Corporate Actions– Mandatory vs Voluntary Actions!

The announcement of a Corporate Actions attracts significant attention in the markets and also creates an exciting atmosphere. It may be Christmas early in the cases of dividends or at times a shock in some unfortunate cases of delisting.

Actions

Today, we try to further understand the world of corporate action through the means of an important distinction i.e. on the basis of choice available to shareholders. Here, we are going to discuss what are Corporate Actions, types of Corporate Actions and difference between Mandatory vs Voluntary corporate actions.

What is a Corporate Action?

A corporate action is a process initiated by a company after the approval of the company’s Board of Directors and brings material change to the organization and its stakeholders. Corporate Actions include dividends, mergers, and acquisitions, rights issues, name change, change of the security identification numbers like CUSIP, SEDOL, and ISIN, etc.

A Corporate Action at times may also impact the securities (both equity and bond securities) by affecting the price. Because of this, it is mandatory for a corporate action to be announced in order to keep the shareholder informed. This is done both by the company and also the exchange the security is listed on.

But did you know in certain cases shareholders too are given the option to vote over the processing of corporate action? Here we try to understand the basis on which corporate actions are differentiated as mandatory and voluntary.

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Mandatory vs. Voluntary Corporate Actions?

Some corporate actions when announced are generally automatically applied to the investments of the shareholders. These are known as Mandatory corporate actions.

In some cases, the shareholders are given the option to participate in the respective corporate action. Here the shareholder decides if he will be a part of the corporate action or not. These Corporate Actions are classified as voluntary.

Mandatory Corporate Actions

A mandatory corporate action is decided on by the board of directors and affects all shareholders once it is bought into effect. There is nothing much a shareholder can do in this case.

If the shareholder does not want to be affected by a mandatory corporate action he has to relinquish his ownership by selling off his holdings in the stock market.

Examples of Mandatory Corporate Action

Dividends: Here the shareholder is not required to do anything in order to receive the dividend. The only function the shareholder is limited to collecting the dividend and observing the effects on his shares.

Stock Splits: In this corporate action the shares of a company are divided based on the ratio provided. Say a company announces a 2 for 1 stock split. Here for every share held by the investor, he will receive an additional share. Or in other words, the number of shares held will be doubled. The value of the shares, however, will remain the same i.e. a share that was worth at Rs.10 will be 2 shares at Rs. 5 each.

The investor may be in favor of this decision as the shares which were earlier at a higher price may now be easily sold in the market. Or he may be disappointed as his investment may trade at a reduced market price due to its increased availability. But regardless of the scenario, he will only have to accede to the decision taken by the organization and not have any say.

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Voluntary Corporate Actions

A voluntary corporate action is like an offer made by the board of directors of the company that only comes into effect if the shareholder elects to participate in the corporate action. Unlike a mandatory corporate action, a voluntary corporate action does not impact all the shareholders after it is announced. It only affects those in favour of it.

In the case of Voluntary CA, the shareholder is required to respond to the company. Only then will the company go ahead and process the corporate action. The shareholders not in favour are not impacted and their investments are left untouched.

Examples of Voluntary Corporate Action

Tender Offer: Although a tender offer may possess various forms. They however generally outline a company offering the shareholders to purchase the shares from them at a predetermined price. This price is generally slightly higher than the price the security is currently being traded at in the market. Here the investors have the option to either tender their shares to the company or simply not participate and continue to hold their shares.

10 Largest Stock Exchanges in the World

People who invest in stock must be familiar with the New York Stock Exchange (NYSE), NASDAQ, Tokyo stock exchange as a few biggest exchanges in the list of Largest Stock Exchanges in the world. But there are a few large stock exchanges with which they might not be familiar with. In this post, we are going to discuss the biggest and largest stock exchanges in the world.

exchanges

Before we start this post, let us brief a bit about what the stock exchange is. A Stock Exchange is an organization that anchor formulated market for dealing in securities, derivatives, commodities, and other financial equipment. It is one of the powerful ingredients of the financial market. Here, buyers and sellers club together to carry out transactions. And, securities are bought and sold out according to clear-cut rules and regulations.

Stock exchange furnishes the required edifice and framework to the brokers and members who deal with asset classes. It also governs the transaction activities to certify free and fair trade. The most engaging aspect is that the Stock exchanges are also deemed as the financial measures of an economy where the industrial development and firmness is mirrored in the index. Here is the list of the ten largest Stock Exchange in the world.

10 Largest Stock Exchanges in the World

1) New York Stock Exchange

The New York Stock Exchange (NYSE) is first on the list of the largest stock exchange in the world and is a highly esteemed stock exchange in the USA which is situated at 11, Wall Street, New York City. It was established on May 17, 1792, and consists of 2,400 listed companies. It is the world’s largest stock exchange and has a market capitalization of US$ 30.1 trillion.

Back to the back of mergers has aided the New York Stock Exchange to gain its colossal size and global footprint. The blue-chip companies which are listed under NYSE are Berkshire Hathaway Inc, Coca-Cola, Walt Disney Company, Mc Donald’s Corporation, etc.

 2) NASDAQ

Second on the list of the largest stock exchange in the world is NASDAQ which was primarily an abbreviation and stage for the National Association of Securities Dealers Automated Quotations. It is an American stock exchange and is headquartered at 151 W, 42nd Street, New York City.

The NASDAQ commenced its business on February 8, 1971, and is sighted as the world’s first electronically traded stock market. NASDAQ has a combined market capitalization of $10.8 trillion and is ranked second in the list of largest stock exchanges.  It consists of more than 3,000 stocks listed under it and comprises of the world’s humongous tech giants such as Apple, Microsoft, Google, Facebook, Amazon, Tesla, and Intel.

