Fundamentals v/s Technicals

Investing is a choice-making task, one has to choose on where and how much to invest. Equity is a very opportunistic investment option, but it can bring with it a decision making equation of whether to look at fundamentals of a stock or its technical’s.

Fundamentals determine the health of the company, whether the company is doing well, it has enough working capital, there is good cash flow, the price to equity ratio is not very expensive, the forward earning is tempting and so on and so forth.

Technical’s is the volume and the stock price, historic charts and nothing beyond that.

A big price swing in a short time is not ruled out, however when the dust settles down the stock normally moves back to a fundamental price.

When a stock takes a beating, it may not be due to fundamentals turning worse, more often than not it is the external environment which lead to negative breadth for the stock price.

Doing the fundamental analysis before investing is a good practice as a fundamentally sound stock tends to always give decent returns in the long run. Having said that one should also exploit any technical bust in the stock price.

Never ever invest on half-baked analysis.

Cashflow

Knowing and estimating you cash flow is important to plan your investments. In simple terminology cash flow is the amount of cash which flows towards you (or away from you) after deducting all the expenses. e.g: if your monthly salary is Rs 10000 and if you have expenses of Rs 3000, then you have a positive cash flow of Rs 7000 for the month.

The salary you earn is not important. You may earn a huge six digit salary per month, but if your expenses are huge, your investment potential is nullified.

Cash flow is the overall picture of your personal economic health. Make sure you scrutinize your cash flow estimations to throw away the unnecessary expenses thereby augmenting your investing potential.

System Investment Plan (SIP)

An investor is like a test cricket batsman, a long term innings has to be perfectly planned by first playing in and then accumulating the singles and twos over by over.  In the similar analogy, a small investment every month accumulates to create a big corpus in 20-25 years.

This month by month systematic investment does not put any burden on the investor and the investor is freed with the pressure of timing the market to perfection.

A systematic investor can invest in either fixed income instruments like Recurring Fixed Deposits or can invest in equity funds.

I am too early to plan retirement

A big myth is that retirement planning is not for the young!! Everyone wants to have a big corpus after retirement, but the realisation of planning for the corpus usually happens in the second half of work life.

The Providend Fund(PF) which is deducted from your salary and deposited in your PF account  is a miniature. Considering that the purchasing power will be less than half of what it is today, more should be done to create a big corpus by the time you are near retirement age.

Right from younger days, one should set aside 10-15% of your net income towards retirement planning. Remember the power of compounding? The earlier the money is invested towards corpus,the more times would it compounded.

This is a discipline act and sometimes tough choice would have to be taken. No wonder one has correctly said that the pain of discipline is still less than the pain of regret.  

Golden rule of 72

In finance, the rule of 72 is an estimating method for doubling the invested capital.It works well for fixed income segments.This rule also works to estimate the purchasing power to halve with respect to inflation.

For instance, if you were to invest  Rs 1000 with compounding interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth Rs 2000.

Remember,the rule of 72 works well only for compound interests.

Asset, Liability, Cashflows and Contiguency

In simple terms an asset is something that puts money in your pocket and a liability is something that takes money out of your pocket.

The first house you buy is normally a liability as you will live in it and pay the monthly outgoings. A second house you own can be an asset or a liability depending on how you have bought the house, weather it has outgoings and whether it draws rental income.

Is car an asset? The answer is a big No. A car is a depreciating good which does not even preserve the invested capital. The moment the car is bought it has already depreciated 30% of its capital investment.

A rule of thumb is to have enough cash flow so that the assets draw enough income for you to pay off your liabilities. This is what can be called as financial stability.

One should also keep a small corpus as contingency as this will come handy on a rainy day.

The asset v/s liability becomes a blur the moment an asset is listed as collateral for drawing car loans, jewellery loans or any other loan.

Non-convertible debentures (NCD) and yield to maturity(YTM)

Non-convertible debentures or NCD are company fixed deposits, basically it is like you are giving a loan to the company, in return the borrowing company pays you interest on the capital.

Even though NCD’s are like fixed deposits in a financial institution, they are not completely risk-free. So one must check the CRISIL rating and company history, company balance sheet and past company record before investing in NCD’s. Normally NCD’s come with a maturity date and a rate of interest (referred to as coupon)

NCD’s are listed in the stock market as well so these are highly liquid in nature. One can trade NCD’s on the stock exchange.

Yield to maturity(YTM) is the return rate of interest which the investor will receive, if the NCD is held until maturity. Normally the interested accumulated is re-invested so the YTM compounds over time.

A rule of thumb is to choose a NCD which has a AAA CRISIL rating and invest only if the YTM is more than the FD rates in public financial institutions.

Any income earned from NCD’s are taxable at a fixed rate of 10% (with indexation) if sold after 1 year of holding. If sold in the same financial year then the profit is added to the taxable income and tax charged will be treated as per the income slabs.