Learn Technical Analysis » Investing

Can you Afford Investment Linked Insurance?

Shabbir Bhimani — Thu, 15 Mar 2012 15:19:46 +0000

Anyone selling you insurance policies is actually not selling you an insurance policy but they are selling you the worst investment product ever. If we take an example from LIC, more often than not agents sell either Jeevan Anand policy or Money Back policy. Even my father in law has taken money back insurance policy for my kids . Each time I ask him why or recommend canceling it and he replies kaam ata hain (It works) but cannot explain how, when or why. Cannot argue beyond this point with him.

The reality is every insurance agent is selling such insurance policies and unknowingly we all buy them. I also had couple of them but decided against it in 2008. Total premium paid by me was 200,000 and when I decided not to pay and get my money back I got back 110,000. Deepak Bhattacharya on March 13 asked a question about insurance here

I have used a very harsh words worst investment product ever. So let me justify why it is actually worst investment product ever and why I decided to make a loss of 90,000 investing in LIC policy would be better option for me.

Insurance and investment cannot go hand in hand and I explained why in my article – Is Insurance an Investment Option?. Let us actually see if we can be insured with Jeevan Anand or Money Back type of insurance policies.

Based on my current earnings, expense and other liabilities I need an insured amount of 1 crore. I am 32 years old now and so adding those data into LIC’s insurance calculator this is what I see as the premium amount I need to pay for Money Back Policy and Jeevan Anand Policy.

Money Back Policy

Jeevan Anand Policy

I cannot afford 40,000 Rs as monthly premium and I am damn sure very few can actually afford such amount.

So what is the solution. Definitely not reducing the sum insured because the amount of 1 crore is not by choice but by compulsion based on my requirements. The solution is term insurance and LIC’s product name for term insurance is Amulya Jeevan.

Amulya Jeevan

The sum I need to pay is 32,800 Rs per year or 2733 Rs per month for being insured for Rs 1 crore which I think everybody can afford for an insurance cover of 1 crore.

This concludes that Jeevan Anand and Money Back type of insurance policies are not for your insurance but only for investments because you are anyway not insured. So if you are only investing in those policies then why you are giving away those insurance fees and administrative charges each year and reducing your return on your investment?

I know there is no answer to it and don’t worry I also had no answer to it when I took that LIC Policy. There is nothing to feel shy about and this happens to everybody.

Average return on non-equity linked insurance policies are in range of 7-12% and debt investment don’t work for the longer term because beating the inflation with debt only investment is very tough.

Note: There is a poll embedded within this post, please visit the site to participate in this post's poll.

Let me give a small task to all my readers. List all your insurance policies you have and then ask to yourself – Are you really insured with those policies? Or can you actually afford to be insured with those insurance policies?

If your answer is NO make sure the next insurance agent calls you, ask him to give you Amulya Jeevan (or equivalent term insurance policy in his insurance company) and you will see how he will convince you that it is worst possible product that will not give you any return.

The reality is 3000 Rs as monthly premium would mean he would get hardly few hundred as commission and on top of that would need to get lot of documentation to get you insurance cover of 1 crore.

Remember insurance with returns is not affordable by any individual and so treat insurance as insurance and not as investment. Invest in investment products and not in insurance products.

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What is the difference between top-line and bottom-line?

Shabbir Bhimani — Mon, 16 Jan 2012 10:13:47 +0000

If you watch business news channel, you may have heard the term top line and bottom line and if you read the definition of those terms they sound very complex to understand. Today I will try to explain top-line and bottom-line in a very simple language and simple examples as well as clarify the difference between them.

What is Top line?

Amount received from the sale of products or services before the expenses. Is also referred to as Gross sales.

What is Bottom line?

Bottom line is the total income after adding total revenue and gains and subtracting all expenses and losses. It is also referred to as Net Income

Example

From the above definition we know what is top line and what is bottom line. Now let us take a simple example to understand it further.