3) Tokyo Stock Exchange

The Tokyo Stock Exchange (TSE) which is also known as Tōshō is located in Tokyo, Japan. It was validated on May 15, 1878, and is also the third-largest stock exchange in the world.

TSE  has close to 3,500 listed companies with a syndicated market capitalization surpassing the US$ 5.67 trillion. The TSE’s metric indicator is Nikkei 225 and it is home to some of the voluminous  Japanese giants with international exposure, including Toyota, Suzuki, Honda, and Mitsubishi and Sony.

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4) Shanghai Stock Exchange

The Shanghai Stock Exchange (SSE) is located in the city of Shanghai, China and is one of the two stock exchanges plying autonomously in the People’s Republic of China. Although its foundation traces back to 1866, it was adjourned after the Chinese Revolution in 1949. However, The Shanghai Exchange in its contemporary outlook was laid down in 1990.

Currently, Shanghai SSE is the world’s fourth-largest stock exchange with a combined market capitalization f  US$ 5.01 trillion. The most interesting fact is that the absolute market cap of the SSE is constructed out of formerly state-run insurance companies  & commercial banks.

5) Honk Kong Stock Exchange

The  Hong Kong Stock Exchange (SEHK)  is located in Hong Kong and is the world’s fifth-largest stock exchange on the basis of market capitalization.  It consists of 2,315 listed companies with a wholesome market capitalization of HK$29.9 trillion.

6) London Stock Exchange

The London Stock Exchange (LSE) is based in London and is the sixth-largest stock exchange in the world. It was established in 1571 and is the oldest stock exchange in the world.  It has more than 3,000 listed companies with a combined market capitalization of $4.59 trillion.

LSE is also the maiden source of benchmark prices, equity-market liquidity and market data in Europe. Some of the massive companies listed under the LSE are Barclays, British Petroleum and GlaxoSmithKline.

7) EURONEXT

The Word EURONEXT is an acronym for European New Exchange Technology and has its corporate address at La Défense in Greater Paris. EURONEXT was established in 2000 by the consolidation of the exchanges in Amsterdam, Paris, and Brussels.

Over the years, it amalgamated with multiple exchanges, most particularly the New York Stock Exchange. It steers financial markets in Amsterdam, London, Brussels, Lisbon, Oslo, Dublin,  and Paris. It has around 1,500 listed companies leading to a market capitalization worth €4.1 trillion. EURONEXT provided the segments which are equities, warrants, exchange-traded, bonds, commodities, funds and certificates, derivatives, indices, and foreign exchange trading platforms.

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8) Shenzen Stock Exchange

The Shenzhen Stock Exchange (SZSE) is oriented in the city of Shenzhen, China and was founded on  December 1, 1990. It is the 8th largest stock exchange in the world and has approximately 1,300 listed companies with a combined market capitalization of $3.92 trillion.

Most of the companies under this SZSE are corporate firms of companies in which the Government Of China has a controlling interest. The Shenzhen Stock Exchange had introduced the “ChiNext Board” in 2009 comprising of high-tech & high-growth startups, quite similar to NASDAQ.

9) Toronto Stock Exchange

The Toronto Stock Exchange (TSX) is situated in Toronto, Canada. It was introduced in 1852 and is held and wielded as a subsidiary of the TMX Group. It is the ninth-largest exchange in the world and has 2,207 listed companies with a combined market capitalization of $2.3 trillion.

The financial instruments include equities, investment trusts, exchange-traded funds, bonds, commodities, futures, options, and other products. It is also to be noted that mining and oil and gas companies are listed in more numbers under the Toronto Stock Exchange compared to other stock exchanges around the world.

10) Bombay Stock Exchange

The Bombay Stock Exchange  (BSE) is an Indian stock exchange located at the high-wheeled Dalal Street in  Mumbai. It was established in 1875 and is Asia’s first-ever stock exchange. It is also the world’s 10th largest stock exchange with a total market capitalization of more than $2.2 trillion.

The BSE has approximately 5,000 listed companies and has assisted in the growth of the country’s corporate sector and financial markets. Securities listed under BSE comprises of stocks,  futures, options, index futures, index options, and weekly options. However, the BSE’s benchmark is measured by the Sensex which nearly covers all the sectors of the Indian economy.

What are Supports and Resistances? And How ?

One of the most elementary concepts while trading in stocks that every trader should know is, “Supports and Resistances”. If you’re already involved in the market, you might have heard or read terms like “Nifty50 has got a big resistance at 10,800 points” or “Stock XYZ has a support line at Rs 105”. So, what exactly do the traders mean by these terms in their analysis? We are going to discuss that through this article.

Resistances

In this article, we are going to discuss what are supports and resistance, their characteristics, and how exactly to use them. By the end of this article, you will have a good idea about these concepts and use them in your trading.

What are Supports and Resistances?

The Synonym for the word support is “Reinforce”.  Basically, support can be said to be a point of reinforcement. In other words, supports are those points which acts as a barrier for the prices, when they start to some down. They can also be said as points, where the downtrend is expected to be paused. And we should see a new surge in buying and demand. In short, supports are those points, where buyers are more forceful than sellers.

On the other hand, Resistances are said to be the point where the supply increases or the longs start getting out of their positions from the market. Therefore, if we were to carefully analyze, supports and resistances can be said as the point of friction or tussle between buyers and sellers. And Resistances, are those points where sellers have higher say than buyers.

