Smart tips to grow your money

If you really want your money to grow – stocks is the only way to go'- Haven't you heard this umpteen times. Well, it holds true every time.

The reason being that stocks have the potential to earn at a rate higher than the rate of inflation and thus generate actual savings for you!

Traditional investments like fixed deposits are good and safe and one must have a part of their savings invested in such risk free options. However, your portfolio is not complete and balanced in the absence of stock investments.

If invested wisely, you can minimize the risk of loss in stocks and increase the earning potential of your hard earned money.

Here are some statistics for you:

Nature of Investment	% Returns after 5 Years	% Returns after 10 Years
Real Estate	30%	14%
Gold	10%	7%
Bank FDs	8.50%	12.50%
Equity	35%	16%

As compared to fixed deposits, investments in equity will pay 26.5 percent higher returns in 5 years. Even for a longer term, investment in stocks pay higher returns even in comparison to real estate and gold.

To begin with, when you purchase equity in a company, you must ensure that the stock prices are reasonable.  If you over pay for stocks of a company, naturally you will have to wait longer to make profits on them.

This is because, if you buy stocks at a time when the prices are soaring at unreasonable levels, you will have to face an immediate setback when the market comes to normal levels, and the stock price drops to its average range. 

To understand if the stock price is reasonable, you have to understand how stock prices are determined. The price for a stock depends upon the demand for it amongst buyers. The base line of a stock price is its EPS (Earnings per Share).

The market price of a stock is generally a multiple of its EPS. The multiple depends upon the demand the stock fetches. Demand for the stock depends upon company's reputation, customer relations, financials, current news feeds, economic environment in general, political news, market sentiments etc.

If you are new to the stock market, it is best not to buy stocks when the market is influenced by a certain news feed as market sentiments prevail over logic at such times.

For example, the Sensex shot up in mid 2009 after the Congress led UPA Government was elected in the Parliament. Such price upheavals are temporary in nature.

A calm market is good for new investors.  If you are looking at stocks as an investment it is best to hold stocks for long term. Further, one should invest in good companies with sound management.

Investing in stocks for the long term

If you invest in stock of good companies for the long term, say 5 years, you will most likely earn good returns on your investment. This is because, a good company with a stable history and excellent growth charts, will grow over time.

Its EPS will also move in a forward direction as the company grows. Over time the demand for the shares will also increase and so will the PE multiple. Therefore, your initial investment will multiply over tie if you hold on to the stocks. Also, companies pay dividends and issues bonus shares. These factors add to returns.

Here is a sample of growth in share prices of reputed companies. Even if the prices have moved up and dipped from time to time, over the long run, the share prices have risen and investors have profited!

Share prices of Tata Steels (June 2005 – June 2010)

 Share prices of Infosys Technologies [ Get Quote ] (June 2006 – June 2010)

Option of investing through mutual funds

If you are vary of investing in stocks or are confused about the company where you should put your money, the option of mutual funds may be right for you.

This way you can invest in stocks of different companies, though indirectly, and gain the benefits of the stock markets without having to research stocks, study the market etc.

Fund houses have researchers and experts to study and analyse stocks.

You automatically have a diversified portfolio since mutual funds invest in multiple companies and different industries- this reduces the risk factor. Further you can make a modest beginning since most mutual funds are available for a small investment of Rs 5,000.

All you need to know about Portfolio Management Services

Portfolio Management Services (PMS) is a specialised service that offers a range of specialised investment strategies to capitalise on the opportunities in the market.

Investing requires knowledge, time and the right mind-set. This is besides constant monitoring. PMS gives you professional managers who strategise to deliver you consistent returns keeping your risk appetite in mind. Every portfolio manager has a well-defined investment philosophy and strategy that acts as a guiding principle.

PMS relieves the investor from all the administrative hassles of investments. You receive periodic reports on your portfolio performance and other aspects of your investments. Investments are tracked continuously to maximise returns.