We all use mobile phones and so let us take an example of dummy mobile phone manufacturing company. We call the company is XYZ company. XYZ Company has come up with a brilliant handset and so the sales of the company in the current month have increased by 20% from the previous month.

It means XYZ company is generating 20% more cash compared to previous month and so XYZ company sees a top line growth of 20%+ (+ is because XYZ had some nominal growth without this new handset anyway)

Does the above scenario also means XYZ company is also making 20% in net profit. No because to manufacture such high number of mobile phones, the company had to setup new manufacturing units. So XYZ company has taken a loan that has increased expense of the interest part that they are paying to the bank. Taking the interest expense the company’s bottom line did not grow at 20% but say it grew only by 8%.

This means you have good sales and good top line growth but then bottom line is lagging behind. As the sales are good with good cash inflows, company decides to pay off major part of the loan and soon the bottom line of the company starts catching up.

Real Example

We assumed an XYZ company but it is always better to see a real example to understand the real market terminologies. Let us take an example Infosys and understand the difference between top line and bottom line.

Let us look at the yearly result for the last 5 years for Infosys at MoneyControl.

Our focus will be for the time period Mar 09 and Mar 10. There is an increase in total income from 20,766 to 22,050 and so we see a gross profit rise from 7408 to 8270 but if you see the net profit, it remained flat at 5819 to 5803. This is mainly because of the extra 900 Cr tax from 895 to 1717 Cr Rs. We see growth in topline for Infosys but there is hardly any growth in bottom line of Infosys in the same time period.

I hope this clear the confusion among fellow investors about the terms top-line and bottom-line and what do they mean.

How scenarios can impact top-line and bottom-line?

A company would be experiencing top-line growth if a new product or campaign increases sales for the company.

Bottom-line growth would occur in a situation where a company found a method to reduce the cost. It could be by having new supplier for raw materials or government has some policy change that can reduce the cost or a management decision to generate cash to pay off the loans.

The significance of each of them

Bottom line significance is the efficiency in operation of a company that can include spending and operating costs. Top line, on the other hand, only indicates how effective a company is at generating sales and driving customers.

Drastic change in bottom line effects the price of the share almost instantly but the growth in sales may not impact the share price in the same direction every time.

Final Thoughts

A company can always have growth in both top-line and bottom-line growth at the same time if it can increase sales (top line) and reduces its operating costs (bottom line). Share your views and feedback in comments below.

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Why 4700 is Nifty Support and What to Expect From Market Ahead?

Shabbir Bhimani — Wed, 12 Oct 2011 07:27:57 +0000

Every broking house will have Nifty support levels around 4700 but very few broking houses will explain why the support for Nifty is around 4700 and what could be an action item for your investment objective. Let me first try to explain why there is strong support for Nifty around 4700 and an expected roadmap ahead with action items for each type of investment objective.

Why Nifty Support is at 4,700?

Let us first look at the Daily Nifty chart for last few months.

Charts by Yahoo Finance

Let us observe the chart of Nifty for last few months. We see a low of around 4,750 on 26th September, which was above the August low of 4,720 indicating W formation or a double bottom formation. This clearly suggests strong support for Nifty’s around 4700.

Very detail explanation of understanding double bottom or W bottom is in Chapter 12 of my Technical Analysis eBook.

The Road Ahead

We already know from Signals of Market Crash that Nifty has a strong resistance around 5200. I have shown the same here again in the above chart with red arrows.

Nifty has support around 4700 and resistance around 5200 and so according to me this should be the range for the nifty for next few trading sessions and Nifty should consolidate for a elongated period of time in range of 4800-5200.

Depending on the news flows, RBI action and inflation number we may either see a breakout or break down. Important point to note here is – Don’t assume either breakout or breakdown. Let them happen and then go for it unless you know how to play the anticipated trades.

I expect more positive news on the back cooling OIL in the world market but the bad news will be on the result front where some companies can miss on the result expectation – giving Nifty a tight range.

