .

I will give brief introduction of each of it , Its your responsibility to take it further and learn it in detail . take this as just a starting point .

3M of successful trading

The 3 M’s are :

  • MIND
  • METHOD
  • MONEY

MIND

This part of Trading is most important . It deals with Psychology . When one enters Trading business , he/she has some beliefs about the environment, about markets. They have to understand the importance of Discipline, How people think , how greed and fear affects investors. There are sub-parts to this

# Individual psychology of traders : You have to understand how to control Fear and Greed . How you should take rational decisions and not fall pray to your emotions while trading .

# Mass psychology of the markets : You also have to understand how mass psychology works . Why most of the people do what they do .

# The rules for maintaining personal discipline : You also have to understand the importance of Self Discipline, why you must be always consistent with your trading . You must never violate your rules . because in long run your discipline in one thing which will make you most money , not your knowledge or your skills .

METHOD

This is the part which deals with your knowledge about market , technical analysis , other tools which you can use to make Entry and Exit from any trade . This part is perceived to be the most important aspect and most of the people run after these a lot , but these are the least important part of your trading . Let us see part of this .

#Technical indicators :

These deals with the tools available for making decisions , for example , MACD, RSI , Stocastics, OBV and other 200 weird words.

#The best chart patterns :

Then you must know different types of patterns, which gives some idea about future action and how masses are thinking, some examples can be double top, Head and shoulder pattern etc.

#Developing a trading system :

Then finally after you are done with knowledge part, you should build up your trading system. what is trading system ? Its your rules for buying, selling, booking profits and cutting losses.

For learning on some technical tools you can see my series of articles on “How to be a better than average Investor”

MONEY

Now this part is an amazing one and my favorite 🙂 . What this determines is how will you manage your money , it decides how much money will put in market at any given time , and how much loss will you take maximum on any given trade . How much will be your maximum loss on any one trade, things like that .

Basically this part decides how long can you in the game of trading if things would go wrong . This part is extremely important . Without proper money management no can can survive for long in Trading . Lets see some basic and widely accepted views .

# The 2% Rule for individual traders :

This rule days that on any given trade your loss should not exceed 2% of total capital . So if you have Rs 1,00,000 , first time your loss should not be more than 2,000 . This rule makes sure that even if you make long series of loosing trades , still you are in the game .

Even if you make 10 consecutive loosing trades , your overall loss will be 18.3% , Though this will be rare , still you take care of this situation .

# The 6% Rules for every trading account :

This rule says that your monthly loss should not cross more than 6% in a month . Sometimes when you trade it may happen that there is some problem with your analysis or some issue between you and market which can not be explained , you keep trying to win , but don’t succeed, that time you have a great urge to revenge trade and get your money back .

The best thing at that time is to stop and get some rest , go for vacation and come back with fresh mind . This rule will make sure that if your chemistry with market doesn’t fit , you stop after loosing 6% of your capital . You can choose your own percentage amount .

I would like to choose 12% for me . it all depends on your risk appetite and stubbornness 😉

You might be interested in my previous money management example

# Essential record keeping for success :

This part says that you should always keep all the information regarding each trade . Buy price , sell price , date of purchase , how many days you carried , Reason for buy , reason of sell , what you learned from the trade , chart at the time of buying , charts at the time of selling etc etc .

Why do you do this ?

Record keeping makes sure that any day you can go back to your records and see what kind of mistakes you have done, why some trade failed , why you succeeded in some trade ? you can get lots of information from your records , you need to analyse your performance over days/months/years .

Its extremely important , after a series of trades when you look back to your records , you may be able to find out some pattern , some particular aspect or mistake which you do with each loosing trade and hence can take corrective measures .

So, finally we are done with 3 M’s of successful trading . Professor Van Tharp , in this legendary book “Trade your way to Financial Freedom” talks about how the weightage they would give on these 3 M’s .

According to him in Trading the importance factor is like this

Mind : 60%
Money : 30%
Method : 10%

Its totally opposite of what people perceive it to be , general people think that having all market knowledge and technical analysis is most important .

Nothing is far from truth , It wont be too ambitious to say that you can make money in market by simple coin toss if your have sound money management Techniques and Great control over your self , you need to cut your looser short without any emotion and let your profits run till they can by sitting tight and doing nothing .

Conclusion

So finally if you want to start learning Trading , Work hard on your Psychology part and money management techniques , Technical analysis and other knowledge is important but not vital !! .

Some other article’s you might be interested in :

– Options Trading
– Trading , What is it ?
– Swing Trading Presentation by Mr. Sudarshan Sukhani

you might also be interested in simple technical analysis example given by me with charts at my analysis blog

Don’t buy “Return of Premium Term Plan” – It does not make sense!

Posted on by Jagoinvestor

Does it makes any sense to buy “Return of Premium Term Plan”?