In a PMS setup, your relationship manager defines your financial goals and advises you the right product mix. They give personalised service and ensure that you receive periodic updates and account performance reports.

Here are some of the most frequently asked questions about PMS, answered!

What are the advantages of investing in PMS vis-a-vis mutual funds? 
You have greater control over the asset allocation in PMS, whereas it is automatic in mutual funds. The portfolio can be customised to suit your risk-return profile.

The PMS portfolio manager also has relatively greater flexibility to move in and out of cash as and when required depending on the market view.

How can I introduce my initial corpus to portfolio management services (PMS)? The initial corpus can be brought into the PMS ambit by way of either cash and/or securities. The initial portfolio of securities will be re-aligned as per the desired investment model.

Does PMS guarantee the initial corpus and any return thereon?
Returns cannot be guaranteed as per regulations governing portfolio management services in India [ Images ].

What is the difference between discretionary and non-discretionary Portfolio Management Services?The discretionary portfolio manager will independently manage the funds of each client in accordance with the needs of the client. The non-discretionary portfolio manager will provide advisory services enabling the client to take decisions with regards to his portfolio.

Is the payment upfront?
Yes, payment is upfront.

Does portfolio management services have any lock-in period?
There is no lock-in period according as per regulations. But some companies may have a lock-in period depending upon their company polices.

What are the tax implications of investments in PMS?
Each PMS transaction is considered an independent trade and capital gains will be applied on each depending upon whether the relevant stock was held long-term or short-term. At present, 10 per cent tax is chargeable for short-term capital gains and no tax is chargeable on long-term capital gains. Securities transaction tax (STT) is also applicable.

What is the fee structure for PMS?
The fee structure depends from company to company. There may be many options such as:

• A fixed proportion of the fund amount (for eg 2 per cent of the initial corpus)
• A fixed proportion of the fund amount + variable depending upon the performance of the portfolio (2 per cent above 10 per cent of the returns)
• Variable depending upon the performance of the portfolio

Can I withdraw my profit any time?
It completely depends if your PMS has a lock-in period or not. If not, you can withdraw your profit as and when you want, provided you maintain the minimum ticket size. If you have a lock-in period, you will have to either wait till the end of the lock-in period or pay the exit load.

Investment planning tips for 2010

 Keep the following investment planning tips in mind for 2010.

1. Get yourself a financial plan

As an individual it is very important to have a financial plan which will guide you with investments as per your goals and needs. It serves a very important purpose of bringing discipline to your investing habits.

An ideal plan gives you a complete picture of your current investments and liabilities, your net worth, cash flow, goals and a specific plan to achieve those goals. The goal can be buying a car, house, going for a vacation, children's education or building a retirement corpus. When you are young you tend to live for the moment and do things as they come but it's very important to secure your financial future. It does not have to be at the cost of a good lifestyle.

2. Start SIP (Systematic investment plan)

SIP is a proven instrument for long term investments for steady returns. Timing the market is rarely possible for anybody and you can end up spending a lot of your productive time and energy trying to do that. Even after doing that the chances of getting it right remains very low. Better alternative is to do SIP in some equity funds with a good track record of performance.

 Keep the following investment planning tips in mind for 2010.

1. Get yourself a financial plan

As an individual it is very important to have a financial plan which will guide you with investments as per your goals and needs. It serves a very important purpose of bringing discipline to your investing habits.

An ideal plan gives you a complete picture of your current investments and liabilities, your net worth, cash flow, goals and a specific plan to achieve those goals. The goal can be buying a car, house, going for a vacation, children's education or building a retirement corpus. When you are young you tend to live for the moment and do things as they come but it's very important to secure your financial future. It does not have to be at the cost of a good lifestyle.

2. Start SIP (Systematic investment plan)

SIP is a proven instrument for long term investments for steady returns. Timing the market is rarely possible for anybody and you can end up spending a lot of your productive time and energy trying to do that. Even after doing that the chances of getting it right remains very low. Better alternative is to do SIP in some equity funds with a good track record of performance.