Action Items

Depending on your investment objective you need to play the market.

Investors can buy around the support zone of Nifty i.e. around 4,700 and 4,800.
Positional long traders can initiate long positions around 4,800 with stop loss at 4,680.
Positional short sellers can initiate short positions around 5,150 with stop loss at 5,250.

If you are not a Nifty trader, you can still invest in stocks that have similar kind of support formation in a downtrend or have already shown a breakout above the resistance level.

What is your view for the Indian Market? Share your views in comments below.

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How I Formed My List of Forever Stocks

Shabbir Bhimani — Fri, 07 Oct 2011 01:50:31 +0000

In my article about list of forever stocks many readers wanted to know the reason for selecting those stocks. So let me not only clarify the reason for selecting those stocks but also share my criteria for selecting the stocks as well.

Criteria for selecting Forever Stocks

If you are following my blog for last few months you may be aware that I am not been very bullish. If you missed you can read my post Signals of Market Crash later.

To create the list of forever stocks I used a very simple logic of sector eradication which I am going to share here.

Let us divide the world markets into 2 parts. First those countries that have issues with maintaining growth and the second one are those that have growth going forward but have concerns related to inflation. India falls into the second category and so issues here in India is related to inflation.

RBI is trying to bring down inflation by controlling liquidity. The problem is never the liquidity but RBI has very little option when it comes to controlling inflation and all it can do is control liquidity and this in turn is actually not helping control the inflation but is also hurting the growth because of high interest scenarios going forward.

So India has problems with high interest rates. Interest sensitive sectors like Banks and Real Estate companies go out of my forever stocks. [Reason SBI could not make to my list of forever stock.]

We have just seen the recession in 2008 and in couple of years time everyone was and is talking about the new growth platforms. What this actually did was (and is) – Everybody is now wanting to catch on the future growth and don’t want to miss out. This made the equity markets and commodity prices soar very quickly in last couple of years and we again fear yet another recession. I am not the right person to predict we will go into recession or not but the scenario is making everyone uncomfortable.

If another recession is considered you should keep yourself away from sectors like heavy industries and Infrastructure. [Reason BHEL, L&T could not make it to my list].

So I considered stocks that have mix of Good Indian demand story in sectors excluded by above scenarios.

Why for each of my Forever stocks

Nestle India – Food giant which has shown very good results for last 18 quarters. That speaks for itself.
Asian Paints / HiTech Plast – India growth story but yes OIL prices can have an impact on the stock.
Infosys – Can benefit heavily because of Forex movement.
Coal India – Demand of Coal always on the rise but dampening coal prices can have an impact on the performance of the stock.
VIP Industries – Indian demand story.
Lovable Lingerie – Unique player with good Indian demand story.
Hero Motocorp – Company has come out with flying colors in Honda deal.
CRISIL – Always buy and forget stock.
Havells India – Indian demand story.
Titan Industries – Indian demand story.

I wish I could add more Forever Stocks?

The list is for my investing and so it is never complete. I wish I could add few more companies from Pharma sectors as well but they could not make my list of top 10 stocks. May be I could have added them in top 15. You never know.

I hope this clarifies all the doubt. Share your views in comments below.

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List of Stocks You Should Buy Now and Forget Forever

Shabbir Bhimani — Thu, 22 Sep 2011 11:07:49 +0000

Given the recent stock market condition, this may be the perfect time to build your position in a unique set of ”eternal” stocks. Buy now and forget. I may be sounding like a jerk on having a portfolio of forever stocks but still I will share my list of forever stocks.

As a general disclaimer I have investment in majority of them and even have the plans to invest more in the list.

Nestle India
Asian Paints / HiTech Plast
Infosys
Coal India
VIP Industries
Lovable Lingerie
Hero Motocorp
CRISIL
Havells India
Titan Industries

What is your list of 10 eternal stocks that you can buy now and forget forever? Share the list in comments.