The one-line answer is “NO – it does not make sense”

A “Return of Premium Term Plan” or TROP as its called – pays back all your premiums at the end of the period, whereas the plain term plan doesn’t return back anything. Before we get into the analysis further, I want you to know why these return of premium term plan came into existence!

Term Insurance with Return of Premium

Why the Return of Premium Term Plan came into existence?

Term plans have become very popular in the last few years. We are seeing so many advertisements screaming about term plans importance. However, a lot of investors who don’t understand term plans fully, still feel a pinch that their premiums get “wasted” if nothing happens to them.

They equate “paying premiums” as “losing premiums” if they dont die. They compare it with an investment policy (read traditional insurance plans) where they get back there a sum assured towards the end of the policy.

Insurance companies sensed this behaviour and they introduced something called “Term Plan with Return of Premium” which can now proudly tell customers that they have nothing to lose. They get claim money on death, and if they don’t die, they get back all their premiums paid. Many investors who do not understand the time value of money concept fall for a product like this, as to human mind “getting back all your premiums” sounds very attractive offer.

Now, let’s talk about why it does not make sense as a product.

Return of Premium Term plan has an extremely low return

The premium for the TROP (return of premium term plan) is higher than the plain term plan and it can be 2x-3x times the normal premium in some policies.

So basically, you are paying an extra premium for getting your premiums back after 30-40 yrs!

Let’s look at an example of a 30 yr old male, who wants to buy a 1 crore term plan till 60 yrs of age (for 30 yrs tenure). In which case the premiums are as follows (Example is of Max Life Term Plan as on 21st Dec 2020)

[su_table responsive=”yes”]

Type of Plan Yearly Premium Details
Simple Term plan Rs 9912 One has to pay Rs 9912/yr for 30 yrs for Rs 1 crore cover. You don’t get back anything at the end on survival
Return of Premium Term Plan Rs. 17,969 One will have to pay an extra amount of 8057 for 30 yrs (apart from 9912) and will get back Rs 5.01 lacs (this is all premiums paid excluding the tax amount) at 60th year

[/su_table]

If you look at the example above, you can see that in both the plans you are paying Rs 9912 for the Rs 1 crore cover. Only difference is that in second policy, you are paying an extra Rs 8057 to get back Rs 5.01 lacs (excludes the taxes part) at the end. This is the only difference between the two versions.

So internally, the term plan with return of premium is simply a bundled product of a normal term plan and an investment policy. If we ask what is the return of this investment policy where you are paying Rs 8057 per year and getting back Rs 5.01 lacs after 30 yrs.

The answer is 4.05% CAGR.

Yes, its barely above saving account rates and a little below a normal fixed deposit interest.

I did the same analysis for the tenure of 40 yrs and 50 yrs policy (read why you should not take such a long tenure term plan) and the IRR return was 3.92% and 3.00% respectively, which means that if you buy the policy for a longer tenure, the return gets lower and lower and the product becomes even worse.

Below is the IRR return calculated in an excel sheet for your reference 

return of premium term plan irr return

Note : The above calculations are done in Excel for just one company plan, however similar kind of numbers are expected from other companies return of premium term plan. Please do IRR calculations yourself if you looking at other companies plans.

Return of Premium Policy ties you up with the product

What do you do, if you want to stop a “Return of Premium Term plan” in-between? Let’s say after 10 yrs?

It will not be as simple as a normal term plan, because, with the return of premium policy, your mind will tell you that you just have to continue it for another 20 yrs and you will get back all your premiums. Very smartly, the insurance company has converted a pure term plan into an “investment policy cum term plan” with very bad returns.

so the better alternative than a “term plan with return of premium” is to buy a simple term plan (here are 20 checklists before buying term plan) and invest the extra amount in another investment products like PPF, FD’s, Equity mutual fund or debt mutual fund and you will have better flexibility and returns.

Check out this video from Subramoney talking about this product

What happens if you stop paying a premium for Return of Premium Term plan?

There is an option to get a surrender value if you stop paying the premiums in between. Just like traditional plans, there is the concept of “Guaranteed Surrender value” in these kinds of policies which comes into picture once you have paid 3 yrs premium. However, the amount you get back is a fraction of what you have paid. There is a percentage assigned for every year which tells what part of the premium paid will you get back if you surrender the policy in a year. Below is a snapshot of the chart taken from Max Life Brochure

Surrender value chart of the max life insurance return of premium term plan

So, as per this chart – if one wants to surrender the policy in 10th year, they will get back only 55% of the premiums paid (excluding premiums).