3. Create a budget and track your expenses

A budget helps you break down your spending and compare on a month to month basis. Thus it helps you identify areas where expenditures can be cut and money diverted to meet your goals like buying a car or house. When you look at your budget and see anomalies, it becomes possible to take remedial action. Do not procrastinate on this

4. Make your PPF and other fixed income investments at the beginning of the financial year

If you invest in the latter half of the year, you miss out on a good amount of interest income. Investing early in the year will tie-up your money which will also help you control certain discretionary expenses.

5. Invest in insurance policies

You can get life cover, child education cover, health cover and save for retirement when you invest in the right insurance policies. Besides this, you get tax exemptions to reduce your current tax payout. This exercise should be done in the beginning of the financial year so that your tax planning can be taken care of. Remember that choosing the right insurance policy can be a tricky exercise and you might need to take assistance from a qualified financial planner.

6. Buy a house

• A house is one of the best investments you can make and it offers many advantages:
• You save on the rent
• Your interest payments are tax deductible
• It usually appreciates in value
• In times of need it serves as great collateral
• Peace of mind and many other intangible benefit

7. Determine your asset allocation and diversify

This involves matching your investment vehicles with your investment goals. Your investment choices should always be based on your age, portfolio, personal situation and level for risk tolerance. Diversification is the key to minimizing risk. You should not put all your eggs in one basket. Real diversification means spreading your money across multiple asset categories including stocks, bonds, real estate and commodities etc.

8. Rupee cost averaging

If you invest directly in stocks then rupee cost averaging is one technique you should look at adopting. It is similar to SIP for Mutual Funds. You fix certain amount of money for a stock and buy at regular intervals regardless of the price. In this way when the prices are low you get more units and vice versa. The key here is to select quality stock for the rupee cost averaging.

9. Don't be obsessed with tracking your portfolio

Stay invested for the long term and don't allow every downward market move to rattle you. It's far too easy to panic when you're watching daily, weekly or monthly results. Too many trading tips, recommendations etc only confuse you. Investment is like a test match and not a T20 match.

10. Don't wait. Start now!

One of the mistakes we do is waiting for the right time as well as a lump sum amount to start investing. Being slow and steady wins in this case. Start small but start now. All you need is self discipline to stay on course!

Topsy-turvy markets: Do I invest or do I exit?

Markets dancing up and down: do I invest now or do I exit? This question is in the minds of almost all investors small or big; short-term or long-term. This is a problem because nowadays the markets are fluctuating so much that a 1 per cent to 2 per cent change per day has become quite common.

If one thought the market was weak two weeks ago and going down, this week the markets are looking up. So where does a salaried individual put his/her bet on? This article is to give some ideas particularly for the small investors.

Market fluctuations

The stock market fluctuates, that too when the overall economy is not that stable, it fluctuates a lot. This is true not only for India [ Images ] but across the world.

Again this is true not only in our times, but in all known history. To fluctuate is one of the basic characteristics of the stock market.

However, research -- or for that matter any five-year chart of the indices (Sensex or Nifty) -- shows that there is always a significant gain. The same is the case even for the 5 years ending December 2008, when the market has fell almost 50 per cent during the year.

What are the implications of fluctuation?

There are a number of negative aspects/scenarios to the short-term fluctuations.

1. Investments are still in negative even after the markets have gained.

If an investor had invested his/her funds at the peak of the market and stayed there, the funds would not have still recovered from the losses that they suffered in 2008. Will the investment ever recover? Should I exit, taking the loss?

2. The planned financial goal is here. But the market is still low.

The planned financial goal could have been the daughter's marriage, retirement, a housing down payment. But if one had the misfortune of a fall in the market happening right when the withdrawal was planned, it is definitely a long postponement of the plan (if possible) or financial trouble (if it could not be postponed). A requirement like a daughter's marriage cannot be postponed for want of money.