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When to Buy In Market Crashes

Shabbir Bhimani — Sat, 27 Aug 2011 08:41:30 +0000

Today I will be answering the questions that I am getting quite often these days and the questions are -

Is this the right time to buy when the market is down? I am ready to hold on to the stock for few years.

I am not a trader but a long term investor and so is this the right time to add more position to my portfolio?

Can I invest in any good mutual fund here for long term?

I am sure many blog readers who have not asked me this question also has this question somewhere in the back of their mind as to when will be the right time to buy in the market crash.

Let me first share with you my couple of previous articles where I sensed the crash - Why Nifty Around 5600 is in No Trade Zone? on June 30th, 2011 and Understanding Signals of Market Crash & Sentiments of Retail Investors on August 10th, 2011.

Past is history and now we need understand when is the right time for long term investment.

When market starts falling people think they could start investing. Once they invest the fall continues and they invest more and suddenly they run out of cash and still their portfolio is down a lot. Now they are ready to wait for few years to get the capital back. Remember if you are not investing at the right time and at the right price you will actually not make any money but will actually loose money.

So let us first understand what needs to be done in a market crash.

1. Never try to catch the fall

Let me be very frank. Retail investors most of the time try to catch the fall because they think they will be left out in the next bull run. This left out feeling makes the investors invest when the market starts cracking. Investors think they will make lot more when they invest in the falling market but they don’t understand that when trying to invest in the fall they still need to invest at the right time and at the right price.

I would let the fall get over, get signals of market forming the bottom using technical analysis and then buy after the fall is over. There will be ample time to invest when market forms the bottom (Explained later).

2. Never assume market bottom

Never assume market is bottoming out unless you clearly see the signals that market is actually bottom out. Market crashes are always followed by strong short covering rallies and if you don’t understand the support and resistance you can be carried away by investing in the short covering rallies with the assumption that market has bottomed out and you have missed the bottom.

3. Never trade against the trend.

Always go with the trend. Currently the index trend is down and if you are like me not very fond of short selling remaining in no trade position is also a position in the market.

When to Buy In Market Crashes

Now to answer the question is this the right time to invest let’s see the nifty chart for last 3 months.

Charts by Yahoo Finance

We see Nifty sliding from 5600 to 4800 pretty much in a straight line without any meaningful bounce of any kind and so I don’t think this is the right time to invest.

The question still remains when will be the right time to buy? The right time would be when either one of the two things happen in the market especially Nifty.

Nifty forms a tight range and it neither cracks down nor breaks out of that tight range. Break out above that tight range would be ideal sign for going long.
Nifty falls but keep bouncing from certain level which would be new support for Nifty. Using that support as stop loss you can invest.

In both the above scenario you can clearly see that you need to wait few weeks to see if Nifty either forming a tight range or it forms a good support. So instead of looking at levels like 4800, 4600, 4400 I will recommend wait for Nifty to give you signals on what needs to be done.

Share your views in comments below.

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Understanding Signals of Market Crash & Sentiments of Retail Investors

Shabbir Bhimani — Wed, 10 Aug 2011 09:31:51 +0000

You may have started seeing on lot of TV channels where people have started predicting new lower levels and the problem with such prediction is no one actually knows the bottom but are just making noise to get noticed.

I thought I will also make some noise ( ) and write an article to help traders and investors understand the clues and psychological characteristics in a market crash. No one can predict the day or time of the crash, but if you pay attention, you can recognize the signals well before in advance and can also know the after effect of the crash.

Let us now understands the signal’s of market crash is coming as well as understand the sentiments of retail investors.

Crashes happens in downtrend

On June 30th 2011 I wrote an article about why I think the market is in no trade zone. I saw a downtrend in the market. The no trade zone was clearly because the Nifty was in the resistance zone in a downtrend.

Bounces fizzles out faster

Nifty was not able to cross the resistance levels of 5600 decisively for the last few months.

