Basic Knowledge of Mutual Funds for the Beginners

What is Mutual Fund?

A mutual fund is a collection of investments, such stocks, money market instruments, bonds, gold and other types of securities funds owned by a group of investors and managed by a professional financial manager. A mutual fund investment is like sharing a car ride with the people who are going to the same location or nearest location of your destination. And the driver of the car is a professional fund manager. The fund managers are the experts and their tasks are to analysis the market. They use their knowledge and experience to drive you to your destination.  Basically, the money pooled in by a large number of investors is what makes up a Mutual Fund.

It is basically a trust that collects money from a number of investors who share a common investment goal. Then, the fund managers invest the money in equities, bonds, money market instruments or in other securities. Each investor holds units, which represent a portion of the holdings of the fund. The income generated from this collective investment is circulated correspondingly among the investors after deducting certain expenses, by calculating a scheme’s NAV (Net Asset Value). A Mutual Fund is one of the most feasible investment options for the common investors as it offers an opportunity to invest in an expanded, professionally managed bag of securities at a comparatively low cost.

Mutual funds are managed by the Asset Management Companies (AMCs)

AMCs is a company who takes investor capital and put it to work in different investments including stocks, bonds, real estate, master limited partnerships, private equity, and more. All Asset management companies give investors with more diversification and investing selections. They also hire specialized fund managers who buy and sell securities in line with the fund’s specified objective. AMCs are involved in the daily administration and act as investment consultants for the fund.

All Mutual Funds are regulated by SEBI (Securities and Exchange Board of India). SEBI formulates policies and regulates the mutual funds to guard the interest of the investors.  SEBI also issues rules to the mutual funds and are subject to monitoring and inspections. All mutual funds have a Board of Directors of Trustee that represents the mutual investors' interests in the mutual fund.

Lump Sum Investment or SIP – Which One is Better for You 

A lump sum investment offers more time to investment. This will give the investors higher returns since the power of compounding increases as the time goes by. An investor can purchase their favourite mutual funds unit when the market is in correction mood. One can expect a higher return when they are investing in the corrected market. However in SIP, you will participate in the markets all through higher levels as well as lower levels, and you will get a weighted average return over a period of time.

SIPs (Systematic Investment Plans) are not magic. What this means is that most of the time, under most situations, over a sufficiently long period of time, SIPs will do well. SIP is a consistent investment in a fund of a fixed amount at a fixed frequency, usually monthly. SIPs precisely solve the two main problems that inhibit investors from getting the best possible returns from mutual funds. In SIPs investors automatically buy more units when the markets are low and fewer units when markets are high. This takes the investors to an average price. But if you invest large money in one go, you could end up catching a high point of the equity markets. That means you have invested at a high NAV and that would decrease your gains if the market falls. A SIP is a decent way to invest at an average price over a period of time.

Objectives of a Mutual Fund

The main purpose of mutual fund investment is to provide you higher returns but with lower risk as compared to individual stock and bond investments. Different types of mutual funds objectives are given below:

Growth Fund: 

The main aim of the growth fund is to achieve capital appreciation by investing in growth stocks. The main focus of the fund managers is on companies that are experiencing significant profits or revenue growth, rather than companies that pay out dividends. The expectation is that these fast-growing companies will continue to increase in value, thus allowing the fund to advance the benefits of large capital gains. In overall, growth funds are more volatile than other funds, increasing more than other funds in bull markets and dropping more in bear markets.

Income Fund: 

Income fund is suitable for investors who are looking for a consistent source of income. To guarantee a stable income, a main portion of the asset is invested in bonds, stocks, fixed interest debentures, chosen stocks and dividend-paying stocks etc.

Sector Funds: 

These mutual funds aim to invest only in precise sectors or industries, such as banking, real estate, transportation or healthcare. The main objective of this fund is to maximize the returns by investing in sectors that are flourishing at the moment.

Value Funds: 

This option usually aims of investing in stocks which are underrated in price. Stocks that have less value because of some hitches in the market are expected that once they are corrected, their stock prices will increase. This manner, the investor who has invested in these funds will make a profit.

Pros & Cons of Day Trading & Swing Trading

Those who buy stocks and sell them on the same day known as a day trader. A day trader can buy and hold the shares for few minutes or few hours. A day trader does not hold the shares for more than a day. When a trader holds the shares for more than a day then it cannot be called day trading. Whereas a swing trader holds a position for multiple days, a week, a month depends upon the swing trader. 