3. I have got a one-time lump sum of money.

A loving relative's gift or an unexpected bonus or an arrear due for 2 years may suddenly land in an investor's hands. One can be sure that the same will not happen often.  So when does one invest this money in the market?

A better perspective

A better perspective to investments in the stock market is that the loss or gain is only on paper till the shares are sold. So the investment that has a lower value today as in scenario 1 has not lost its true value, unless one sells it. All that it needs is time to give a better value.

This perspective however does not solve the problem, when an investment is time bound as in scenario 2 or 3.

The question is thus not whether there will be returns or not but how does one time the market to get better returns?

Timing the market: Is it possible?

Is this the solution? Again the answer is 'NO'. Because we could find the right time to invest in the market only retrospectively. No one could guess to what extent the market would react to certain economical news.

So too no one could guess accurately in advance at what level and when a market would turn down or up.

So timing the market is not really possible. However, any five years' graph will show a steady gain as discussed earlier. So can we use time in the market to our advantage?

Time in the Market –The Solution

 By increasing the time in the market by being invested for a longer period and by investing in a higher frequency, we can overcome the problems related to the fluctuations in the market.

This is definitely a solution that can be used to tackle the problems faced by the small investors.

By increasing the time in the market (investment period), fluctuations are over come. This requires planning earlier and investing at least for a period of five years.

Even the one time lump sum of money, can be invested over a period of, say, five months in smaller chunks. This will take care of the market ups and downs during the investment period.

Those who have invested for their retirement and their daughter's (or son's) marriage can practice the same but in reverse order. Rather than wait till the date of retirement for the withdrawal from the market, they could withdraw over a period of 6 months before the marriage.

This will not only help them in the run up to the event but also prevent losses from any sudden fall in the market.

Fluctuations are a basic nature of the stock market. An investor cannot wish it away. Nor should one avoid the stock market because of the fluctuations.

Timing the market for its ups and downs for making investments is not possible as accurate prediction is in the realm of speculation.

The better option is to stay in the market. This is done by increasing the time period of investment and by increasing the frequency of investment and withdrawal.

5 things to do to avoid the tax blues ... !!

It's a typical day in March when you see people running helter skelter to invest to save on taxes. And more often than not, they end up investing in products that are either not right for them or not worth investing at all.
You can, however, start saving on your personal income tax during the year, and make additional strategic moves as the year-end approaches. Here are some basic tips for saving on your taxes:

1. Invest and claim your deductions


Section 80C: There are various sections which offer you tax breaks, the most popular one being this one as you can claim up to Rs 1 lakh under this section and it offers you a wide variety of investment options. The options include Employee Provident Fund (EPF), Public Provident Fund (PPF) up to Rs 70,000 per annum, National Savings Certificate (NSC), 5-year bank fixed deposits, life insurance policies, equity-linked savings schemes (ELSS), unit linked insurance plans (ULIPs), school fees, and home loan principal repayment.
Section 80D: If you have taken a medical insurance plan for yourself, your spouse, dependant parents and dependant children, you can claim deduction up to Rs 15,000 (Rs 15,000 additionally for your parents' medical insurance is also available) under Section 80D for the premiums paid. The limit now has been enhanced to Rs 20,000 for senior citizens on the condition that the premium is paid via cheque.
Section 80DD: Expenses on the medical treatment of a dependent who is a person with a disability also qualifies for tax benefits under Section 80DD.
In this case, deductions up to Rs 50,000 can be claimed.
A life insurance policy bought for the benefit of such a handicapped person is also eligible for this benefit up to Rs 50,000. In case the disability is severe, the claim can go up to Rs 75,000. However, to claim any deduction under this section, certification by a medical authority is mandatory.

2. Interest component of your home loan

The interest component of your home loan is allowed as a deduction under the head 'income from house property' under Section 24(b) up to a limit of Rs 1.5 lakh a year in case of self-occupied house.
One condition being that your house must have been financed by a housing loan taken after April 1, 1999.
It is also essential that the acquisition or the construction of the property is completed within three years from the end of the financial year in which the loan is taken.
The claim can be made even on loans taken for repair, renewal or reconstruction of an existing property.