As you can see in the chart above the same downtrend I talked about here is still continuing with the latest peak in Nifty is less than it previous peak. Also we see some additional levels like 5200 and 5400 support levels for the Nifty are broken and so they will act as a very strong resistance levels in the near future.

Media Hype

In a downtrend common investor and trader don’t make substantial money from the market and so they actually turn on the TV and news channel to see if they can get clues about the happenings in market. If you are not sure how to use the Media you are bound to fall into the trap. Each bounce in a downtrend is hyped by media which makes a trap for non savvy investors and traders who are reluctant to learn and understand the market.

The Sentiments of Retail Investor

Once trapped, retail investor leaves the market thinking stocks is not for them. At times they even keep what they hold in their portfolio because of huge losses and wait for their purchase price to return. In the mean time they make calls to the same news channel asking what they should be doing about their holdings.

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Is Savings Bank Account Actually Saving Or Killing Your Money?

Shabbir Bhimani — Thu, 04 Aug 2011 05:21:14 +0000

Do you withdraw money from savings bank account just before the need and not few days in advance to make few extra bucks for the money lying in your savings account? If your answer is YES you are actually trapped mentally by your savings bank account features.

Let me try to help you come out of such mental trap.

Let me ask you one question. Do you know anyone who has made a fortune with his savings bank account? If your answer is NO read further.

Many of us park large chunk of money in a savings bank account just because of not enough investment awareness. We should realize that this chunk of money parked in savings account is actually termed as dead money in finance terms and will never make us a fortune. The actual use of bank account should be for safety and security purpose only and not for return on your capital.

If you can make that as your motto for bank accounts, you will not need any further action but if you cannot then you need to come out of the trap by taking some actions.

To come out of the trap of return from savings account, I use a personal current bank account instead of savings account where I don’t get anything for parking my money into my bank account.

Yes I do have a savings account with my bank and this is because I have linked my savings bank account with my demat accounts and other mutual funds. I keep only minimum balance in my savings account and everything else is in my current account.

I know it is difficult to get a current account just for the sake of having a current account but there are other options as well to make yourself mentally prepared of not parking your money into a savings account.

Fixed deposits as an investment option is not my favourite and so don’t expect that as an option from me but what I prefer is to park free money in Liquid and Liquid Plus funds.

Liquid funds can fetch you much higher return on your capital than a bank deposit. Liquid plus funds can fetch you much higher returns than liquid funds but are more risky than liquid funds.

Where do you park your money? Share your views in comments below.

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Are you Investing in Companies Business or Companies Equity?

Shabbir Bhimani — Thu, 21 Jul 2011 05:13:01 +0000

A myth among investors is they think they are investing in companies business and this may sound true to some extent but is by no means the complete truth – at least not for the minority share holders.

Shocked!!!

Let me explain this with an example.

Say you invested in a company and the company goes bankrupt. What would be your investment worth? To calculate your worth, the company assets are liquidated and every share holder should get their part of it. As a minority share holder you will not get anything because the distribution of asset is not uniform. Majority share holders (i.e. holding more than 5% of company equity) gets their share first and whatever is left over would be distributed among the minority share holders.

Many people (who forgot the Satyam and Lehman Brothers scenario) can argue that bankrupt is not very common in India for large companies and so the above scenario can be totally hypothetical.

So let me share with you one more example.

Let say you invested in a great company and in few months that great company want to delist. You are having part of the equity capital of the company, so ideally the company cannot delist but in reality they can despite you (as a minority share holder) don’t surrender your shares to them. Why this has been done is a separate topic of discussion but as a minority share holder you have nothing much to say but to tender your share to the management or else it will become worth a big zero.

So unless you are investing more than 5% of the equity capital of the company you are actually not investing in companies business but you are actually investing in companies’ equity. The performance of equity of company can be at times near to the companies business but not always.

Share your thoughts in comments below.

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How I Find Good Stock For Value Investing

Shabbir Bhimani — Sat, 28 May 2011 04:45:13 +0000

In Ask me Anything Kalpesh asked few of interesting questions and one of them was

How do you find a good stock for value investing? I mean what factors attract you to analyse the stock and invest in it for a long term perspective.