Some other Info

  • The TROP gives you income tax benefits as per sec 80C
  • There is an option to pay premiums on a monthly, quarterly or yearly basis
  • There is also an option for limited pay (pay in 10 yrs) or in one single premium

Conclusion

So TROP is a very carefully designed product which favours the insurance company but makes the product look very good and works on the psychology of the investor. Better stay away from it. The best idea is to buy the simple term plan with the lowest premium.

If you have already invested in this kind of plan, then you need to evaluate what will make sense for you!

Do let us know if you liked the article and does it make sense to you? Share in the comments section!

Fundamental Analysis and Technical Analysis , What and When !!

Posted on by Jagoinvestor

I am starting a series of articles that will deal with “How to invest in stocks efficiently”. This post is Part 1.

There are two important questions which you have to answer when you want to buy shares? They are “What to buy” and “When to buy”?

How to invest in stocks efficiently

Fundamental analysis

You may be familiar with Fundamental Analysis, Fundamental Analysis answers the question “What to buy” ? . It a study of companies Financial statements, cash books, markets study to find out the future prospects of a company. It answers the question “Will this company is a good buy for long term”? , “Will it be more valuable than what it is now ” etc, etc ”

But !!, Even though you have picked up some excellent companies for your long term investments, That’s not the end of the story. Now the biggest challenge and question you have is “When to buy it”?

You should not just go the next day and buy the share, that’s not the right approach. There can be a price area where buying is best in terms of risk/reward .

Technical analysis

Technical Analysis is the study of charts, price and volume patterns and other indicators derived from price and volume. Technical Analysis gives us hint on what can happen in the future, understand that it only gives you chances, not a guarantee.

So everything should be taken with crossed fingers, Decisions are taken on the basis of TA only increases your risk/reward scenario.

I will give you an example :

Reliance is a very good long term Investment (do your own analysis to find out why, but it is :).

Investment Analysis

 

On Feb 1, 2009, Ajay and Robert want to invest Rs 1 lac in Reliance for the long term. Both of them understand that Reliance is a truly long term buy. Ajay invests in Reliance on Feb 1, because share is going up and he feels its a good time to enter others. He buys the stock at Rs 1360.

After some days Stock starts falling and reaches around Rs 1,150. Roberts buys the stock at that time.

see the chart here

Here you can see that Robert has got the stock at a 15% lower price, which means his profits will always be more than Ajay’s by that much. What did Robert do? Robert used simple Technical Analysis concepts and entered in the stock with better prices, It does not mean it will always happen, but there are good chances for getting a better price.

In the above case of Reliance, there is no significant price difference, but there can be cases, where there can be drastic differences, and it would be really worth using basic Technical Analysis.

Don’t be scared, I will tell you some very basic things of technical Analysis in some of the next post.

I will talk about

Part 2: Support, Resistance
Part 3: Trend Lines
Part 4: Simple Oscillators to use for short term investments.

Watch out for the second part soon.

Please share any real-life example which happened with you, May be we all can try to find out what could have been done to make a better entry or exit from the stock.

cheers 🙂

Margin Of Safety Principle

Posted on by Jagoinvestor

Came across a good article. Just reproducing the work here. This post talks about the Value and Price difference of some investment .

Margin Of Safety Principle

In his book, The Intelligent Investor, Benjamin Graham describes the concept of margin of safety as being an essential part of any true investment. He goes on to say that margin of safety is an element of investing that can be demonstrated quantitatively with sound rationale and from a historical perspective.

Graham’s definition of margin of safety is essentially the gap between price and value. All else being equal, the wider the gap between the two, the greater the safety level. Graham also explains that the margin of safety is important because it can absorb mistakes in assessing the business or the fair value of the enterprise.

As Graham says – “The buyer of bargain issues places particular emphasis on the ability of the investment to withstand adverse developments.

For in most such cases he has no real enthusiasm about the company’s prospects…If these are bought on a bargain basis, even a moderate decline in the earning power need not prevent the investment from showing satisfactory results. The margin of safety will then have served its proper purpose.”

From its origin, the calculation of margin of safety was never related to the volatility of the stock price of a company. The focus of most value investors has always been based on the intrinsic worth of the company in question–a bottom-up process that should be done without regard to current market valuation (which very few analysts are willing to do).

Even with a margin of safety, an investment can still go bad. This is not a failure of the concept of margin of safety principle, as the concept only provides assurance that the odds are in the investors’ favor that they will not lose money. However, it is not a guarantee that the investors will not lose money.

There are and have been many adjustments to Benjamin Graham’s margin of safety concept in the modern era. The way that Benjamin Graham calculated margin of safety years back was very asset-based, and probably quite different from how analysts today would make the calculation.

It is the inclusion of the concept that is important in one’s assessment of an opportunity, rather than the actual mechanics and particulars of the safety calculation.

Some value investors use a variety of measures in determining a firm’s safety levels. They are as keen on asset values as on earnings and cash flow, and may even consider intangible asset values like brands, reputations and intellectual property.