3. Take a loss

If you've done well with your investments and are looking at significant short term capital gains, prior to year-end is the time to offset some of those short term gains by selling some of the losing investments.
If the stock is good, you could sell it on 31st March, say on March 31, 2010, and buy it back in the next financial year, say April 1, 2010; here of course there is the risk of price fluctuation.
Remember that you can carry forward short term losses from previous years' losses for the next 8 years.

4. Do some charitable donations

While donations should not be made simply for tax purposes but for philanthropic reasons, you can always make a couple more at the end of the year to lower your tax.
You get a tax relief if you donate to institutions approved under Section 80G of the Income Tax Act.
The rate of deduction is either 50 or 100 per cent, depending on the choice of the charity fund. There is no restriction on the amount of charity.
However, donations must be made only to specified trusts and also only donations of up to 10 per cent of your total income qualify for such a deduction. Remember to get receipts.

5. Spreading your income

Normally, if you invest in your wife's or child's name, the income generated from such investments will be clubbed with your income and taxed accordingly. However, if you transfer money through a deed to a child who is over 18 years of age and invest in his name, then the income generated from such investment will not be clubbed with your income.
Instead, that will be clubbed with the income of your child/wife and taxed accordingly.
Cash gifts received from specified relatives are exempt from income tax and there is no upper limit.
Similarly, cash gifts of any amount and from anyone received during your child birth, marriage or any other specified event are totally tax-free. However, any cash received from a non-relative where the value is in excess of Rs 50,000 in a particular year will be considered as income in the hands of the recipient.
You should make sure that you have a record and valid receipts for all tax savings investments made in your name. You do not want to be running around at the last minute collecting all the documents required for tax filing.

Protect your investments. Here's how !!

Anything done without proper planning will turn out to be a dud! This holds good for almost everything in life, from marriages to managing finances to running businesses.

Today, one of the most important things is managing finances. Going by recent trends almost everything else in your life hinges more on one huge binding factor called money!

Believe it or not, making money is no big deal, neither saving it nor cutting down on your expenditure for that matter. These are all important but above everything is mastering the art called investment!

It is the only sure way you could build on your wealth and protect it. Investment is a science. And a wise investment is about choosing the right scheme based on certain underlying principles and algorithms.

And unless we do our home work right even the effective steps of the regulators will not help us. So, let us see what it takes to turn into a smart and wise investor that will help you protect and multiply your investment!

To begin with, know your goal

Perhaps the first point to consider before investing in a financial product is to understand your goal! Are you looking at the investment for the long term or short term?

For instance, never invest in a product like Unit Linked Insurance Policy (ULIP), a long term product, if you have plans to surrender it after paying the premium for the mandatory first 3 years called the lock-in period in industry parlance!

When you finally decide on the nature of the investment scheme it is better to do a comparison of the similar products available in the market. Do not give in to selling pressure. After all, it is your money and investment.

Be disciplined

Don't try to do things that are really outside your purview, portfolio management for instance. Approach your financial consultant or a fund manager for expert guidance on these issues.

These areas and things like timing the market are expert zones that requires years of experience to understand and practice and not like simple investment methods like the public provident fund.

Also, misunderstanding does as good as not knowing a product at all and probably even worse! Just one ore two instances of making accidental profits don't put one anywhere in the vicinity of financial disciplines.

Proper asset allocation is important

Allocation of assets in a portfolio is very, very important. Simply put, it is deciding about the mixture of stocks, bonds, real estate, derivates and mutual funds you want to hold in your portfolio.

The fact is that most asset allocation is ad hoc but aims to minimize risk. Asset allocation begins with considering your objectives. This is perhaps one area where even the most seasoned investor might go wrong. Though there is no select formula for a perfect asset allocation, you can still try to do a few things that could help you build a safe portfolio.