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Characteristics of Supports

Here are the key characteristics of Supports while looking into the charts:

  • Supports are those points or levels, below which the market finds difficult to fall. They can also be said as point of infliction between buyers and sellers.
  • Supports are also the point of Maximum demand from buyers, and even the sellers exit their selling positions from the market.
  • The buyers have a higher say in deciding the levels of support in the market. These levels can also be said to be mainstay for buyers.
  • Supports, if breached sees a quick sell off in the market, and then the next level of support becomes a point of contention.
  • If the levels of supports holds in the market, then fresh longs can be initiated and generally these trades have good risk to reward ratios.

— Understanding Supports with an Example

The figure below shows the daily chart of HDFC Bank. Through this chart, we get a clear illustration on the concept of supports and the impact on the market, if the supports are respected or breached

Now, if we carefully look, the market finds a very strong support in the range between Rs. 1030 and 1075. The sellers continuously try to breach this levels, but to no avail. And after forming a base at these levels, the market starts going up.

And, we see continuous buying momentum in the share price of HDFC Bank. A Trend line support is formed in the market by joining three points from where the market is bouncing. In this rally, the share price of HDFC bank moved up from 1030 levels to almost 1250 levels (a near 20 % gain).

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Characteristics of Resistances

Here are the key characteristics of Resistances while looking into the charts:

  • Resistances are the levels which are defended by sellers. And the market finds it difficult to go beyond that level. It is a tussle point between buyers and sellers.
  • Maximum selling pressure comes from sellers at this point and even the buyers start to exit their long positions at these levels
  • If the levels of Resistances are breached in the market, we could see a massive short covering in the market, up to next resistance levels.
  • Resistances can also be called as points where fresh short positions can be initiated in the market, with good risk to reward ratio.

— Understanding Resistances with an Example

The figure above is a weekly chart of Airtel Limited. Through this chart, we get a clear illustration on the concept of Resistances, and the impact on the market if the resistances are breached.

The Share price of Airtel Limited had made a new high in the year 2007 and after that, the market had corrected nearly 50% from its highs. And then again, the market made a move up and went up till near 500 levels and started correcting again. And by joining these two points, of the initial high and the recent high, we could form a trend line.

Closing Thoughts

In this article, we tried to simplify the concept of Supports and Resistances while looking into the charts. Let’s quickly conclude what we discussed today.

Supports and Resistances are important points of significance on charts as we get good entry or exit points for our trades. On one hand, Supports are defended by bulls/buyers and on other hand, Resistances are defended by bears/sellers. These levels of Supports and Resistances can be used to identify targets for the trade and also for keeping Stop losses for existing trades. As a thumb rule, for a longer trade, look for the immediate resistance level as target. On contrary, for a short trade, look for the immediate support level as target.

3 Easy Ways to Invest in Foreign Stocks From India

Apple, Google, Facebook, Amazon, Microsoft, Samsung, Twitter… foreign These are some well-known companies in the world. We all have grown up using the products/services offered by these companies. But along with using their products, can we also own a part of these companies?

foreign

Wait, these are not Indian companies, right? Therefore, they won’t be listed on the Indian stock exchanges. These companies will be listed in their respective country’s stock exchanges. So, how to buy shares of a company that are registered in the foreign stock exchanges?

Don’t worry, if you really want to buy these stocks- you’ll get it. Always remember the famous movie dialogue by King Khan- “Kehte hain agar kisi cheez ko dil se chaho … to poori kainath use tumse milane ki koshish mein lag jaati hai

Why should you invest in foreign stocks?

Before we start this post, let us first discuss why should you invest in foreign stocks? Are they better than Indian companies? Here, you need to make up your mind why you want to invest in foreign companies. There are over 5,500 listed companies in the Indian stock market. Aren’t they enough? Why do you need to invest alternative stocks?

Well, I’m really not in a position to answer the second question. These are giant multi-billionaire companies that we are talking about here. Google, Apple, Facebook, Amazon, Samsung, Cisco, Tesla, etc are too big companies to comment upon. These companies have lots of highly qualified professionals, employees in their management team. It won’t do justice if a boy in his 20s sitting on the comfort of his couch judges these companies. Nevertheless, I can share a few of my personal opinions regarding why to invest in foreign stocks.

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Top reasons why many Indian invests in the US

Here are my top reasons why many Indian invests in the US or other foreign stock exchanges:

1. People want to invest in their favorite companies

Apple, Google, Twitter, Facebook, Amazon, etc. are the darlings of this generation. And of course, many people want to invest in these companies

2. Diversification with Global Investments

Investing in foreign stocks helps in diversification. Let’s assume that the Indian equity market starts falling due to some local region. However, investing in foreign stocks can mitigate the risk in your portfolio as the local reason may not have a significant effect on the international markets.

3. To seize bigger opportunities

Once you start to invest in foreign stocks, there are no boundaries anymore. You can hunt for better (profitable) opportunities in the international markets.

Besides the above-mentioned points, few investors believe that foreign companies have better resources, facilities, government cooperation, and standards. That’s why they invest in these foreign companies, compared to Indian companies.

Cons of Investing in Foreign Stocks

There are two sides to every coin. Here are a few critical points to know before you invest in foreign stocks:

1. Be ready for the high charges

While investing in international stocks, you’ll be transacting in foreign currencies. For example, if you are trading in the US stock market, you have to pay the brokerages in the US dollar. And hence, the stock brokerages may be a little higher compared to the charges in the Indian stock market. Similarly, the annual/monthly maintenance charges may also be higher compared to domestic accounts.

2. Profits are subjected to the currency exchange rate

Let’s assume that you are investing in the US stock market. When you bought the US stock, the currency exchange rate was $1= Rs 68. However, next year- when you sold the US stock, let say the Indian currency got stronger, and the currency exchange rate becomes $1 = Rs 62. In such a case, you have already lost 8.8% due to the change in exchange rate. That’s why when you invest in foreign stocks, profits are always subjected to the currency exchange rate.