They also use a variety of measures just in case one of them does not hold up–the objective is never to be caught off guard. Based on these criterion, these value investors look for several different measures, such as break-up value, favorable dividend yield, price to cash flow, and discount to future earnings as supporting casts to Graham’s margin of safety principle.

Buying companies with a margin of safety prevents owning companies with a high burden of proof to justify their stock valuations. When a stock trades at a high valuation level, the expectations are so great and often so specific that a slight disappointment or an adverse change in expectations could be catastrophic. Buying shares with ample safety means buying stocks with the lowest possible burden.

Value investors also believe that margin of safety should incorporate an investor’s appetite for risk. The disparity of safety levels among investors is based on the amount of volatility they are willing to tolerate, the mistakes they are willing to accept, and perhaps the financial pain they are willing to endure.

The margin of safety principle essentially asks the question: What is supporting the stock price at its current level? or, Why shouldn’t the stock fall significantly from today’s current price? The Graham margin of safety is heavily conscious of what can go wrong, and not what the discount is to its fair value–the safety is thus purely based on the liquidation value of the current assets.

WallStraits uses the concept of margin of safety, with a debt of gratitude to Professor Graham–but we shift the primary focus from asset valuations to discounted future earnings. Our method is less tangible today, but more valuable as a predictor of tomorrow.

Because our DCF method entails making several important predictions 10-years into the future, we require a large margin of safety–perhaps 50% or more. Luckily, in a bear market environment, such as Singapore is currently experiencing, there are several fine businesses discounted by over 50%.

Upon satisfying the 50% discount to future earnings, WallStraits moves on to evaluate dividend yields (after tax), payout ratios, cash and debt levels, brand values, sustainable competitive advantages, management capability and other fundamental aspects of each business being considered for our portfolio.

We place rather equal emphasis on quantitative and qualitative issues. This differs from Graham’s search for pure quantitative net-nets (a price equal to the firm’s current assets less all liabilities–placing current value squarely on the value of property, plant and equipment).

Graham’s most notable student, Warren Buffett, demonstrated how vital it was to consider both the quantitative asset valuations and the qualitative business assessments to find true value stocks.

Buffett favored the discounted cash flow valuation because it included both the ability of a business to generate cash flow from tangible assets, as well as the ability to create value from intangible assets–like brand strength, intelligent management, and consumer monopolies. Buffett made famous the expression–I’d rather pay a fair price for a good business than a bargain price for a fair business.

WallStraits agrees that the ultimate investment is one undervalued versus its ongoing ability to produce profits and reward shareholders.

You can use your own logic and creativity to make personal assessments of the qualitative and quantitative forms for any business you consider for your portfolio–but regardless of your methodology–don’t forget to always think from the perspective of seeking large margins of safety.

Credit goes to original post here

What is long term in Share market? – Understand short term, mid-term and long term investment

Posted on by Jagoinvestor

Long term investments are the investments that are suppose to be held for an extended time period which will be considered to be more than 1 year.

There is no exact definition for long term investments. Let’s see how it is different from short term and medium term investments.

long term investment in share market

How long is long term ?

There are mainly 3 time frame in markets

  1. Short term (6 months – 2 yrs)
  2. Medium term (2 yrs – 8 yrs)
  3. Long Term (8+ yrs)

We are taking about long term investing from point of view of Investor , which invests in a company on the basis of fundamentals and valuations .

Time Frame is a relative term , Short term for some one can be medium term for some one and long term for other . similarly if some time duration is long term for you , it can be short term for someone else .

I have also written a small post on IDBI FORTIS WealthAssurance ULIP , Read it

But here we are talking about an average investor . So lets look at predefined tenures .

from my understanding, any time frame less than 6 months shall be considered as trading Time frame . Traders are people who like to take advantage of short term price movements based on news , Charts patterns etc .

One thing you must understand before hand is that Risk and returns are proportional , If you take high risk , there are chances of high Returns.

Now , lets see different time frames .

Short Term (6 months – 1 yrs) :

Any investment made from 1-3 yrs should be considered as short term .

Risk/Return Potential :

VERY HIGH .

Investing for short term :

Invest for short term only if you can afford take the risk. Its always good, not to invest for short term for any goals which are very important. Like for example, if you are going to have an operation or a marriage after 1 years, don’t put your money in stock markets for less than a year to gain extraordinary gains .

Its for professionals , not for an average investor. do it if you can afford to risk loosing it.

Low risk Short term investment option :

Corrections in a BULL RUN : If there is a BULL Run, wait for a correction, It happens many times that there is some correction in stock markets , At that time you can do some investments for short term like 6 months – 1 yrs. Invest only when markets start rising again .