Now let’s talk about the advantages of being a day trader. Firstly, a day trader has no immediate risk on gaps or earnings, because you’re hundred percent cash by the end of the day. Secondly, you can earn money faster. So if you are a lucky day trader and making a profit on a regular basis then you can also invest your previous day profit into the next trading day. People like quick money and excitement that’s why day trading is most popular among many people. Lots of young traders are more attracted towards day trading. Young traders like more excitement than the elder ones. It’s like wow my profit's going up. Or this really sucks, my profits going down. In my point of view, I do not suggest young traders do day trading because of the lacks of experience. Always remember trading is not good for the beginners.

Many brokers try to involve their trading account holder in day trading proving day trading tips to their account holders. So, if you are able to make the profit from their tips you might become an active day trader. That will also help to fulfil the broker’s purpose. But frankly speaking, daily trading tricks only work for few traders not for all. So before trying to become a day trader, you should always do some research whether it will suit you or not. Because daily trading is not suitable for all.

So if you are not well developed in reading and studying the daily technical charts and you are not a good calculator in calculating support and resistance then my opinion for you to not opt for the day trading and don’t become a day trader.

The market hours just don’t work for everybody when you’re day trading. If you are doing any business and job you might not be able to watch the terminal all the day in the market yours. It will be very difficult for those to track their position all the time.

If you are a swing trader you might think about in terms of short to intermediate term position. So if your stocks dip down you may think that you are not stressed and you don’t need to worry about as the stocks prices will increase in near future. But if you are a day trader then you don’t have that option.

Swing trading and its advantages:

Generally, swing traders look for a minor trend reversal to enter trades in the track of the main trend. For example, a swing trader may follow the technical chart to identify which stock is giving reversal signal for buying. If a stock is in a downtrend and the stock might give an indication in the technical chart that all bad is now over for this stock and the stock is going to bounce back from here. On the opposite side when a stock is in a downtrend and the stock is giving a reversal signal for selling a swing trader sell that stock at that particular point. I will discuss how you can make money using technical chart later on my blogs. I have seen investors are making money in swing trading

•    Swing trading is considerably easier to learn than day trading.

•    You don’t have to spend your time in front of the market screen all the day to track your stocks.

•     Trading transaction cost is much lower than the day trading because of fewer trades placed.

•    Swing trading is also less stressful than the day trading.

•    Swing trading allows you to ride out the trend for maximum profit extraction using trailing stop technique

•    Chances of making profit are much higher if you are swing trader than of the day trading. It let your trades run for more than one day so the chance of increased profit much better.

Swing trading is not for you if you don’t have patience because swing trading can be very time-consuming. You might not have to watch out for your stock the entire day sitting in front of your monitor but still, you need to monitor your trades every day to move stop loss to break even, move trailing stop etc.

Which is better a day trading or swing trading?

For me, I personally prefer swing trading as I have tasted it and got the result. Maybe I will also prefer trading with the swing trading later in my life. I would rather be making 5 to 10% profit per trade than 1% per trade and swing trading provides that opportunity. And if you are thinking, which one is more profitable, swing trader or the day trader? The answer is this, both can be profitable. It is really up to you to decide which one is better for you a day trading or swing trading.

So whichever option you pick, swing trading or day trading is actually irrelevant. Both options will make you money probably, It is up to you how you manage your trading risk, how disciplined you are and how you manage your emotions etc.

Investment opportunities in the Indian Stock market:

Shares give us a wonderful opportunity to grow your wealth. There are many ways to earn money through investing in shares. Firstly, when you buy a stock and hold and it appreciates in value, in other words, when your stocks price goes up that means people are ready to pay you more for your stocks than you had spent on them. But always keep in mind that if you hang onto a stock that has gone up in value but you have not booked your profit yet it’s called unrealized” gains. You can only realize your profit only when you sell your stocks. Because stocks prices fluctuate often, you never really know how much you’ve made until you sell your stocks.

Secondly, you can earn the dividend from the companies every year or half-yearly depends on the company you are holding. As a part owner of the companies whose stocks you are holding. They always love to pay dividends to their shareholders when they are making a profit from their business.  This acts as a source of consistent income.

Many companies also issue bonus shares. Companies often reward their shareholders by offering them bonus shares. In most cases have noticed that stocks prices move up when a company offers bonus shares to their shareholder. For example, a company announces 1.1 bonus shares to their shareholders that mean shareholder will get one share for each share held by him. If someone is holding 100 shares then he or she will get more 100 shares. The shareholders don’t have to pay for these additional 100 shares.