3. Up to $250,000 can be invested overseas by the Indian residents

As per the RBI notification in the Liberalised Remittance Scheme (LRS), an Indian resident individual can only invest up to $250,000 overseas per year. With the current exchange rate of ($1= Rs 68), this amount turns out to be over 1.7 Crores. Anyways, if you have a family of four, you can invest 4 x $250,000 = $ 1 Million. That’s enough money to invest, right?

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How to invest in foreign stocks?

Now that you have learned the basic concept of investing in the international stock exchanges, here are three simple ways to invest in foreign stocks—

1. An account with Indian Brokers having a tie-up with a foreign broker

Many full-service Indian brokers like ICICI Direct, HDFC Securities, Kotak Sec, Axis Securities, Reliance money, etc has a tie-up with the foreign brokers. They have made it very simple to open your overseas trading account with their partner (foreign) brokers. You can invest in foreign stocks using these full-service brokers. 

2. Open an account with the foreign brokers

A few international brokerage firms like Interactive BrokersTD AmeritradeCharles Schwab International Account etc permits Indian citizens to set up an account and trade in US stocks, mutual funds, etc. In fact, US-based brokerage like ‘Interactive brokers’ also has an office in India where you can visit, get your queries answered, and open your overseas trading account.

3. Investing in Foreign stocks through new startups Apps

In the past few years, many new starts have been launched in India and abroad than helps Indians to invest in foreign stocks. For example, recently launched startup Vested Finance, helps Indians to invest in US stocks. They are a US Securities and Exchange Commission (SEC) registered investment advisor. Similarly, you can also invest in foreign stocks using the Webull app, another popular startup company that is also committed to building the best investing and trading experience for India and Global stock markets.

Extra: Buying Indian MF/ETFs with global equities

There are a number of mutual funds/ETFs who invest in international markets (global market, emerging market, etc). You can invest in those mutual funds/ETFs to indirectly invest in foreign equities. 

This is the easiest approach to invest in foreign stocks. An advantage of investing through mutual funds is that you won’t need to open any overseas trading account. Further, you won’t also require to invest a hefty amount. Compared to direct investing in foreign stocks (where you might be asked to maintain a minimum of $10,000 deposit), investing in mutual funds/ETFs are cheap.

Closing Thoughts

Investing in the foreign market will help you widen your investment horizon. Here, you can invest without boundaries in your favorite companies. Moreover, in the era of the internet- it’s not much difficult to invest in the international market.

Nevertheless, investing in the international stock market has both advantages and disadvantages. The most significant advantage is that it helps in diversifying your portfolio. However, the obstacles are higher expense charges and currency exchange rates.

Why Prices of Petrol and Diesel Increasing in India

After 67 days of lockdown, the economy finally opened up on June 1st. Since then most of us have been trying to bring our lives together and adapt to the new normal of living with COVID-19. In the midst of threats on our borders and the steady rise of corona cases, petrol and diesel prices have steadily increased in the background for 22 days. These added to the unusual events of 2020, as the diesel prices were higher than petrol.

petrol

Today we shed light on the rising petrol and diesel prices. We also try and answer the possible reason for the increase especially when just a few days ago the crude oil prices crashed into the negative territory.

How are petrol and diesel Priced?

Before we look into the causes for the price increase, it is best to figure out the chain that crude oil moves through in order to better understand where the price increase has come from.

Unlike other oil-rich countries, 80% of the crude oil consumed in India is sourced from other countries. This crude oil faces freight charges until it is transported to Oil Marketing Companies (OMC) which is dominated by public sector enterprises with very few private players. These companies go on to refine the crude oil into finished products.  The public players include IOCL, HPCL, BPCL, MRPL, etc. The ONC companies then charge their cut of profits in addition to the cost incurred by them for refining. The next cut is taken as profits to the dealers in petrol pumps etc. It may be surprising but the portion of the charges mentioned above make up only one-third of the amount paid by the consumers for petrol or diesel.

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Reasons for the increase in prices of Petrol and Diesel

— Crude oil price normalizing

One of the major questions we would be having is that since the prices had gone negative, how is it that we are facing an all-time biggest increase in a fortnight. It is important to note that there exist different types of crude oil varying based on the place they are sourced from and the sulfur content present in them. WTI from the US, Brent crude from the UK, and the OPEC basket from the middle east. Of these the most expensive has been the Brent and the OPEC.

— Setting off losses

As seen above despite Brent and OPEC being comparatively expensive, their global prices had reduced significantly in the months of April-May. This further raises questions as to why the prices of petrol and diesel were not reduced to match the global fall. The answer to these questions lies in the fact that the govt had chosen not to transfer the benefits to the consumers but instead use it to set off other losses.

These losses were primarily because of the COVID-19 environment. It had forced the government to move into a lockdown freezing most of the revenue channels for the govt. Which also included income from petrol and diesel as the consumption was dropped to only 30%.

The fall in demand to only 30% of consumption also caused the OMCs to sell every liter at a loss as the profit made was not able to cover the cost incurred. The OMCs were forced to further increase their margins in the’ Lockdown-Unlock’ period to cover the losses they operated on during the lockdown which led to a 22-day steady increase till the prices touched levels where they were profitable.

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— INR to Dollar exchange rate

The exchange rates also impact the prices of petrol and dollar as the crude oil is traded only in exchange for the dollar. The COVID-19 pandemic hammered the already weakened rupee. The rupee currently hovers at over Rs. 75 for a dollar. The rupee traded at Rs.70 for one dollar in December 2019.