I don’t find stock myself but it is my brokers who suggest me stocks. Once I get the stock it goes into my list of interesting stocks.

Once I have the list of interesting stocks I do some basic fundamentals of the company like market cap, type of business and sector, quarterly earnings, management background …. If I see things are in favour of the stock, the stock moves from interesting list of stock to good list of stocks.

Now on the list of good stocks I apply technical’s to find the support and resistance for the stock and see where I should be getting into the stock and what should be my stop loss. In my eBook on Technical Analysis I have explained how to select the right stock at the right TIME and at the right PRICE.

For investment I prefer to get into stock which has good fundamentals but very good technical’s because according to me market movement is based more on sentiments and technicals depicts the sentiments more than fundamentals. So I prefer technical’s slightly more over fundamentals.

Have more questions? Ask them in the comments below. I will be more than happy to answer them all.

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Physical Gold Or Gold ETF – Which is Right for You?

Shabbir Bhimani — Fri, 06 May 2011 04:58:42 +0000

In the closing lines of my article about Best Gold ETF in India I told why Gold Investment is what I personally prefer and so here I tell why?

I purchased my first Gold bar on 20th January 2007 from my HDFC Bank for a price of 10700 per 10gm. My investment was mainly for long term and it is just today I realized that I am 3 year into the investment and so If I sale I make double the amount and all will be tax free for me.

Now coming back to the topic of Gold ETF Vs Gold Bar let me share positives and negatives of investing in gold bars over gold ETFs but before that let me tell you why you should be investing in gold.

Why Gold Investment?

Excellent way to diversifying portfolio.
Requires no ongoing maintenance.
Gold does not rely on growth prospect of any country.
Used in times of high inflation to protect wealth.

Benefits of investing in Gold ETF over Gold Bars

Low cost

No matter which bank you buy the Gold from you have to pay a bit higher than the pure gold price. When I purchased from HDFC bank I purchased at the price of 10,700 Rs per 10 gm but market rate was below 10k and if I remember it correctly was 9800.

Tax benefit

ETF is like a stock where if you remain invested for 1 year+ time you don’t pay any tax on the gains but for Gold it is 3 years.

Gold Bars selling issue

Banks don’t buy back gold bars and so you can have issues selling the bars. You have to sell them to your local goldsmith and so you may not get the right price for selling it.

Benefits of Investing in Gold bars over Gold ETF

Changing NAV without Net Asset

I don’t understand the concept of trading ETF. This may be because of my non-finance background but I still cannot understand the concept of an ETF.

Let me give you an example of what I don’t understand.

Let’s say you have a Gold ETF with Net Asset Value calculated as value of total gold + cash. For the sake of argument let us make the NAV for ETF as 2000. Now as per my understanding your asset pricing can go higher or lower depending on the how your asset value unfolds. Isn’t it?

ETFs are actually traded in the market like stocks and what if no one is willing to sell the ETF at the NAV value of 2000. For argument’s sake, say people are ready to sell at 2010. If you are willing to buy the same ETF you have to be buying it at a price of 2010 which is not the real NAV of the ETF but higher than the net asset of the fund. It is better to be paying the bank the fees than paying higher or lower than NAV for the ETF.

You may argue that stock pricing is not equal to the actual Net Asset of the company but for stock at times you purchase on how things will perform in the future giving them premium but don’t understand why ETFs should be trading at a premium.

So instead of investing in ETF I prefer Gold Mutual funds even.

Not All Your Investment is in Pure Gold

ETF needs to remain liquid and so they cannot invest everything into GOLD and so you are actually not investing in 100% gold.

Final Thoughts

If you are looking to opt for short term trade based on Gold pricing you should opt for ETF or else go with physical gold. Keep in mind that when trading in ETFs, you are trading against the underlying basket of gold as an asset and not in gold.