Investing in stocks also give you divisibility where you sell a part of your shares in case you require cash for some purpose. Others investment instrument don’t offer this. You can also buy and sell shares in a day, next day and so…

The main goal of investing in share market is to earn profits. You can earn money from the long and short-term investment. What you also need to follow while investing in stock market is latest news of the share market, what is happening and the economic and commercial scenario of our country. You have to identify the present best performing sector and industry. Choosing the top industry and stocks in the main aspect when you are investing in shares. To choose the best stocks for the investment the investors need to study the financial strength of those companies by analyzing EPS, revenue, the liquidity of the company, debt and the valuation of the company. Once you identified the best stocks for the investment you can then buy your stocks for investment and earn dividends and bonus shares.

Invest your hard earn money with blue-chip companies:

It is up to you whether you want to invest your money like a tortoise or a hare. Hare investors always buy high flying stocks to earn quick money while tortoise investors always go for steady blue-chip companies. But the fact is the tortoise investors always win in the long run.  Hare investors may win the quick profit in the beginning but in the long run, hare investors tend to fade. It is also true that all blue-chip companies are not same. Some blue-chip companies always do well in the market if you check the history and other blue chip companies do not perform well as you expect. You need to look at the balance sheet of the companies you are interested to buy. Check if the companies change their management that would impact future results of those companies.

Diversify your investment:

Diversification is an effective way to reduce risk. If you put all your eggs into a single basket you may lose your money badly. It is recommended that you at least investment in 4 to 5 blue chips stocks because out of those 3 to 4 may perform very well and 1 or 2 may not do well. This always helps you to reduce your risk and stay profitable. A diversification strategy can help you achieve more steady returns over time and cut down your overall investment risk.  Blue chip companies with stable revenue streams tend to be considered lower risk and more likely to pay regular dividends to their shareholders. Blue chip companies have strong management that will tend to make the right moves to compete in a changing marketplace. The top blue-chip stocks offer a smart combination of low p/e’s (price-to-earnings ratio), stable or rising dividend yields (annual dividend divided by the share price), and promising growth prospects. You may have a higher or lower tolerance for risk in your portfolio depending what type of investor you are. You may love to be an aggressive investor. So before you buy your stocks always research the sectors and stocks you are buying you also may ask your financial advisor to guide you in this matter. 

Long Term Investment in Shares - Tips & Guides

Never Ever Chase a Hot Tip: 

Regardless of whether the tip originates from your friend, your neighbour, your brother or even your broker, never ever consider it as a genuine. When you are making an investment, it's imperative you know the explanations behind doing as such. Do your own research and investigation of any stocks before you considerably consider contributing your hard earned money. Depending on a goody of data from another person isn't taking the path of least resistance, it's likewise a kind of gambling. Of course, with some luckiness, tips here and there work out. Be that as it may, they will never make you an educated financial investor, which is the thing that you should be to be effective in the long run.

 

Spotlight on the Future:  

The intense part about investment is that we are to make informed decisions based on things that presently can't seem to happen. It's imperative to remember that despite the fact that we use past information as a sign of things to come, it's what occurs later on that issues most.

At the point when a stock is going the right direction, taking decisions isn't as simple. To what extent would it be advisable for you to hold? Here's a particular lead to help support your prospects for long-term stock contributing achievement: Once your stock has risen 15% to 20% at least sell your ¼th stocks and book your profit and so on….  

Always remember, most likely all your stocks aren't going to be enormous winners. Many of the stocks you purchase in a positively trending market will be profitable. But won't become among the best victors of the decade.   

Booking profit feels good. It enables your certainty when you to move some money to the realized capital gains column in your investment account.

Once a stock's correction closes, there's no confirmation it will keep on being a major champ. You may have sat through that correction just to find your decision is a fair performer.

You can simply purchase a stock back in the event that it displays another legitimate purchase point.
Stock investors must exhibit amazing patience on the off chance that they need to profit from stocks. They should figure out how to withstand unpredictability and hold tight when the going gets unpleasant. Legendary investor Warren Buffett says his most loved holding period is "for eternity". In any case, however, little financial specialists are captivated by Buffett's capacity to make riches, they are not willing to listen in to his recommendation.

 

Embrace a Long-Term Perspective:  

Large short-term profits can often attract those who are new to the market. But embracing a long-term prospect and dismissing the "get in, get out and make a killing" attitude is necessary for any investor. This doesn't mean that it's difficult to make the profit by actively trading in the short term. But, investing and trading is very different ways of making profits from the market. Trading involves very different risks that buy-and-hold investors don't practice. As such, active trading needs positive specialized skills.