Closing Thoughts

The increase in the prices of petrol and diesel-only would kick off the inflation domino effect on other products as well. The Jet Fuel too has already begun to see its share of the inflation. And we already know that ATF being the major expenses for an airline company will further be transferred to the consumer fares. Other products too face inflation in prices as the cost of freight and transportation would increase too. The already ailing Automobile industry has already started to feel the burn as the Demand for diesel vehicles has already dampened.

A complete guide on Value investing in India

There are many successful strategies in the stock market. However, three of the most popular investing strategies are- Value investing, growth investing in india and dividend investing. It’s really difficult to say which one is better as it totally depends on the investor’s knowledge, style, and preference.

india

Nevertheless, value investing is one such proven strategy that has created huge wealth for many investors who have followed this strategy with discipline. In fact, one of the biggest followers of value investing is the legendary investor, Warren Buffett.

What is value investing?

The basic strategy of value investing in very simple. You find an amazing company, calculate its true (intrinsic value) and pay a lot less to purchase the stock (when it is on sale in the market). As you have bought the stock at a discount, you can make a profit by selling the stock when the price reaches its true value.

Few common tools that value investors use in order to find undervalued stocks are- lower than average price to book value, a low PE ratio or higher dividend yields.

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Three Fundamental philosophies of Value investing

Value investors believe that the market overreacts to good and bad news and hence they do not correspond with the company’s long-term fundamentals. Therefore, at a specific time in the market, stocks can be overvalued, undervalued or decently valued.

The strategy of value investing is to find the undervalued stocks -which are trading at a discount because of short-term reasons or market not yet realizing their true potential. Here are the three fundamental philosophies of value investing:

1. Look for the true/intrinsic value

What distingue value investing from other popular strategies is that value investors believe that stocks have an intrinsic or true value. They find this concrete number using different valuation methods like discounted cash flow analysis. When the market value of that stock is below the calculated value, the value investors purchase that stock. Further, as these investors have bought the stock at a discount, they sit back and relax until the stock reaches its true value.

2. Avoid following the herd

Interestingly, you can find a large population of investing community following herd mentality psychology in making various financial decisions like buying a new property or investing in the stock market. Seeing others getting profited with investment, our brain tells us to go for it without a second thought.

However, the value investors avoid herd mentality. They do not believe in group thinking or buying a stock just because everyone else is buying. That’s why, many a time- the value investing strategies looks similar to the contrarian investing

3. Always have a Margin of Safety

The margin of safety is the guiding philosophy of value investing to reduce risk and avoid loss. Here, the value investor gives a benefit of doubt to themselves by purchasing a stock with a margin of safety.

For example, let’s assume that an investor calculated the true value of a company to be Rs 100. Here, buying the stock at any price below Rs 100 can be considered as an undervalued price. However, if the investor wants a margin of safety of 20%, then he/she will buy that stock at Rs 80 or less. Here, the value investor is safeguarding his investment by adding a significant margin of safety in his/her purchase price.

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Does value investing in India works?

Yes, Definitely!! Tell me one thing- If I offer you to purchase a brand new iPhone X at a discount of 50%- Isn’t this deal profitable to you? Even if you don’t plan to keep the iPhone, still you can sell it for a price way higher than your original purchase price. There are a number of online websites like Olx or Quickr where you can easily find a buyer for this phone.

Value investing works on the same concept. Here, you buy terrific stocks at a price below their intrinsic value (i.e. discount price) and hold it till they reach their true value.

So, does value investing in India works? Absolutely!! Value investing is a time-tested strategyFrom Benjamin Graham to Warren Buffett to Joel Greenblatt to Raamdeo Agrawal -all have made a massive fortune by following the strategies of value investing.

Best books to learn value investing in India

Although, I tried to cover most of the critical points related to value investing in India in this post. However, there are still many concepts yet to learn for beginners. Here are the best books to learn value investing in India.

Closing Thoughts

Value investing is a proven strategy to build wealth. And value investing in India definitely works for those who apply this strategy with discipline.

However, value investing is subjective and depends on the investor’s style of investing. While many value investors only look for undervalued stocks, few also consider the future earnings expectations and cash flows to determine the future value. For example, the star fund manager Peter Lynch (Author of One up on wall street) was more interested in undervalued stocks with good growth prospects.

10 Biggest AMCs in India – Asset Management Companies

An Asset Management Company (AMC) manages a pool of funds collected from investors. Investors prefer to invest their money with AMC due to the level of diversification, the skill of the investment manager offered, along with other professional services. AMC’s attract investors who either do not possess much knowledge of the markets and would benefit from an investment manager or those who would rather allocate their precious time elsewhere.

Asset

A small retail investor will be able to invest in a very few stocks with the limited savings he has. By doing so he exposes himself to the additional risk if the shares of the company he invested in make a loss. In products offered by the AMC’s the huge pool of funds collected from investors is invested in a huge number of stocks protecting its investors from the losses of focused investment. AMCs designs various products to suit the needs of different investors. They create portfolios that suit the different risk appetites, tenure, tax benefits, etc. that the investors look for.

10 Biggest AMCs in India 2020

The following are the top Indian AMCs with the largest Assets Under Management (AUM) as of March 2020.

1. SBI Mutual Fund

The SBI mutual fund was founded in 1987. At its inception, the MF was fully owned by State Bank of India (SBI) a public sector bank. In 2004 SBI disinvested 37% stake from its mutual funds which was taken up by global leaders Societe Generale Asset Management. In 2011 the stake held by Societe General was taken up by Amundi as part of a global movement to merge its asset management business with Crédit Agricole. SBI Mutual Fund is currently a joint venture between SBI and Amundi of France.