Have a level in mind where you will take loss if it goes against you. There is no guarantee of profits ever. If you are in profit after 6 months, take your profits and get out, don’t convert your short term investment in long term one, One who can not be loyal to his plan in markets will eventually loose it all some day.

Same thing can be applied to short selling in corrections in Bear markets.

Example : In April 2005 , Oct 2005 , June 2006 , there was very good correction, after which it gave 30-40% returns within 6 months – 1 yrs.

If you want to understand the short term and long term in share market, watch the video given below:

Medium Term (1 yrs – 3 yrs) :

Any investment made from 2-8 yrs should be considered as Medium term .

Risk/Return Potential : HIGH/Medium :

Higher the tenure , lesser the risk .

Also it depends on the situation , there is again no guarantee , There can be some time , when there can be high risk in 3 yrs and some time it can less , but over all it should be less than the short term investment .

Investing for Medium Term :

You should invest for medium term for goals like Car , Vacations , etc and some part of portfolio for House , etc (close to 5+ yrs , not 2 yrs) . Choosing well diversified portfolio and investing in strong fundamentals is extremely important . Good timing is always important in any time frame .

But its difficult to time the market .

Low risk Medium Term Investment Time :

After a Bear Market is there for some time around, and markets have fallen considerably, you can start accumulating good stocks with good valuations every month in installment. Don’t jump and put all your money at once ,just because you feel, “now markets have fallen much”, Markets are supreme and you are no one to “feel” or “tell” markets movements.

Just expect it to come back soon and now start accumulating good shares , or start a SIP. There is no guarantee of any profits, we are just discussing the low risk opportunities here.

Read why SIP helps in falling and Volatile markets , Part 1 and Part 2

Example : Current time . This is an excellent time to start accumulating fundamentally good stocks in installments over next couple of months , especially a big chuck should be invested when there October lows are breached within some days ,which is expected with high chances .

Long Term (8+ yrs) :

Any investment made from 2-8 yrs should be considered as Long term .

Risk/Return Potential :

LOW , By Low do not think that we are saying you will get lower return , we are talking about CAGR, obviously the CAGR you can expect over long term is lower than the CAGR which you can expect in short term or medium term, but more important is the risk, the loss potential, and that is extremely low here, almost Nil i would say, This I am saying on the basis of past historical data.

Loss is possible but chances are very bleak .

Investing for Medium Term :

You should invest for Long Term for goals like Retirement , Child Education , Children Marriage or any financial goal which is to be taken care of after 8+ years , Do it using SIP .

Low risk Long Term Investment Time :

Ideally speaking, you can start doing this any time without seeing the current situation of market, because over long term it would matter less that when you entered markets. This does not mean that timing is not important in growth of money, obviously, If you enter neat the end of bear market or at some other important time, it would help .

But the point here is that , it would not harm if you start investing for long term at any time frame assuming that you are diversifying it well across sectors and stocks and also apply some extremely beneficial techniques like Portfolio rebalancing over this long tenure .

Don’t get scared by these words ,they are extremely easy to understand things and can be applied by anyone , and it does not take much time also , The only thing required from investor is the his share of determination to do all this .

Read what is Portfolio Diversification and Portfolio Rebalancing.

different investment goals

Final Note :

What ever i have talked about here are my personal views and my own idea of short term, medium term and long term. It can differ from people to people with different risk – appetite. Also understand that deciding your time frame is important to deal with the situation in markets after investments.

For example: if you decide that you are investing your money for your retirement which is going to come after 25 yrs, then it would be really easy for you to digest the volatility of markets and to see it going down while you invest. So know your time frame and invest it smartly at correct time.

Don’t try to get smart and get greedy. Markets are the place where Albert Einstein and Issac Newton also failed and returned to try what there were good at. That does not mean we will also fail. try to made fast money, in fact try to make smart money.

For new comers in this area, its advisable not to enter through Direct equity, better go though mutual funds, and please listen to people when they tell you all this, don’t get smart, else you will be ruined like millions others.

I have also written a small post on IDBI FORTIS WealthAssurance ULIP, Read it

My trip to Savandurga on Saturaday was Great, check the pics at flickr here

What Are RBI Relief Bonds?

Posted on by Jagoinvestor

In this article we will talk about RBI relief Bonds. Some bonds have a special provision that allows the investor to save on tax. These are termed as Tax-Saving Bonds, and are widely used by individual investors as a tax-saving tool. Examples of such bonds are:

  • Infrastructure Bonds under Section 88 of the Income Tax Act, 1961
  • Capital Gains Bonds under Section 54EC of the Income Tax Act, 1961
  • RBI Tax Relief Bonds

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RBI Relief Bonds

What Are RBI Relief Bonds?

