Things You Should Know About Initial Public Offer (IPO) Before Investing

Initial Public Offer popularly known as IPO is a process in which a company raises money by selling their shares to the public for the first time for growth and expansion. Investing in IPOs is very popular because it gives us the opportunity to earn quick money. And also if you are a long-term investor then you have been provided with the opportunity to buy some good companies shares at a cheap rate. If you are allotted shares in an IPO, you can then sell your stock in the secondary market. Secondary market means you can sell your shares on NSE or BSE (stock exchanges). Listing gains depend on demand and supply of that company shares. If the demand for a company’s shares very high then you will get high gain upon listing on the secondary market. But if the company’s shares are not in demand then it may be listed at a discount rate and you could suffer a loss.

Before investing in IPOs you must be very careful while selecting companies to invest in an IPO. 

Why should you invest in IPO?

You will get many benefits if you choose to invest in IPOs. Firstly, the companies normally offer discount price on the fair value when they are offering shares to the public for the first time. So that means as a retail client when you are buying IPOs, you are getting shares at a cheaper price. Secondly, there are many growing companies here in India, but they are still new to entering the stock market. So buying those companies’ shares in IPOs means you are associating with them from the beginning. Thirdly, it can be a gateway for you if you want to enter the stock market. You can get high return without taking too much risk. Also, not much of expertise is required for investing in IPOs, unlike stocks.

How to invest in an IPO?

If you have trading and Demat Account with any Stock Broker, that’s it now you can invest in an IPO. Research the company issuing IPOs before investing your money. Try to choose the best from the lot and check the issuing and closing date and pricing details of the IPO you want to invest. Your next step will be applying on the IPO. You cannot apply for any number of shares for an IPO like you can do with shares; you should be investing as per lot sizes according to the company specification. You may not be allocated all the stocks that you offer to buy. You may or may not be allocated a "pro rata" portion of the number of shares you have been offered to buy. Just try to request the maximum number of shares you would like to purchase assuming they are available. 

The main reasons behind companies go public:

• To Raise Fund:  The companies often offer IPO to the public to raise money. They generally use this raised fund for capital expenditure, working capital, research & development, and acquisitions and hoping for the company to grow and make more and more money for their shareholders.

• To build a reputation: Building reputation is very important for a company to sustain in the modern days.  Going public on reputable stock exchanges such as NSE or BSE Builds Company’s reputation because the company is now subject to the scrutiny of the SEBI (Securities and Exchange Board of India). As we all know the key to success is building a reputation. With better reputation, a company can attract higher talented employees, do business easier, and continue to raise money or cash out existing shareholders due to higher levels of trust.

• Marketing:  IPO is a great way for increasing prestige, new investors, and business partners.

You must know what you are investing in:

Any investors thinking of investing in IPOs need to do their homework first. This does not mean only checking the fundamentals of the company you are interested to invest but you should also know why the company is issuing IPO. Is the business plan of the company realistic? Is there any demand for the IPO issuing company’s products and services? The company belongs to which sector? Does the sector will perform well in the future? You can take advice from your financial advisor as well to gather the information related to the company.

Always check out the supporting cast of the IPO before Investing:

You have to understand the supporting cast of the IPO, without knowing it, you cannot judge the real value of an IPO. Firstly, you need to look at the promoter’s stake in the company post IPO. If the company is reducing the stake significantly, in that case, you won’t feel comfortable. Also, check out the pedigree of the bankers who invested and the book running lead managers.

There is continuously a lot of performance pressures associated with a public listed company, simply due to the fact that much info is made public within a very short period of time for the investors to guarantee timely decision making.

Understanding Futures and Options Trading

In this blog, I am going to discuss the basics of derivative market (Futures & Options). But before proceeding I would like to begin with few basic fundamental questions generally asked about futures and options.

What are Futures & Options (Derivative) Trading?

A derivative is a financial contract with a value that is derived from an underlying asset. An underlying asset is a security on which a derivative is based. Like stock trading in the cash, segment derivative is another kind of trading instrument. The derivative is mainly used to hedge the risk for one party of a contract. The more risk you undertake the more reward you can gain. The derivate traders who enter into a derivative contract are basically betting the future price of the underlying asset. Derivative trading is most popular among the companies who ensure profits in volatile markets.