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2. HDFC Asset Management Company 

The Housing Development Finance Corporation Bank provides mutual fund services through its subsidiary HDFC Asset Management Company Limited. One of the leading AMCs in India, HDFC formed this Mutual fund company with Standard Life Investments and holds approx. 57.4% of its shares.

3. ICICI Prudential Asset Management Company

ICICI Prudential Mutual Fund was established in 1993 with 2 locations and 6 employees at the inception of the joint venture in 1998, to a current strength of more than 1000 employees with around 120 locations. Due to its substantial growth, it currently boasts more than 4 million investors. The AMC is a joint venture between ICICI Bank in India and Prudential Plc, one of the largest players in the financial services sectors in the UK.

4. Birla Sun Life Mutual Fund (BSLMF)

The Birla Sun Life Mutual fund was established in 1994 as a joint venture between Aditya Birla Capital Limited and Sun Life Financial Inc ( Canadian insurance provider founded in 1865)

5. Nippon India Asset Management Company

Nippon India AMC, earlier known as Reliance Asset Management Limited was founded by the late Dhirubhai Ambani and is one of the most popular AMCs in India. It was later run in a joint partnership with Nippon Life Insurance from Japan. In 2019 Nippon Life Insurance went on to own a 75% stake in the mutual fund allowing Anil Ambani owned Reliance to exit the Mutual fund industry.  After this, it came to be known as Nippon India Asset Management Company.

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6. Kotak Mahindra Asset Management Company

Kotak Mahindra Asset Management Company (KMAMC) started operation in 1998. The Kotak Mahindra AMC is one of the few wholly-owned subsidiaries among the top AMCs. It is a subsidiary of Kotak Mahindra Bank Limited (KMBL) and boasts an investor base of above 1.7 million investors.

7. UTI Mutual Fund 

UTI Asset Management is India’s oldest and largest mutual fund management company. The mutual fund industry in India originally began in 1963 with the Unit Trust of India (UTI). For a period it was the only source of mutual fund investment for Indian citizens in the 90s. UTI Mutual Fund is a Government of India and the Reserve Bank of India initiative.

8. Axis Asset Management Company

Axis Asset Management Company was launched in the year 2009. It is a joint venture between Axis Bank and Schroder Singapore Holdings Private Limited.

9. Franklin Templeton

The American establishment was set up as Templeton Asset Management India Pvt. Limited in India in the year 1996. Over 2 decades of consistent growth made Franklin Templeton as one of the largest foreign fund houses in India. 2020 however was seen as the worst year for Templeton Asset Management India as they ended up winding six of their debt mutual fund schemes in India. This has led to the company currently facing multiple litigations across the country.

10. IDFC Asset Management Company

IDFC Asset Management Company is one of the leading AMCs in India since its inception in 2000. It formes a part of Infrastructure Development Finance Company Limited a finance company based in India

ROE vs ROCE – What’s the difference?

As investors, the financial ratios have become an essential part of our decision-making process. This is because ratios measure and give us a more comprehensive picture of companies’ operational efficiency, liquidity, stability, and profitability in comparison to the raw financial data from various statements.

ROE

Today we look at two profitability ratios namely the ROE and the ROCE with an attempt to better understand them

Return on Equity (ROE)

The Return on Equity ratio enables us to measure a company’s performance by dividing the annual net returns by the value of the shareholders’ equity. The ROE ratio helps us to judge the effectiveness of a company’s management to use the shareholder contribution available in order to generate profits

— ROE Formula

Return on equity (ROE) can be calculated as Net Income of a company divided by its Shareholder Equity.

ROE formula

Net Income: The Net Income considered here is the income remaining after the taxes, interest, and dividend to preference shareholders is paid out.

Shareholder Equity: Assets – Liabilities

ROE brings together two financial statements. It includes the Net income from the income statement and the shareholders’ equity from the Balance Sheet.

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Example to understand ROE

Take two companies A and B in the ice cream business. Both companies have made a profit of 20 lacs for the financial year 2019-20. But how are we to compare the greater of the two in this scenario. After taking a  closer look we find that the investments received by the 2 companies are: Company A – 1 crore and Company B – 2 crores.

The ROE computed for company A is 0.2 and for company, B is 0.1.

This puts the returns from the two companies in a whole new perspective. Despite both of the companies reporting the same profits, the management of Company A is more efficient in converting the money invested into profits. Hence, it would be wise to invest in Company A as management is more efficient in generating profits.

Return on Capital Employed (ROCE)

The Return on Capital Employed ratio shows us the effectiveness of a company’s allocation of capital. The ROCE ratio is acquired by dividing a company’s operating income by the capital employed.

ROCE Formula

Return on capital employed can be calculated by dividing EBIT (Operating Income) by its Capital Employed.

ROCE formulaOperating Income: The operating income is what we get after the total sales is deducted by the operating expenses like wages, depreciation, and cost of goods sold. In other words, it is the Earnings before interest and tax charged (EBIT).

Capital Employed: Assets – Current Liabilities or Equity + Debt.

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Example to understand ROCE

Let us take a similar example as that taken in the case of ROE. The same companies A and B are in the ice cream business. They have earned a profit of 20 lacs and have an investment as follows: Company A -1 crore and Company B – 2 crores. But in addition to this, the debt taken by the companies is Company A – 3 crores in loans and Company B – 1 crore in loans.

Using ROE and ROCE – The right way?

A shareholder may also use the ROE and the ROCE ratios in comparison to each other. When the ROCE ratio is greater than the ROE it signifies that a major portion of the profits earned is diverted to service the debt of the company. This would not be taken positively by shareholders. However, it is also important to consider that a company with a high ROCE ratio is able to raise debt at attractive terms. The high ROCE improves the valuations of a company. This is because it shows that the company can easily raise debt for its future operations.