RBI Relief Bonds are instruments that are issued by the RBI, and currently carry an 8.5 per cent rate of interest, which was reduced from 9 per cent early this year. The interest is compounded half-yearly. Maturity period of RBI Bonds is five years, and interest received is tax-free in the hands of the investor.

INVESTMENT OBJECTIVES

How Suitable Are RBI Relief Bonds For An Increase In My Investment?

RBI Bonds are not very suitable if you are looking for an increase on your investment. Since RBI Bonds carry interest @ 8.5 per cent, capital appreciation is better in other safe instruments that offer a higher rate of return.

However, if safety is of paramount importance to you, you couldn’t ask for a better deal as this is the safest instrument to invest in. In case of the cumulative option, bonds issued at a face value of Rs 1,000 are redeemed at Rs 1,516.

Are RBI Relief Bonds Suitable For Regular Income?

Yes, you can opt to receive interest either on a half-yearly basis or on maturity of the instrument, along with the principal invested.

If you opt for the first option, i.e., to receive interest on a half-yearly basis, you will receive interest every six months from the date of issue of the bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st July and 1st January each year.

To What Extent Do RBI Relief Bonds Protect Me Against Inflation?

RBI bonds do not offer any protection against inflationary pressures. As with other instruments of a similar nature, this risk has to be borne by the investor.

Can I Borrow Against RBI Relief Bonds?

Yes, you can borrow against RBI Bonds by pledging them as security in a bank.

RISK CONSIDERATIONS

How Assured Can I Be Of Getting My Full Investment Back?

RBI Bonds are issued by the country’s central bank, the Reserve Bank Of India. These are among the safest instruments available for investment, and you can be assured of getting back the full amount of your investment.

How Assured Is My Income From RBI Relief Bonds?

Your income from RBI bonds is assured. Since the issuing entity is the country’s central bank, the risk on this investment is nil. In case of the half-yearly interest payment option, the rate of return is 8.5 per cent.

In case of the Cumulative Scheme, where you receive the total interest at the end of the tenure of 5 years, the simple interest works out to 10.32 per cent at the end of the tenure.

Are There Any Risks Unique To RBI Relief Bonds?

No, there are no risks associated with your investment in RBI bonds. This is one of the safest investments you can make. Inflation and fluctuations in interest rates affect investment decisions in RBI Relief Bonds. An increase in the interest rates result in a decrease in bond prices, and vice-versa, if you want to sell them in the secondary market.

Are RBI Relief Bonds rated for their credit quality?

No, since the issuing party is the country’s central bank-the RBI-these bonds are extremely safe, and require no commercial ratings.

BUYING, SELLING, AND HOLDING

How Do I Buy RBI Relief Bonds?

Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank of India, designated branches of the State Bank of India, and designated branches of nationalised banks across the country.

What Is The Minimum Investment And The Range Of Investment for RBI Relief Bonds?

The minimum investment on RBI Relief Bonds is Rs 1,000. You can apply in multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your investment in this instrument.

What Is The Duration Of RBI Relief Bonds?

The period of holding of RBI Bonds is five years from the date of issue. The bonds are repayable on the expiration of 5 years from the date of their issue.

Can RBI Relief Bonds Be Sold In The Secondary Market?

Yes, the bonds can be sold or transferred to another party. If the bonds are in the form of Bond Ledger Account (BLA), they can be transferred by execution of a Transfer Deed in the prescribed form. However, transfer shall not be deemed as complete until the name of transferee is registered as holder of the Bond in the Office of Issue.

A new BLA will be opened in the name of the transferee (whom the bond has been sold to) for the remaining period by closing the BLA of the transferor (original holder of the bond). The Bond in the form of Promissory Note (PN) will be transferable by endorsement and delivery.

What Is The Liquidity Of RBI Relief Bonds?

While RBI Bonds cannot be redeemed prematurely and must be held for the entire duration of 5 years, you can always exercise the option of selling RBI Bonds in the secondary market if you so desire.

How Is The Market Value Of RBI Relief Bonds Determined?

Market value of RBI Relief Bonds is determined on the basis of prevailing (8.5%) interest rates and market conditions.

What Is The Mode of Holding RBI Relief Bonds?

RBI Relief Bonds can be held at the credit of the holder in an account called BLA or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding will be issued to the holder of bonds in the BLA.

The bonds in the form of BLA are issued and held with the public debt offices of the RBI or any branch of a scheduled bank authorised by the RBI. The bonds in the form of PN are issued only at the offices of RBI. However, bonds issued in one form will not be eligible for conversion into the other.

TAX IMPLICATIONS

Interest received on RBI Relief Bonds is completely exempt from income tax as per the provisions of the Income Tax Act, 1961. RBI Relief Bonds are also exempt from Wealth Tax. However, there is no tax benefit on the amount invested in these bonds.

Hope you liked this article. Leave your views about this article or any query if you have in our comment section.