Firstly, weigh the difference between risk and returns. For example, investors willing to take a higher risk should allocate more money into stocks. Do not fully rely on planner sheets.

Find out the real cost of your investment from the company. Timing is also important, the earlier you start the better but do consult an expert before you implement it.

Watch out for costs

The one area which many investors fail to decode is the breakup of the costs involved in an investment. Failing to see the hidden costs such as the brokerage costs particularly in a mutual fund or a life insurance company could actually hurt you real hard.

Mutual fund companies often subtract fees from your portfolio known as fund's expense ratio before their annual results are announced. These are expenses paid to the advisor as fees, marketing efforts, legal expenses and accounting and auditing costs.

According to statistics, every year on an average, the expense ratio for a U.S stock fund is roughly between 1 and 1.5 per cent. Apart from this there are other hidden costs like trading costs involved. Learn about the impact of this break up on your investment.

Fund managers often churn their portfolios to whopping per centages thus putting your investment at a higher risk by making your yield fall far below the index return.

Hence, as an investor it is very important for you to keep a watch on all costs, including the fund manager cost, churning cost and other associated costs.

The Ideal P/E Multiple For A Stock Is...

Warren Buffett’s fortune is enough to stupefy anyone. Starting from scratch, he has amassed a fortune of billions and billions of dollars. And the most amazing part of that feat is not even that – it is the fact that he has achieved so much wealth in his lifetime purely by investing in the stocks and bonds of companies.

As he has mentioned a number of times, he credits much of the framework with which he invests to Benjamin Graham, his mentor and teacher from whom he learned how to invest. Thus, it should be of immense interest to anyone who wants to invest wisely, to hear what Graham has to say on the subject of the maximum price one should pay for buying a stock. After all, this is a perennial question that comes to the mind of investors – What is the right price to pay?

For the purchase of a stock to be successful, every investor relies on future earnings of the company and not its past earnings. But at the same time, Graham was of the firm opinion that when evaluating a stock and its future earnings, one can be conservative only by basing this opinion on company’s actual performance over a period of time in the past. Thus, in most cases, the investment (and not speculative) value of stock can be arrived at by taking into consideration the company’s average earnings over a period of five to ten years.

The company’s profit in the most recent year may be taken as the base for arriving at the value in some cases, but only if it meets the following criteria –

(1) general business conditions in that year were not exceptionally good

(2) the company has shown an upward trend of earnings for some years past

(3) the investor’s study of the industry gives him confidence in its continued growth

And only in the extremely rare and exceptional case should one rely on the assumption of a company achieving higher earnings in the future while calculating the price one pays. Higher future earnings should be taken into consideration only if it is a 100% sure thing, which is very rarely the case.

The above was a discussion of Graham’s suggestion of which earnings should one take as the base when valuing a company by using a P/E ratio. Now for the second part – what would be the right multiple one should give those earnings to arrive at the price one should pay for the stock?

A conservative investor may rightfully give a very attractive company a higher multiple. This may be a company whose latest earnings are above its past average, which has extremely promising future prospects, or has an inherently stable earnings power. However, at the very heart of Graham’s argument was his opinion that there must always, in every case, be some upper limit of this multiple that is assigned to the stock in order to stay conservative in one’s valuation. He suggested that about 20 times average earnings is the highest price that can be paid buying a stock from an investment perspective. While this is the maximum one should pay for a company considered to have very good prospects, about 12 or 12.5 times average earnings would be suitable for the typical company with average prospects. This is because investment, as opposed to speculation, necessarily requires demonstrated value, which can be verified only by way of average earning power in the past. A P/E multiple of 20 in effect means an earnings yield of 5% (1 divided by 20).

It would indeed be very hard to conservatively justify average earnings of less than 5% of the market price of a stock without betting your money on an increase in earnings of the company in the future. Thus, according to Graham, a price to earnings ratio of higher than 20 times average earnings cannot by any means provide the margin of safety that an investor should have. It might be accepted by an investor in expectation that future earnings will be larger than in the past. But such a basis of valuation would then have to be termed “speculative”. That is because speculation derives its basis and justification from potential developments that differ from past performance.