What is Ponzi Scheme? And How to Protect Yourself from it?

Frauds and scams are part of our lives for a very long time. From corporate frauds, government official frauds to individual scams, our society has witnessed all. Time and again we have heard of big scams like Indian Coal Allocation Scam 2012 – Rs 1,86,000 Crore, 2G Spectrum Scam 2008 – Rs 1,76,000 Crore, Commonwealth Games Scam 2010 – Rs 70,000 Crore, Satyam Scam 2009 – Rs 14,000 Crore, etc.

Ponzi

However, one such scam which is quite common but never came in a lot of notice or fame for the retail people is “Ponzi Schemes”. Although a lot of people have lost lakhs of rupees in these schemes, however, most of our population still do not understand what exactly are these and how they work. In this article, we are going to demystify this fraud and discuss what is Ponzi scheme, it’s history, some infamous Ponzi Schemes and how investors and common people can safeguard themselves from such fraudulent tricks.

What is Ponzi Scheme?

A Ponzi scheme is an investment scam where returns are paid to existing investors from funds contributed by new investors. In a Ponzi scheme, investors are duped by being promised high returns with little or no risk on their investments. The scammers then rely on cash flow from recent investors to provide returns to older investors. The scam runs along the lines of ‘Robbing Peter to pay Paul’.

Here the investors have no idea from where their returns come from. They are misled to believe that the returns are being generated from the success of a business opportunity or the superior skills of a portfolio manager. At the initial stages, if an investor wishes to withdraw money, the scammers ensure that this is done promptly in order to gain the investors’ trust. The liquidity coupled with the superior returns results in a social feedback loop where current investors amazed by the returns suggests it to their friends and relatives.

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History of Ponzi Schemes

The scheme is named after a man called Charles Ponzi, an Italian who committed the fraud a century ago. He promised to pay investors a 50% profit within 45 days or 100% profit in 90 days. He claimed that he was able to raise the profits by acquiring Postal Reply Coupons from countries where it was cheaper and sell these coupons in countries where they were being sold at a higher.

How is the Ponzi Scheme different from a Pyramid scheme?

A Ponzi scheme may at times be confused with a Pyramid. A Ponzi scheme promises a high rate of return and the source of these returns is hidden from the investors (which is actually from the investments of new investors).

In a Pyramid scheme, it is made clear to investors that in order to gain returns they have to recruit new investors. The new investors further have to do the same after the initial investment and so on. In addition to this investors at times are also given a right to sell a product in exchange for a commission which also turns a pyramid scheme into a marketing and sales campaign.

Some Other Infamous Ponzi Schemes.

— Bernie Madoff

The phrase ‘ Give the devil his due’ suits no one better than Bernie Madoff and his Ponzi Scheme. This is due to the size, period, and the ruse implemented by Bernie Madoff. Bernie Madoff was a pioneer in the investing world as he brought forward the advent of trading using electronic systems, and hence NASDAQ. He was also looked up to as he served as the non- executive chairman of the NASDAQ for 3 terms( 1990-93).

Crypto Ponzi

The success of cryptocurrencies took the world by storm due to the success of Bitcoin and Ethereum. But scamsters somehow have always have managed to be a step ahead adapting to cutting edge innovations. Cryptocurrencies too have not been free from scams as con-artists take advantage of investors who evidently have lesser knowledge of the working of cryptocurrencies.

Plustoken a crypto from China received investments of $2 billion. They did this by marketing themselves as a crypto wallet service. Here the investors were promised higher returns if they exchanged Bitcoin or Ehereum in exchange for Plustoken’s own crypto. This scheme was just another Ponzi were over 3 million investors were cheated.

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How do you protect yourself from Ponzi Schemes?

1. High investment returns with little or no risk

Any investment opportunity that says this is a major flag that actually says you are never getting your money back. It is best to apply one of the basic rules of investing here that only with greater risk comes with greater reward. Low risk is accompanied by lower returns. Investors should also beware of words like ‘ everyone else is doing it and profiting’ as these create a fear of missing out.

2. Overly consistent returns

Investments react to market trends barring a few outliers from time to time. If you are given proof or notice that the investments are able to generate consistent returns regardless of the market going through extended bearish periods, then it is another red flag. Bernie Madoff’s investment firm delivered consistent returns of 8-10% every year regardless of market trends. This was a major red flag that investors missed.

3. Secretive or complex strategies

When you receive investment opportunities it is best to try and understand how the business or investment opportunity works.

Scammers in the crypto world have made use of this obliviousness that investors had towards the working of a cryptocurrency.

4. Believe numbers and data over individuals

Scammers generally have charismatic qualities that attract people towards them. Bernie Madoff was always seen as the most genuine individual until the scam broke out. He was described as a person always reachable by phone. Investors have even claimed that he attended funerals when one of their loved ones passed away as a sign of support. This quality allowed Bernie to gain the trust of potential investors at the synagogues he prayed in and the country clubs he hung out in.

5. Background Checks

It is always best to perform background checks when we are presented by investment opportunities by individuals. This can be done by verifying the firm’s registration numbers.

Bharat Bond ETF? And Is it a Good Investment Option?

Finance Minister Nirmala Sitharaman announced the formation of India’s first Bond Exchange-Traded Fund (ETF). This first corporate bond ETF of the country was named ‘Bharat Bond ETF’. This news came nearly two years after the then FM Arun Jaitley announced a plan to launch a bond ETF in his 2018 -19 budget speech.

ETF

The FM Nirmala Sitharaman announced that this move was in order to deepen Indian bond markets and at the same time provide additional money for Public sector units. Today, we try and decode what these funds newly introduced in the Indian markets really are.