To mitigate the risk everyday investors also look for derivative for their investment insurance.

An option is a contract between two parties in which the option buyer buys the right but not the obligation to buy or sell shares of an underlying stock at a predetermined price within a fixed period of time. Two types of stock options are available call and put options. Call options give the buyer the right to buy the underlying shares whereas put options provide the rights to sell them.

Strike price:

A strike price is set for each option by the seller of the option, who is also called the writer. When you buy a call option, the strike price is the price at which you can purchase the underlying asset if you select to use the option. For example, if you buy a call option with a strike price of Rs.100 then you have only the right, but not the obligation to buy the stock at Rs.100. You can also sell the call option to make a profit. Profit (the difference between the underlying stock price and the strike price). you can exercise your option and buy the stock at Rs.100.

Keep following my blogs to checks more detail about call & put options.

Futures vs. Options

Both futures and options are derivative instruments. Both derived from the underlying asset that they track. Both these options are a hot favourite for the speculators. Futures contracts have been primarily used by commodity traders such as crude oil, soybeans, wheat, coffee and so on. The futures contracts are more liquid than their option contract.

The most interesting part in options trading is that the risk is limited. You know here how much max you can lose here. For options contracts profit is unlimited but the loss is limited, unlike futures.

Although future trading has some significant advantages over options it is not suitable for everyone. Because futures contracts are leveraged they can be very risky, future trading is one of the most broadly widespread markets in the retail trading community.


 The derivative is the most popular trading instrument worldwide. The Futures and options segment also called F&O segments accounts for most trading across stock exchanges in India.

•To trade in futures the buyer or seller has to pay certain % of order value as margin. For example, if a trader wants to buy Reliance Industries may future 1 lot (500 units) at Rs.900. Then the buyer has to pay Rs.  4,50000 x 14% = Rs.63,000 for this trade. If the prices move up to 920 from 900 then the buyer get a profit of Rs. 10000. The percentage of profit will be 16%.

• Profits and losses are calculated on a daily basis as it’s is a margin trading until the trader buys or sells (square off) his position or the contract expires.

• The derivative has an expiry date. Three months contracts are always available. For example, right now there are 3 months future options are available. 1. April 2. May & 3. June. All contracts will expire on the last Thursday of that particular month. April contract is going to expire on 26th April, May on 31st and June on 28th. That means if you if enters in April contact then you have to square off your position by 26th April or on 26th April.

• The margin is calculated on a daily basis. You have to maintain proper margin in your account, otherwise, the broker will square off your position automatically.

• Future trading can be done on indices. Nifty future is the most popular traded future in India.

What is Hedging?

Hedging is the most important application of futures. Hedging mainly helps to protect the investors from making a loss by protecting their portfolio without selling off the stocks from the investors Demat account. Hedging is like transferring of risk without buying any insurance policy. Let’s imagine you have 4 or 5 stocks value Rs. 1,00,000 in your Demat Account and you are holding for long term. But you may worry about thinking that the market may come down but you don’t want to sell off your stocks. In this scenario, you can sell nifty future to protect yourself from the loss if the market comes down. Meanwhile, the position in the spot is ‘long’; we hedge for ‘short’ in the futures market. I will discuss hedging strategies in my future blog.

Return is always much higher in derivative trading than what you would make if you owned the stock.

Tips & Ideas for Getting a Higher Return from Share Trading

As you all know investing is the best way to grow your money. All of us are now more interested in making more and more money with our investments. However, the truth is many people around the world don’t know where to invest their hard-earned money. Please read my blog to know how you can grow your money by getting a higher return because I am going to share with you how you can do this. There are many investment options available today. You can expect an average return from them.

• Savings Account – 3.5% to 7.1% per year
• Fixed Deposit Account – 7.10 % to 9.50% per year
• Mutual Funds – 10% to 20% per year
• Stock Market – 15% to 28% per year 

These are based on Indian scenario. However, you can also investment your money in real estate, insurance policies, bonds and commodities.