By the above thumb rule of not paying more than 20 times average earnings, Graham did not imply that it would be mistake to do so. He suggested instead that such a price would be speculative. Further, it should also be noted that such a purchase can easily turn out to be highly profitable, but in that case it will have proved to be a merely fortunate speculation. And very few people are consistently fortunate in their speculation.

Hence people who habitually purchase stocks at more than about 20 times their average earnings “are likely to lose considerable money in the long run” according to Graham. This is all the more likely because if such a mechanical check were not enforced, investors have the tendency to time and again give in to the temptation and lure of bull markets, which always find some or the other deceptively pleasing argument to justify paying extravagant prices for stocks.

Do you know where to invest your money ??

 How many of you can confidently say that you are well aware of all the investment avenues available? Not all. There is a plethora of investment options available in the market today. But then the options must be selected based on the goals you want to achieve in life and the time frame in which you want to achieve it.

Let us take a trip down the different paths of investment world.

This is the first part where in we will explore different options available under equities:

Equity

I guess one of the most talked about asset class in recent years. So what is equity investment? It refers to buying and holding of shares or stocks in a stock market by an individual and funds in anticipation of income by way of dividend and capital gain as the value of the stock rises. Equity investment is a good form of long-term investments. There are various ways of investing in equity:

Direct investment: Refers to buying and selling (trading) in the stocks or shares on the exchange. In order to trade you need to have a demat account. As for trading you need to register with a broker or you can have an online trading account which is linked to your demat account and your bank account through which you can trade.

This form of investment in equities is for investors who regularly follow the stock market. Investors who are looking for developing long-term wealth should not indulge in speculative trading (buying and selling within a short span of time). Also investments in stocks or scripts should not be done based on tips that you have received from your friendly neighbor or relatives.

Investment should be done after a thorough analysis of the company, sector, and industry on the whole. We have heard many stories where people have lost their entire wealth by investing based on tips. Also do remember, one can never time the market. So be careful when you are investing directly.

Portfolio management services (PMS): In return for a fee, trained professional portfolio managers allocate your assets in various asset classes depending upon your personal investment goals and risk preferences. PMS is not restricted to only investing in equity and equity mutual funds. They also include investment in bonds. The advantage of this form of investment: professional expertise for your hard earned money, transparency and flexibility. You do not have to overlook in the day-to-day management. You are given an online user name and password that grants you an online access to your portfolio that keeps you up to date. The fee structure can also be selected either on performance or on a fixed basis.

The disadvantages: the minimum requirement for PMS is generally very high, that is., most of the PMS are offered where the portfolio offered to manage is at least Rs 25 lakh. The fee charged is also high. Generally losses are not shared when you opt for performance-based fees. This form of investment is especially good for high net worth individuals who have money but no time to monitor them.

Equity mutual fund: Mutual fund is the latest buzzword. After the debacle of US 64, the mutual fund industry took many years to get their act together. But now with stricter norms set by SEBI and more transparency mutual fund industry has developed in a big way. With more than 500 funds there are options available for each and every investor. Also, with investment of as low as Rs 1,000 (for systematic investment plan) and Rs 5,000 (lump sum investment) this form of investment attracts one and all.

So what is a mutual fund? A mutual fund is professionally managed collective investment scheme that pools money from many investors and invest it in stocks, bonds and various others securities and instruments. Mutual funds are divided into open ended and closed ended mutual fund.

Open-ended fund: Are funds in which you can buy or sell on any business working day. Just like shares value, mutual funds have net asset value on which you buy or sell your units. Unlike shares in mutual funds, units are allocated to an investor for the amount invested.

Closed-ended fund: Is a collective investment scheme where limited a number of units are allocated. New units are not allocated on a day-to-day basis. Generally closed-ended funds are traded on the exchange and one can trade their units on the exchange.