What are Bond ETFs?

Before we look into what a Bond ETF is it is actually better to look into bonds and ETF’s separately so as to understand them better.

A Bond is a financial instrument used by a company to raise funds from the stock market. Here, the investors are paid interest in exchange for the amount lent to the company. It is safe to say that bonds are a means of raising debt. Here the periodical interest is paid to the investor and the principal amount is repaid on maturity. A bond does not give any ownership right to the investor but there exists a risk of default on the loan.

An Exchange Traded Fund(ETF) is a fund that is actively traded on the stock market. If you have noticed mutual funds, on the other hand, do not trade in the stock market. An investor who wishes to invest in a mutual fund does so based on a previous day’s calculated Net Asset Value(NAV) price. In the case of these mutual funds the demand and supply forces of the stock market do not influence the fund price directly and neither can they be bought and sold through the stock market.

An ETF removes this inconvenience faced by the fund. This is because ETFs are the answer for funds that hold different types of securities to be traded on the stock exchange.  This is made possible in ETFs through an arbitrage mechanism to keep the prices on the stock exchange close to the funds’ NAV.

How does Bharat Bond ETF work?

Bharat Bond ETF offers a portfolio to its investors which only includes public sector bonds that have a ‘AAA’ credit rating. Bharat Bond ETF offers investors two products. A BBETF maturing in 3 years and another maturing in 10 years. The main aims of the ETF are realized due to their ability to be accessed by small retail investors. The Bharat Bond ETF allows a minimum investment amount of Rs.1000.

An investor who would otherwise choose to invest in bonds directly would require investments of significantly higher amounts. The ETFs allow a maximum investment Rs. 200,000. The ETF functions as a growth model. Here the returns that are earned on the investments in the fund are reinvested. This adds to the benefits of compounding.

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Why are the benefits of BBETF?

Investing in the newly introduced Bharat Bond ETF offers the following benefits:

— Reduced Investment size

Generally, when an investor would want to invest in the bond market he would be required to make a significantly higher investment. A retail investor would find this amount to be too much to be invested in one company alone.

Tuhin Kanta Pandey, the secretary of Dept. of Investment and Public Asset Mgmt.) highlighted that prior to Bharat Bond ETF retail investors would have no means of accessing bond markets as bond issuances would be done through private placements. The amounts required to be raised here was Rs 10 lakhs. 

— Benefits of diversification

BBETF offers its investors the benefits of diversification. The investors receive these benefits as the ETF invests in multiple bonds. This protects the investors if a few of the investments fail as the investments that perform well set off the losses.

— Liquidity

As the Bharat Bond ETF trades in the stock market, it offers its investors liquidity as they can be bought and sold accordingly.

— Taxation Benefits

Investments in Bonds that are held for more than 3 years receive an indexation benefit. The Bharat Bond ETF also offers the benefits of indexation. Through indexation, the tax imposed on the investors will be adjusted to the amount of inflation.

— Portfolio Quality 

BBETF invests only in funds that are graded as ‘AAA’ securities. ‘AAA’ is the highest rating issued to a bond by a credit rating agency. These ratings are issued based on the issuer’s ability to meet its financial requirements and at the same time have a low risk of default.

— Projected Returns

Following were the projected Yield offered by the two Bharat Bond ETFs

  1. BHARAT Bond ETF April 2023 – 6.7%
  2. BHARAT Bond ETF April 2030 – 7.6%

The post-tax yield after the indexation benefits are considered to stand at 6.3% and 7% for the 3 years and 10-year bonds respectively. These returns are estimates and not guaranteed. They will vary depending on the market conditions and interest rates.

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Who manages the BBETF?

Edelweiss was selected as the Bharat Bond ETF in its first tranche. Bharat Bond ETF has been dubbed as the world’s cheapest fund. This was because BBETF runs at almost zero cost at a 0.0005% charge per annum on the investments. This means that an investment of Rs 200,000 would have a charge of Rs. 1 per year.

Where does the BBETF invest in?

Each of the 2 BBETF products follows separate independently created indexes. The index is constructed with the help of the NSE. These indexes involve only ‘AAA’ rated stocks of public companies. The indexes are rebalanced on a quarterly basis. The maximum exposure given to a bond in the index is 15%.

Is the BBETF without any risk?

The Bharat Bond ETF is not free from risks. They include the innate risks that come with bonds.

The interest offered by a bond will remain constant until maturity. The price of a particular bond reacts on the basis of interest offered by other bond securities.

Say a year after bond ‘A’ is issued the other newly issued bonds in the marked start offering higher interest rates. This will lead to investors selling bonds ‘A’ as they would look for the higher returns from other bonds. This creates a situation where there is reduced demand for bond ‘A’ hence reducing its price.

How can I invest in BBETF?

Bharat Bond ETF is available to investors through two routes

— New Fund Offering (NFO)

An investor has the option of investing in a BBETF at the New Fund Offering. This is made available to investors twice in a year as BBETF is launched every 6 months.

— Fund of Funds (FOF)

Investors are also given the option of investing in the ETF through a FOF. This will be available to the investors throughout its tenure. The FOF also offers the investors to opt for SIP. Investors are not required to have a DEMAT account to invest via the FOF. The investor simply can do so through https://bharatbond.in/.

It should be noted that choosing the FOF route results in the increased cost charged. The added expenses of the FOF bring the cost of investment to 0.0515%.

Is there a lock-in period?

Bharat Bond ETF’s do not have a lock-in period. But they do however have an Exit load in the case of a FOF. An exit load of 0.10% is charged if an investment is withdrawn with 30 days. There is no exit load charged if the investment is withdrawn past the 30-day mark.