 

Book your profit frequently in the stock market:

Financial planners would guide you to “invest in equities for the long term”. But the simple question that rises is – how long is long term? Is it one year, two years, three years, five years, 10 years or, for forever? So, it is significant to realise those booking profits is a key part of the investment. And there are a couple of ways you can book profit. Investment advisers feel that holding on to the whole equity investment can turn out to be a loss-making plan. “Staying in equities for a long term is the key to building capital. But this cannot be accomplished if investors fail to book profits frequently. When it comes to stock market investment advisers, they trust in booking profit at every rally. These experts look at equity investment only as a tool to grow wealth. “Stock-picking should be done after understanding valuation and putting trust in the management. Sell shares of a company only if you feel the valuation is becoming expensive,” said Mukesh Dedhiya, a certified financial planner.

Let’s take a look at passive investment, a passive investment is when an investor buys and holds stocks for a longer period of time say for above 2 years. The main goal of the long-term investor is to achieve long-term capital gain. This also helps to minimize expenses because transaction costs are kept to the minimum because investors don’t have to buy and sell their shares frequently. Also, the investors don’t have waste their valuable time when they are investing for the long term by sitting in front of the market watch screen. The main focus of long-term investors here is to grow their asset.
Asset allocation is also very important when you are planning for long-term investment. Investors strategically allocate cash to stocks, fixed income, and money market instruments. If an investor is young can work for many years then they can think of taking more risks in investing stock market than the older people. Stocks always provided higher return compared to the other instruments.

Sources: www.investors.com, www.investopedia.com, www.business-standard.com

Short Term vs Long Term Investment - Tips & Guides

Get Healthier At Investing & Trading

 

No matter how much you know, there’s always somewhat new to learn. Here you can get free tips and information related to stock market and investments. 

How Do I Select Stocks for Short Term Investment?

Before I advance, let me clarify that I am not a SEBI Registered Investment Adviser. Therefore, I have my own limitations to sharing a set of information & knowledge with the readers of the blog. I only believe in investment, not in day trading. I have done MBA in finance and have worked in Stock Broker houses as an analyst for more than 6 years, I have never experienced a profit in day trading. That's why I only provide you suggestions on short-term investments mainly following the technical chart and fundamental analysis. I will mainly suggest you buy blue-chip stocks.

Please remember that real test of the short-term investment is when the market is on a downward trend. There is a common error that when markets are going down then for sure investor will be at a loss. It is true to a large extent but always keeps in mind that some of the stocks still ride against the tide. The index only comprises of handful stocks.

Short term trading opportunity always occurs even if the market is on a downward trend. Therefore, selecting of stocks for short-term trading is very important and should be such that stocks selected should ride against the tide at least for short period.

Is June Better for Investment?

I feel June is better for accumulating your favourite stocks. After few rough months, stocks are entering what are often two of the best months of the year for the market. A strong correction was seen in the stock offering appropriate level s to the investors to take a fresh position in the stock. Stocks are looking strong on the back of various technical indicators. On the weekly chart, the stock is trading above all near term and medium term moving averages offering further confidence to the upward momentum in the stock. If you are watching market at the end of the march, you can see that many stocks are available near to 52 weeks low. After a huge correction, we can expect that market will reverse in the positive gear very soon.

Is share trading gambling?

Word Gambling is the most complex you may think. Gambling comprises risking something of value on an unpredictable event in hopes of winning something of greater value. Nobody allows cheating in gambling. You cannot change the probability. For example, if you are tossing a coin to decide on an event, the chances are always 50/50. This cannot be changed.

On the other hand, investing in stock cannot guarantee a sure profit like gambling. But through proper studies and stock and market analysis, investors are able to shift the odds. Through proper planning and studies, you can always make money from the stock market. But if you blindly invest in a stock after inspired by its movement then it can be considered as gambling. However, trading in the stock market or investing in stocks for a long period of time cannot be considered as gambling.

Investment & Trading Types

    Long-Term Investment
    Short-Term Trading
    Intraday Trading

Buy mutual funds if you are thinking about long-term investment. The reason being retail investors are not good at booking profit at the correct time. I am sharing here an example with you; I bought a Stock at Rs 500 for the long term. It reached Rs 900 in one year. Wow, I should have booked profit but greed resisted me. Now after 1.5 years the stock is back to Rs. 500 again from 900.There are so many hidden factors that signal a Sell and retail investor is not able to detect these factors. The mutual funds are managed by fund managers so you don’t have to worry about when to buy or sell. Always remember the law of gravity, which goes up definitely comes down. If you want to make a profit then go for buying and selling stocks. Always buy stocks when the stock market is in panic and sell when the market is in good mood.

If you are a risk taker love to take some risk in investing money into the stock market you always opt short-term invest by taking a proper decision and proper planning.

Please Note: Investment in securities market is subject to market risk. I do not offer any profit sharing and guaranteed profit service. I do not accept an advisory fee in any other personal bank account.