In this section, we will have a look at various forms of open-ended equity mutual funds. Equity mutual funds are sub-divided into:

Diversified equity mutual fund: A kind of mutual fund which invests in stocks of various companies of various sectors. Best bet to park your funds in.

Sector funds: Mutual fund whose investment objective is to invest stocks of companies of a particular sector like automobiles, pharma, banking, infrastructure and others. This type of fund can be risky if the sector does not perform well. So limit your exposure to sector funds.

Index fund: A type of mutual fund with a portfolio constructed to match or track the market index. It is relatively passive fund with broad market exposure and low operating cost.

Tax savers or equity linked saving schemes (ELSS): They are same like diversified mutual fund. The difference is investment in these funds have tax benefit up to Rs 1 lakh as it is exempted under section 80C. Also, ELSS has a three year lock-in period. Any withdrawal before this period means that you will not get the tax benefit under section 80C. Do keep in mind the risk factor while opting to invest in ELSS. Also, select growth or dividend payout option but not dividend reinvestment as dividend reinvestments go into the lock in period loop.

Why select mutual fund? Here's why. Low minimum investment amount, low management cost, low investment, professional management, diversification, liquidity and with entry load removed from August 1, 2009 make them all the more attractive.

Disadvantage of mutual fund: Backend load or exit load if investment redeemed within six months to one year. Many funds have high operating charges, decision-making is in someone else's hands and no tailor made portfolio.

The pros outweigh the cons and hence equity mutual funds form a very attractive form of investments. Mutual funds are especially for investors who do not have the time to follow the market and also who cannot shell out huge amounts. It is advisable to do a SIP in mutual funds as power of compounding and cost averaging works wonders to your hard earned money.

Derivative refers to a variable that has been derived from another variable. They have no value of their own. They derive their value from some underlying asset. For example a derivative of a share of Reliance Industries will derive its value from the share price of Reliance. Derivatives are specialised contracts wherein an agreement or an option to buy or sell the underlying asset of the derivate up to a certain time in the future at a pre-arranged price which is known as exercise price. The contract has a fixed expiry period between 3 to 12 months.

The value of the contract depends on the expiry period and on the price of the underlying asset. The underlying asset in derivative trading can be financial assets like shares, index, currency or can be commodities like soyabean, oil and others. We will right now be looking only at financial derivative trading whose underlying asset is equities.

The different forms of derivative contracts are:

Futures and forwards: Futures contract give the holder the opportunity to buy or sell the underlying asset at a pre-specified price some time in future. These contracts come in standardised format with fixed expiry date, time contract size and price. Forwards are similar contracts like future but the size, expiry date and price are customised as per the needs of the user.

Options: It is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (it maybe an index or a stock) at a specific price on or before a certain date. The right to buy an underlying asset is known as call option. The right to sell the underlying asset is known as put option.

Financial derivative contract can be bought or sold by paying a premium. The upside in a derivative contract is unlimited. But again if you are a buyer of an option, your downside is limited up to the extent of the premium amount paid (Note: The seller of an option has an unlimited loss potential).

Futures and forwards too have an unlimited loss potential.

The advantages are you need to pay only 20 to 30 per cent of the contract price. You also have the option to first sell the lot of stocks and then buy them within the stipulated time. This is only possible in normal equity trading if you are an intra-day trader.

The disadvantage is there is a time frame to the contract. Not all the stocks are available in derivatives trading. Finally they are complicated and extremely risky.

Only investors who have a thorough knowledge of derivative trading and who can regularly follow the stock market should trade in them. It is not for investors who are looking to develop long-term wealth.

Who should be investing in equities?

Investors whose goals are long term, that is, more than seven years can invest comfortably in equities. As aptly said by Warren Buffet: If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it.

If you want to achieve any of your goals in less than this time frame then equity is not the vehicle for you. Remember that emotions like greed and fear should have no place when investing in equities. Otherwise debt is the avenue for risk-averse safe fixed income generation.