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Where to Start Investing and by How Much?

Shabbir Bhimani — Fri, 29 Apr 2011 11:17:51 +0000

I get this query quite often and I am sure this is the question in many reader’s mind.

I am years old and earn Rs a month and have no investments so far. How much should I invest and where?

It is encouraging to see people are looking to invest and though the amount you should invest depends how much you can save per month that will not be required in the near future but the main word in the question is the last word which is where to start investing.

As you are asking me you probably will get the advice to invest into equity market and if I was in your position I will start in the Best ELSS Tax saving funds for multiple reason.

1. Forces you to be long term investor

You cannot withdraw from ELSS tax saving mutual funds investment before completing 3 years and this forces you to be a long term investor into equity market.

2. Gives you taste of returns from equity

Over an elongated period of time you are more likely to grab solid returns in equity than many other investment options and this can eventually drive you more towards investing in equity market.

3. Last Fiscal for ELSS

DTC makes ELSS mutual funds out tax savings basket and ELSS will not be an option at all for investors after March 31 2012. This is our last chance to Save Tax investing in equity market because DTC does not leave any option for investor to be into market and save tax.

Final Thoughts

If you are trying to get into equity market, Tax saving can be your best option to get into the market because it not only gives you a taste of equity markets but also saves your tax.

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Best Gold ETF in India

Shabbir Bhimani — Thu, 21 Apr 2011 15:45:00 +0000

Gold is one of the hottest discussions these days and I have been getting lot of queries about investing in gold as a whole as well as Gold ETF investment. Yesterday I got a very interesting question about Gold ETF that leads me to this post. The question was comparing three major (read most advertised on business channels) Gold ETF’s and why each one is priced differently.

Reliance Gold ETF – Rs 2050*
Kotak Gold ETF – Rs 2100*
SBI Gold ETF – Rs 2150*

* The price is approximately for 20th April 2010.

The question was – which one he should be looking to buy and why is the price difference when each one of them is gold ETF which means should reflect the price of gold.

First there are more than three gold ETF’s in India. You can see all the Gold ETF’s on NSE site here but let me list few of the ones here.

Now if I plan to buy into gold ETF I would be buying into the best ETF because there is no point in buying the second best ETF but before I go into the details let me tell you that I am not a fan of ETF investment as a whole (See why here) but I did my first ETF investment yesterday just to test the things out before making this post.

A Myth about Gold ETFs

A myth among investors is – Gold ETF is Gold but that it is not true. Gold ETF is by no means is Gold but is an equivalent of gold.

An analogy can be an engineers’ degree and an engineers’ equivalent degree or diploma. A diploma holder is as good as an engineer but is not an engineer. Phew being a tech guy I could manage to get the engineering into finance as well.

Jokes’ apart coming back to the point of ETF – It is just a reflective price of GOLD and ETF may not hold the exact amount of gold but majority (90 %+) of the asset is gold. So a Gold-ETF means it has Gold but also has some cash and debt along with gold.

Why the difference in ETF Price?

The difference in ETF price among different fund house is mainly because of the expense ratio of the fund house and annual maintenance charge for maintaining the fund/gold.

Best Gold ETF

Now let us compare the ETF’s to see which one is the best Gold ETF for investing. I am using couple of criteria to judge the ETF”s as best.

1. Lower expense ratio

Comparing the expense ratio of major Gold ETF’s I found that Gold Bees and SBI Gold have the minimum expense ratio of 1% and 1.3% respectively and other ETF’s have an expense ratio of in range of 1.5% to 2.5%.

2. Actively Traded

If you opt for actively traded ETF you can liquidate your investment easily. Gold BeES is by far the most actively traded Gold ETF with 61493 quantities traded yesterday and the second best was KOTAK Gold with 6982 traded quantity yesterday. Average traded quantity in Gold BeES is almost 10 times its second best Gold ETF.

Final Thoughts

Gold BeES is the best Gold ETF of India but remember investment in gold is always better than gold ETF.