Magic of SIP in Mutual Funds , Part 2

Posted on by Jagoinvestor

Some days back I had talked about SIP and its characteristics using some examples , you can read it here . Today we will take that forward and see other important things related to Systematic Investment Plan.

SIP - Systematic Investment Plan

So , We have that same last example where 1,00,000 was invested over 2 years using Systematic Investment Plan and without SIP in UNITECH. Can we measure how good our investment is at any point of time . For that I developed a simple indicator called IV ratio which is very simple , Its just the ratio of Your total investment divided by its current Value at any given point .

IV ratio = Current Value / Investment

So if your investment = 10k , has current value of 8k , IV ratio = .8 , If current value is 15k , IV ratio = 1.5

I have plotted a graph of IV ratio in two cases of SIP and NON-SIP . You can clearly see in the graph that , IV ratio for Systematic Investment Plan was always more than non-SIP mode.

At first , IV ration was declining for both mode, which is fine, because of falling markets, but still For Systematic Investment Plan it was high, which means, that you get better returns. Then in last part, when markets were volatile, IV ratio for non-SIP was stable, but for SIP it went up, which means that SIP was giving better returns at this point.


Finally Systematic Investment Plan mode generated worth of around 42k (IV = .42) and Non-SIP gave around 9k ( IV = .09)

Conclusion :

IV ratio is a simple tool to measure the performance of your investment. You can also use it to compare two different Investments mode over a period of time.

Now, let us see some other things in regard to Systematic Investment Plan. I have plotted the graph for IV ratio of SIP, and the investment value itself scaled down to 1. Blue line is the actual growth of investment and RED line is the IV ratio.

Some of the things to Notice here are

1. In the start (till 17-18) Investment was going up, but IV ratio was falling, which indicates Growth in value mainly because of your Monthly inflow in SIP, that means the markets are falling and eroding your investment, but the decrease in value is less than your monthly addition which you make.

2. From 18 payment onwards, you investment and IV ratio both are falling, which means that markets are falling at very high rate and your monthly contributions are smaller than the decrease in your portfolio.

3. from 31st payment onwards, you can see that IV ratio and your investment were going up, which means volatile and sideways market or small upside correction on up side.

At last, you can see that both the value converge to same value of .42, which is your IV ratio and your actual investment value, Because at this point total investment is 1,00,000.

Conclusion

IV ratio is the measure of how well your investment is doing in a given market, If its higher than yours friend, you can feel better because your have lost less for your investments. SIP results in higher IV ratio in markets which are not going up too fast.

Which means apart from fast moving markets on upside it makes sense to invest through SIP only. It protects you from volatility, develops from discipline, and your are more satisfied mentally.

Magic of SIP in Mutual funds , Part 1

Posted on by Jagoinvestor

Numbers Speak !!

Today we will see some characteristics of SIP (Systematic investment plans) . this is first part of this article, we will have part 2 of this as well where we will discuss other important things about SIP.

SIP - Systematic Investment Plan

 

Assumption :

We are assuming that investments were started from year 2007, It has both a part of Bull markets and Bear market, So i chose that time frame.

Let us first see an example where investment was made in NIFTY ETF’s. There are two friends Ajay and Robert. Both of them want to invest Rs.50,000 in markets with 2 yrs of time frame in mind. Both of them do not have that much cash in the start.

Robert believes that Markets are in Bull run and hence it has good chances of Capital appreciation. He does not want to miss this chance and decides to borrow money on loan from friends and family or personal loan and invest it.

What are his Characteristics at this point?

Its just like any normal, average investor, where investment decisions are based on emotions, without foresight and too narrow. They do not understand the cycles of market and they do not understand that markets moves up and down in every time frame.

On the other hand Ajay is an informed investor and does understand cycles of Market, He knows that markets run from up to down and the bull market which started in 2003-04 has already run a long way and can turn any time now. He understands that its a better idea at this point to not get into debt to invest in stock markets. He controls his Greed and will invest only what he has. Also he decided to invest 50,000 in 2 yrs. but a small amount month by money systematically.

Now lets see the capital appreciation which happened for both of them.

Summary :

Robert invest full 50k in the start around Jan 2007 with 2 yrs of time frame. Ajay also decides to invest the same amount but he breaks it in smaller chunks and wants to do it using SIP on his own.

Monthly Investment Growth in NIFTY ETF from Jan 07 – Jan 09 for Rs.50000


Lets look at what happened ?

Markets continue to rise and Robert sees his investments grow from 50k to 75k within a year. Ajay also sees his money grow to 35k, on an investment of 25k. If you see at this point, Robert has made very great returns on his investment compared to Ajay.

But after that see what happened. Markets started going down and investment of Robert kept coming down with markets and at the end it was at 35k. With Ajay it was a different case. His investments went up and down both sides and finally ended at same point at 35k.