Out of the many investment options, the stock market is the best option for getting a higher return.

Things you need to remember for getting higher return form stock market:-

• Risk & Reward Ration: 

The risk & reward ratio refers to how much you want to lose and how much you want to profit. If you want to be a successful trader then you need to consider the ratio. Most probably if you maintain 1:1.5 risk and reward ratio then you will be successful. For an example, if you have bought a stock at Rs. 10,000 then your profit target must be 15% and your trigger price (stop loss) 10%. That means you should sell your stock when the stock price increased to Rs.11500 or decreased to Rs. 9000 from Rs.10000. Now, If you have bought 5 companies shares at Rs.10000 each, that means your total investment amount is Rs.50,000 and out of your 5 shares 3 of them have reached the target and 2 of them not, and you had to sell these 2 at stop loss. Your profit will be Rs. 2500. That means if you earned 5% return in short term.

• High Returns with Low Risk is the Key: 

Warren Buffett says, “Never invest in a business you cannot understand.” Do a research yourself or ask your financial advisor before buying stocks. There are many blue chips stocks those can give you higher return with minimum stock. I always suggest my family members, friends and relatives to invest in blue chips stocks where risk ration is very low. So, target blue chip companies. Never ever invest in stocks if you don’t have any knowledge about them.

• Invest in what you know: 

Do not put your money into any unknown stocks. You don’t need to find hidden stocks and invest as per your broker or friends advice. Research for growing companies around you. Study if they are blue chip companies or not, study fundamentals of those companies if they are financially strong or not. This is the most effective way to invest and earn money from investing in those companies.

• Pay low brokerage: 

Most of the stock broker’s brokerage is very high. When you do intraday trading or delivery based trading they take most of the profit from you as a brokerage. You need to find the discount brokers who take the lowest brokerage from their clients. Your earning profit will be maxed if you are able to cut down your brokerage percentage by finding lowest brokerage taking Stock Broker.

• Always avoid panic: 

Panic is an emotion that forces us to take a wrong decision. In a panic, we always sell our stocks when time suggests for buying and buy the stocks when perhaps these should be sold.

• Learn when to swim with the tide:

It is shown that market pays the investors when they go against the prevailing trend. In a normal situation, the average investors do not necessarily swim against the tide. In the other words, do not buy the stocks if the stock price is falling, wait until the buying pressure is coming back on the stock.

• If you are a new investor then be prepared for some small losses. To become successful in the stock market you must tolerate some small losses. 

• Persistence is most important when you are learning to invest in the stock market.

• Always try to avoid types of investments that are volatile, such as futures, options, currency and foreign stocks. 

• For identifying winning stocks you need to learn fundamental and technical analysis. 

• Remember History always repeats itself in the stock market.

Patience and thorough analysis are most important in the stock market. Once you have picked right stocks for investment then go for it, otherwise, you may miss the flight. Just think about the people who are still kicking themselves for missing the impressive rise in companies, such as Reliance and Infosys etc. Stock trading isn’t about predicting what is going to happen it’s about proper plan and knowledge.

How to Buy Mutual Funds – Full Guide

There are so many interested people who want to invest in mutual funds but do not know how to start. In this blog, I am going to guide you step by step. There are many questions can be raised before start investing. How to open a Mutual fund account? How to pick right mutual funds in the medium term and long term? What documents do you need to submit? What do you choose lump sum investment option or SIP?

How to open a Mutual fund account?

Frankly speaking, there is no such concept of a mutual fund account assuming if you are thinking of a bank account, Demat account or trading account. You can directly purchase mutual funds units without such accounts dedicated to MFs. When you purchase units the fund house will allow you folio numbers similar to an account number.

You can also open an account with a broker who provides online service, for an example, you can open an online account with Sharekhan. From here you can buy and sell your mutual funds yourself. You also can ask them for an advice related to the funds which will suit you. 

How to pick right mutual funds for short term and long term?