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Top 5 Reasons Why Stock Prices Go Down Despite Good Results?

Shabbir Bhimani — Wed, 16 Feb 2011 11:03:13 +0000

At times you wonder why the stock is falling despite very good fundamentals. There are many reasons why short-term stock price diverges from long term fundamentals. Though the major reason for the price-fundamental mismatch is the expectation but there are few other reasons why a stock prices move lower even on good news. Let’s see them.

1. Market Sentiments

If market sentiments are not bullish, it can overlook stock-specific factors like good earnings or good fundamentals. Apart from the market direction sector specific sentiments can also impact the stock prices.

2. Profit Booking

Large investors target good results outcome to unwind their large position. Large investor holds substantial number of shares and if they plan to sell them on any given day the stock price can come down sharply and so on good news or good result outcome, large investors can unwind their long position easily without much of a price damage.

3. Interest Rates

A rise in interest rate can potentially lower stock prices – even if fundamentals of a particular stock are excellent. As an investor you may not be ready to take the risk of investing in stock when you can get good appreciation of your money elsewhere without any risk. The only reason I can think for Indian market under-performance. We see lot of money being gushed out of Indian equity market but the Re-USD price is not impacted to the extent it should. The only reason I can sense for it is – large investors and foreign investors think putting the money in risk free debt market is much more beneficial than remain invested in equity market because of less upside potential from the current levels.

4. Mode of Earnings

Producing winning numbers may not be enough. Occasionally company can report a one-time gain because of unexpected factors like – a lower than average tax rate or income from forex changes… Investors not only value number but mode of earnings as well.

5. Future Prospects

Even if results being reported may be very strong, outlook regarding future earnings may not be as strong and this can dampen the stock prices heavily.

Most of the above discussed factor’s reverses to explain price rise on an outcome of weaker than anticipated results.

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3 Best Investment Advice I Could Ever Give

Shabbir Bhimani — Tue, 08 Feb 2011 03:32:29 +0000

1. Book your Profit (or Losses)

+10% and -10% swing means you actually loose. This may sound very strange but market maths is a lot different.

Stock price is Rs 500.

Day 1 the stock swings up by 10%. Price becomes 550.
Day 2 the stock swings down by 10%. Price becomes 495. 10% swing is based on 550 Rs and not on 500 Rs on the second day.

No matter what order you put this you always make a loss.

Day 1 the stock swings down by 10%. Price becomes 450.
Day 2 the stock swings up by 10%. Price becomes 495.

Conclusion: Good trader’s always take profit (or losses) in the wild swings and circuits.

2. Accept that you can be wrong

If you purchased a stock there are chances you could be wrong. It is important to realize that you can also be wrong. No human can predict the market to perfection. All you can do is get the right decisions most of the time but not always.

Let us say you purchased some stock at 100 Rs. Now it is at 80 and for some reason or other you did nothing when the stock pricing was falling from 100 Rs to 80 Rs. The next thing people think about is let me get more at 80 so that they can get out at 90 easily. Once you buy more at 80 the stock comes down to 70 and so on and so forth.

The first thing you should understand in the market is you can be wrong at buying stock at 100 and so it is wise to cut your losses quickly. Even if you did not cut the losses quickly it is ok to cut big losses and start afresh.

Conclusion: Instead of trying to correct your wrong decisions it is important that you accept you made a mistake and come out of the stock with a loss.

3. Recover losses from other stock

Let us take the same scenario as above. You purchased some stock at Rs 100. Now it is at 80 and you know 80 is a good support for this stock. You also know that some other stock has better fundamentals and technicals compared to the stock you have. Instead of averaging your initial investment it is better to invest in second stock and may be hold your first one for few more days with a strict stop loss and get out of it with a comparatively lesser loss.

Conclusion: A stock that has not done much for you is not the only stock you should invest to recover your money back. It is ok to go with some other stock to recover your money back

What investment advice you would like to share? Share your views in comments below.

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