What is Drawdown ?

Drawdown is the drop in the value of investments from its High. If 10k investment go up to 15k and then fall back to 12k. The drawdown is High(15k) – Lowest point after that (12k) = 3k, OR 20% drawdown.

Things to notice

Roberts Portfolio :

You can see the behavior of Robert’s investments. It was too volatile. You can see it going up and down and here and there. I am not saying that it didn’t move and made profits, It made good profits at one point of time, but Robert must be smart enough and courageous to take his profits even if markets are going up and there are chances of making more.

People who want “more” and “more”, eventually not even get “what they had”. Have a target and BANG !! Once it moves at that point, be unemotional and take the profits. Markets is a place where money is flesh and everyone is Vultures. If you leave it open for a long time, It will be taken by some one of other.

The other thing is Psychological issue.

Because investment moved so high, and then so low, Robert must be feeling bad and too conscious. He must be regretting a lot on not taking the profits. This has bad effects on investment decisions.

Roberts Drawdown :

His 50k goes up to 75k (high) and then it moves down to 38k. Draw down of 41k which is 49.3%, this can have devastating affect mentally, as one sees his investment grow to 75k and then drop to 38k and finally end at same point 38k after some volatile movement up and down.

Ajay Portfolio :

You can see the consistency of Ajay portfolio. It moved up and up all year whee markets where rising. and once markets started going down and was volatile, his portfolio was also volatile, but not very high, Its volatility was very low and finally it was almost at the same point as in the start of the year.

Infact you can see that his portfolio was rising still when Roberts was declining.

Ajay’s Drawdown :

This highest Drawdown seen by Ajay portfolio was from high of 39k (20th payment) to low of 35k, which is just 10.25% drawdown. You can get a feel, How difficult or easy it must be for Ajay to see this.

The point here is not Who made more money or Lost more. Infact you can see that they both were in loss of 12k on an investment of Rs.50k, But the journey was not same for both of them.

While Robert worked too hard and saw wild swings. Ajay made systematic investment and continuously saw his money go up only with minor drawdowns, which was easy to handle psychologically. This is true for any investments weather it is Shares, Mutual funds or ULIPS investments.

Now’s let see and example for the same period, weather these two same investors have made investment in UNITECH.

Why UNITECH?

I have taken this example because it shows what I want to show, the power of systematic investment. Here both of them are investing Rs.1,00,000 (1 lac) in Shares of Unitech. Roberts invests 1 lac in the start of Jan 2007, where as Ajay makes weekly investment of a fixed amount in such a way that it adds up to Rs.1,00,000 at the end of 2 yrs.

You can see the behaviour of portfolio for both of them.

Robert

Investment : Rs.1,00,000
Mode : One time investment
Final Value : Rs 9,000
Time frame : 2 yrs
Drawdown : 91% (Rs 1 lac , from high of 1.1 lacs to low of 10k)

Ajay

investment : Rs.1,00,000
Mode : Weekly investment (weekly SIP by self)
Final Value : Rs.42,000
Time frame : 2 yrs
Drawdown : 70% (28k, from high of 40k to low of 12k)

Weekly Investment Growth in UNITECH from Mar 08 – Feb 09 for Rs.1,00,000

Conclusion :

Now the main question? What is good One time investment or SIP? The answer is both are good inp different conditions, and it depends on your Risk appetite too.

When you don’t have clear indication of trend and are not sure where markets can go, the best idea is to invest through SIP. That will save you from volatile markets and small down moves too.

SIP will definitely miss out on returns in BULL markets. But it will work best in Volatile markets and falling markets. SIP is not a way to avoid losses, its a way of investing, where you feel more disciplined and average your cost of investment of long term.

Watch this video to know the magic of SIP:

The examples I have taken were biased because of the idea I wanted to communicate.

Anyone who did one time investment in 2004 would have made more money than someone with SIP, till 2007 at least because of the rising markets.

You must have seen in first example that Ajay’s portfolio was at 35k in the start of 35k, and even at the end of 2009, it was at same point even though markets fell from 20,000 levels to 10k levels and was too volatile, there comes the power if SIP (the money you pump in fights the falls in markets at least).

Part 2 : This is first part of this article, we will have part 2 of this as well where we will discuss other issues and things regarding the second example we took (UNITECH)

Request from Readers

If you are on twitter, try to post this article there, so that your friends can read it. I also have a small complain from my readers. please recommend this blog to your friends and any one you know and needs it. I feel this blog needs more readership and deserves too. You can help me promote this blog to others, please pass it on to others. Thanks

Also, why don’t you guys and gals leave me messages and comments, please put your comments with your views on article and your own ideas, I should also get chance to learn from you all, don’t I?

Read continuation Part 2 of this post here