Mutual funds are always the good investment option if you wish your money to be growing over a period of time. Wide ranges of mutual funds are available to invest today. Whether you are thinking about capital gain or seeking regular income mutual funds are best options for you. Calculate your financial goal and investment period first and then decide accordingly which mutual funds are going to serve you most. There are many types of funds are available for investment namely:

•    Money market funds

•    Fixed income funds

•    Equity funds

•    Balanced funds

•    Index funds

•    Speciality funds

•    Fund-of-funds

If you are young and want to invest in mutual funds for long-term, then invest primarily in equity growth funds rather than debt funds. But if you are a retired person, then debt funds would be a perfect choice for sustainable income. If you are thinking about investing for a short period time then ultra-short -term debt funds would be the best option for you.

Short Term & Long Term Period:

According to the tax rules if your investment holding period is for 1 year or less then it is considered as a short-term investment. And if you hold your investment for more than 1 year then it is known as long-term investment. For equity funds, capital gains generated from short-term investment are treated as short-term capital gain and taxed accordingly. Whereas, capital gains generated from long-term investment are treated as long-term capital gain and taxed accordingly. For debt funds, the holding period is treated differently. If your debt investments are sold for 3 years then it is treated as short-term capital gain and when it is sold after 3 years then it is treated as a long-term investment and taxed accordingly. Long-term investment is always best but you can also take the opportunity of the short-term investments too.

Documents you need to submit for investing in mutual funds

Buying a mutual fund today is not a daunting task. It is super easy. You could even do it online within a few minutes.

• Application Form: This is the most basic requirement. If you wish to start investing in mutual funds. You may need to fill more than one application form. One for opening a mutual fund account and another one for a SIP plan if you opt this option too. If you wish for an electronic transfer from your bank account, an ECS form will also need to be filled.

• KYC Compliance: KYC (Know your’s client) norms have been made compulsory for everybody who wishes to invest in a Mutual fund. You need to submit your KYC acknowledgement along with your Mutual Fund investment form. KYC compliance proves that you already have a pan that’s why you no longer need to submit your PAN details. Go to the website www.cvlindia.com and then click on “Inquiry on KYC”. A pop-up window will appear on your screen and ask you fill your PAN number. Fill it up and then submit it for verification. Once your KYC is approved you will be notified on the screen. You need to take a printout of it as a proof.

Proof of Identity: (Any of the following documents are required)

-    PAN card

-    Aadhaar Card

-    Passport

-    Voter’s ID

-    Driving licence

-    And Identity card with applicants photo issued by the approved organization

Proof of Address: (Any of the following documents are required)

-    Aadhaar card

-    Driving licence

-    Passport

-    Voter’s ID card

-    Ration card

-    Registered lease/sale agreement of residence

-    Flat maintenance bill

-    Insurance copy

-    Utility bills such as electricity bill, landline telephone bill, or gas bill, less than 3 months old

-    Bank account statement/passbook, less than 3 months old

-    Any other documents issued by the approved organization. 

• Cheques required for lump sum amount or SIP as per your choice. Cheques are not required if you want to do investments online.
• GST rate of 18% applicable for all financial services.

What do you choose lump sum investment option or SIP?

You want to invest Rs.10,000 in Mutual funds. You can invest Rs.10,000 in mutual funds in one shot (lump sum). Or you may want to invest Rs.1000 on a monthly basis (SIP). 

1st Month – NAV 13

2nd Month – NAV 14

3rd Month – NAV 12

4th Month – NAV 15

5th Month – NAV 17

6th Month – NAV 20

7th Month – NAV 18

8th Month – NAV 19

9th Month – NAV 21

10th Month – NAV 20

Suppose you have invested lump sum Rs.10,000 on 1st month and sold in the 10th month. Your total mutual fund's units are (10000/13 = 769 units) and your profit on 10th month is you sell is (769*20 – 769*13= Rs.5383 approx.).

For SIP your total units will be (10000/(13+14+12+15+17+20+18+19+21+20/10) = 592 units), So the profit here is (assume you selling on 10th month at NAV 20 (592*20 – 592*16.9= Rs.1480 approx.).

It is up to you to choose what you will prefer sometimes lump sum investments win and sometime SIP.

You can follow my blogs Basic Knowledge of Mutual Funds for the Beginners & Benefits of Investing in Mutual Funds to know more about mutual fund investment. 

Mutual Fund Investment Tips

There are so many schemes out there for investments. You can choose from including mutual funds, fixed deposits, recurring deposits, insurances, stocks, and bonds, etc. Among these schemes, mutual fund investments have appeared as one of the most attractive schemes in recent times. You can expect higher return compared to the other investment schemes except for stocks. The most interesting part is that investors don’t need to invest their time to monitor their investment. Professional Mutual funds are a convenient investment vehicle for individuals with no previous knowledge about investing for a small fee. 

Mutual Funds have increased generous reputation in a previous couple of years, maintained by their reliable performance at least partially due to the liquidity-driven rally in equity markets not just in India but also globally. In this way, whether you are a novice or an experienced investor, you can start investing in mutual funds and watch your wealth grow in long run. You can expect at least 15% on an average return in medium to long term.

Let look at the advantages of mutual funds - Mutual Fund Investment Tips:

Diversify investment amount:

Diversify specifies reducing risk in investment. Let’s say you work from your home for your office and you only have a single internet supplier at your home. And you are working on an urgent task and internet connection gets disconnected due to some reason. You won’t be able to complete your task within the scheduled time. But if you have two connections then you can always use your alternative connection to complete your tasks. Every mutual fund spreads the money across a large number of investments. In any well-managed fund, this extent is balanced not just across different companies but also across different sectors, thus providing optimal safety. The pleasant thing about mutual funds is that they allow everyone to hold a diversified portfolio. The reason why investors invest in a diversified portfolio is that it raises the expected returns while reducing the risk.  

Professionally managed by the fund managers:

Mutual funds appoint investment experts known as fund managers who are reinforced by a team of research analysts with a number of years of experience. They find the best stocks in the market and track their performance on a regular basis to guarantee that they deliver high returns to the investors. All you need to do here just pick the right mutual funds for investment. And then fund managers will do the rest. This isn’t to say that you shouldn’t review your investments in mutual funds. You positively should, but not too frequently. If you’ve chosen your mutual fund sensibly, reviewing it once a year is usually enough.

Liquidity & Lock-in period: 

The mutual funds are the hot favourite for the investors because of the liquidity. Investors have the benefit of getting their money back almost suddenly in case of mutual funds, based on the NAV (Net Asset Value) at that time. The only thing you need to watch out for is exit load, which may apply to particular funds. There are two types of mutual funds, one is open-ended and another one is close-ended. Lock in period is not available on open-ended funds. Open-ended funds can be traded like stocks. You can sell open-ended mutual funds based on the Net Asset Value at that time when you need money. I personally won’t recommend you to sell your mutual funds until you have reached your goal or underperforms. 

On the other hand, the unit capital of closed-ended funds is fixed and they sell a particular number of units. You cannot buy a closed-ended fund after its NFO period is over unlike open-ended fund. Therefore, new investors cannot enter nor exit before the specified period. 

You Can Invest Small:

You can start investing in mutual with a very small amount. For example, you can invest as low as Rs.100. Some funds like Reliance Small Cap Fund allow you to invest starting with just Rs.100. There are so many good performing funds are also available for investing starting with Rs.500 as well. And most other funds will let you start investing with just Rs 1000.

You can also choose between two different investments styles – lump sum and SIP investments. For a lump sum investment, you pool your capital and invest in the form of a huge single investment at a favourable moment. On the other hand, a SIP is a smaller investment made at regular intervals, usually on a monthly basis, over a period of time in a mutual fund of your choice. The SIP is perfect for investors looking for a controlled methodology to making mutual fund investments.

Tax Efficiency:

When you are buying selling stocks yourself then you have to pay taxes on the profit you make. But this doesn’t happen when that buying and selling is being done on your behalf by a mutual fund. Fund managers could keep buying and selling stocks as needed on your behalf. That’s why you only have to pay taxes when you are redeeming your mutual fund units.

All mutual funds companies come under the preview of SEBI and they need to make required disclosures. All the stocks your mutual fund held are known to you. Fund managers qualification and track record are known to the investors. The net asset value (NAV) of the fund is updated every day. Mutual fund investments are also very safe when you redeem your units; money goes straight into your bank account.